UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended March 31, 2002
Commission File Number: 0-6094
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NATIONAL COMMERCE FINANCIAL CORPORATION
---------------------------------------
(Exact name of issuer as specified in charter)
Tennessee 62-0784645
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One Commerce Square, Memphis, Tennessee 38150
---------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (901) 523-3434
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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 206,315,145 shares
-------------------------- ------------------
(Class of Stock) (Shares outstanding as of May 13, 2002)
National Commerce Financial Corporation and Subsidiaries
INDEX TO FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 3
Consolidated Statements of Income
Three Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements
As of and for the Three Months Ended March 31, 2002 and 2001 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
National Commerce Financial Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
(Unaudited)
March 31, December 31,
In Thousands Except Share Data 2002 2001
-----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 455,126 561,429
Time deposits in other banks 27,657 31,118
Federal funds sold and other short-term investments 11,871 51,873
Investment securities:
Available for sale (amortized cost of $4,378,981 and $3,589,578) 4,366,436 3,611,706
Held to maturity (market values of $728,185 and $913,683) 719,841 900,750
Trading account securities 96,583 197,214
Loans 12,264,784 11,974,765
Less allowance for loan losses 160,194 156,401
-----------------------------------------------------------------------------------------------------
Net loans 12,104,590 11,818,364
-----------------------------------------------------------------------------------------------------
Bank owned life insurance 216,212 212,376
Investment in First Market Bank 25,067 24,550
Premises and equipment 245,037 219,595
Goodwill 1,070,496 946,157
Core deposit intangibles 289,436 251,464
Other assets 458,153 447,117
-----------------------------------------------------------------------------------------------------
Total assets $ 20,086,505 19,273,713
=====================================================================================================
LIABILITIES
Deposits:
Demand (noninterest-bearing) $ 1,995,028 1,732,140
Savings, NOW and money market accounts 5,846,894 5,230,621
Jumbo and brokered certificates of deposits 1,583,986 1,366,034
Time deposits 4,726,412 4,290,684
-----------------------------------------------------------------------------------------------------
Total deposits 14,152,320 12,619,479
Short-term borrowed funds 853,227 1,141,617
Federal Home Loan Bank advances 1,878,220 2,306,554
Trust preferred securities and long-term debt 282,032 282,018
Other liabilities 418,481 468,714
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Total liabilities 17,584,280 16,818,382
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STOCKHOLDERS' EQUITY
Serial preferred stock. Authorized 5,000,000 shares; none issued -- --
Common stock, $2 par value. Authorized 400,000,000 shares;
206,163,422 and 205,058,713 shares issued 412,327 410,117
Additional paid-in capital 1,777,898 1,756,128
Retained earnings 320,064 276,342
Accumulated other comprehensive income (loss) (8,064) 12,744
-----------------------------------------------------------------------------------------------------
Total stockholders' equity 2,502,225 2,455,331
-----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 20,086,505 19,273,713
=====================================================================================================
Commitments and contingencies (note 8)
See accompanying notes to consolidated financial statements.
3
National Commerce Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2002 and 2001
(Unaudited)
Three Months Ended March 31,
------------------------------------
In Thousands Except Per Share Data 2002 2001
-----------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 218,035 246,149
Interest and dividends on investment securities:
U.S. Treasury 835 641
U.S. Government agencies and corporations 49,893 50,729
States and political subdivisions (primarily tax-exempt) 2,006 2,559
Equity and other securities 11,176 20,315
Interest and dividends on trading account securities 429 898
Interest on time deposits in other banks 168 394
Interest on federal funds sold and other short-term investments 143 1,406
-----------------------------------------------------------------------------------------------------------------
Total interest income 282,685 323,091
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INTEREST EXPENSE
Deposits 74,834 130,159
Short-term borrowed funds 3,500 15,831
Federal Home Loan Bank advances 23,189 23,416
Trust preferred securities and long-term debt 2,481 1,552
-----------------------------------------------------------------------------------------------------------------
Total interest expense 104,004 170,958
-----------------------------------------------------------------------------------------------------------------
Net interest income 178,681 152,133
Provision for loan losses 5,514 6,380
-----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 173,167 145,753
-----------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 33,826 27,290
Other service charges and fees 9,205 8,736
Broker/dealer revenue and other commissions 15,413 15,066
Trust and employee benefit plan income 12,900 13,882
Equity earnings from First Market Bank 516 334
Other 10,697 7,849
Investment securities gains, net 2,720 720
-----------------------------------------------------------------------------------------------------------------
Total other income 85,277 73,877
-----------------------------------------------------------------------------------------------------------------
OTHER EXPENSE
Personnel 68,878 59,900
Net occupancy 10,977 9,322
Equipment 6,227 5,835
Goodwill amortization - 12,074
Core deposit intangibles amortization 17,410 15,042
Other 40,205 34,736
Conversion/merger expenses 4,940 -
-----------------------------------------------------------------------------------------------------------------
Total other expenses 148,637 136,909
-----------------------------------------------------------------------------------------------------------------
Income before income taxes 109,807 82,721
Income taxes 34,908 30,431
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Net income $ 74,899 52,290
-----------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Basic $ .36 .25
Diluted .36 .25
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 205,746 205,632
Diluted 208,287 208,545
See accompanying notes to consolidated financial statements.
4
National Commerce Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2002 and 2001
(Unaudited)
In Thousands 2002 2001
------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 74,899 52,290
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and accretion, net 22,194 28,106
Provision for loan losses 5,514 6,380
Net gain on sales of investment securities (2,720) (720)
Deferred income taxes (3,087) (180)
Changes in:
Trading account securities 100,631 (3,572)
Other assets (5,392) (184,701)
Other liabilities (27,235) (2,403)
Other operating activities, net (1,074) 1,347
------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 163,730 (103,453)
------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from:
Maturities and issuer calls of investment securities held to maturity 185,528 231,432
Sales of investment securities available for sale 1,123,882 30,639
Maturities and issuer calls of investment securities available for sale 297,189 234,344
Purchases of:
Investment securities held to maturity (4,326) (88,467)
Investment securities available for sale (1,162,606) (144,724)
Premises and equipment (7,038) (2,744)
Net originations of loans 159,014 (85,218)
Net cash paid in business combination (324,132) -
------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 267,511 175,262
------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposit accounts 184,892 297,554
Net decrease in short-term borrowed funds (319,949) (254,774)
Net decrease in Federal Home Loan Bank advances (428,715) (53,332)
Increase in long-term debt 13 -
Repurchase and retirement of capital trust pass-through securities - (7,303)
Issuances of common stock from exercise of stock options, net 13,929 6,196
Purchase and retirement of common stock - (10,101)
Cash dividends paid (31,177) (26,774)
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Net cash used by financing activities (581,007) (48,534)
------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (149,766) 23,275
Cash and cash equivalents at beginning of period 644,420 531,467
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 494,654 554,742
============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the period $ 105,328 171,475
============================================================================================================
Income taxes paid during the period $ 3,237 1,217
============================================================================================================
See accompanying notes to consolidated financial statements.
5
National Commerce Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Three Months Ended March 31, 2002 and 2001
(Unaudited)
(1) CONSOLIDATION AND PRESENTATION
The accompanying unaudited consolidated financial statements of National
Commerce Financial Corporation ("NCF") have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, the statements reflect all
adjustments necessary for a fair presentation of the financial position, results
of operations and cash flows of NCF on a consolidated basis, and all such
adjustments are of a normal recurring nature. These financial statements and the
notes thereto should be read in conjunction with NCF's Annual Report on Form
10-K for the year ended December 31, 2001. Operating results for the three-month
period ended March 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002.
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 the
wholly-owned non-bank subsidiaries of NCF: TransPlatinum Service Corp., Commerce
Capital Management, Inc., First Mercantile Trust, First Mercantile Capital
Management, Inc., USI Alliance, National Commerce Capital Trust I, National
Commerce Capital Trust II, Senior Housing Crime Prevention Foundation Investment
Corporation and Monroe Properties. Also included in the consolidated financial
statements are the subsidiaries of NBC and TransPlatinum. 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 amounts have been reclassified to conform to the 2002 presentation.
BUSINESS COMBINATIONS NCF acquired 37 divested Wachovia branches and
corresponding ATMs in North Carolina, South Carolina, Georgia and Virginia on
February 18, 2002. Results of operations from this acquisition are included in
NCF's operating results only from the date of acquisition. This acquisition
added $1.4 billion in deposits, $500 million in loans, $24.8 million in fixed
assets and $1 billion in available for sale investment securities that were
subsequently sold to restructure the balance sheet. Net cash paid for this
business combination was $324 million. Core deposit intangible and goodwill
recorded from the branches acquired amounted to $55.4 million and $124.7
million, respectively. The acquisition continues NCF's strategic expansion into
the high growth Southeast. The proforma results of operations, in any of the
periods reported, are not materially different from those reported.
NCF also acquired SouthBanc Shares, Inc. in November 2001 and First
Vantage-Tennessee in August 2001 in transactions accounted for as purchases.
Accordingly, the results of operations of from these acquisitions are included
in NCF's operating results only from the dates of acquisition.
6
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 available to common stockholders by the weighted
average number of common shares outstanding during each period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding plus dilutive stock
options (as computed under the treasury stock method) assumed to have been
exercised during the period.
COMPREHENSIVE INCOME Comprehensive income is the change in equity during the
period from transactions and other events and circumstances from non-owner
sources. Total comprehensive income is comprised of net income and other
comprehensive income. Other comprehensive income for the three months ended
March 31, 2002 and 2001 and accumulated other comprehensive income as of March
31, 2002, December 31, 2001 and March 31, 2001 are comprised of unrealized gains
and losses on certain investments in debt and equity securities and certain
hedging instruments and adjustments of minimum pension liability.
(2) LOANS
Management internally classifies the loan portfolio by the purpose of the
borrowing and such classification is presented below as of March 31, 2002 and
December 31, 2001. This classification basis places the emphasis on the source
of repayment rather than the collateral source, which is the basis for
regulatory classification purposes.
In Thousands 2002 2001
-------------------------------------------------------------------------------
Commercial $ 3,044,614 2,900,346
Construction and commercial real estate 3,455,569 3,361,232
Mortgage 1,717,904 1,912,345
Consumer 3,845,195 3,602,013
Revolving credit 68,060 61,731
Lease financing 133,442 137,098
-------------------------------------------------------------------------------
Total loans $ 12,264,784 11,974,765
===============================================================================
(3) ALLOWANCE FOR LOAN LOSSES
Following is the activity in the allowance for loan losses during the three
months ended March 31, 2002 and 2001:
In Thousands 2002 2001
-------------------------------------------------------------------------------
Balance at beginning of period $ 156,401 143,614
Provision charged to operations 5,514 6,380
Addition from business combination 6,107 -
Recoveries of loans previously charged-off 1,739 1,756
Loan losses charged to allowance (9,567) (7,711)
-------------------------------------------------------------------------------
Balance at end of period $ 160,194 144,039
===============================================================================
7
National Commerce Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) RISK ASSETS
Following is a summary of risk assets:
March 31, December 31, March 31,
In Thousands 2002 2001 2001
-------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 32,753 22,800 10,977
Other real estate acquired through loan foreclosures 11,571 10,687 5,512
Restructured loans - - 2,224
Accruing loans 90 days or more past due 55,265 48,553 21,682
-------------------------------------------------------------------------------------------------------------------
Total risk assets $ 99,589 82,040 40,395
===================================================================================================================
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the three months ended March
31, 2002 is as follows:
Traditional Financial
In Thousands Banking Enterprises Total
----------------------------------------------------------------------------- -------------
Balance as of January 1, 2002 $ 911,185 34,972 946,157
Goodwill acquired during period 124,339 - 124,339
---------------------------------------------------------------------------------------------
Balance as of March 31, 2002 $ 1,035,524 34,972 1,070,496
=============================================================================================
The changes in the carrying amount of goodwill for the year ended December 31,
2001 are as follows:
Traditional Financial
In Thousands Banking Enterprises Total
----------------------------------------------------------------------------- -------------
Balance as of January 1, 2001 $ 897,779 36,688 934,467
Amortization of goodwill (46,450) (1,790) (48,240)
Goodwill acquired during year 59,856 74 59,930
---------------------------------------------------------------------------------------------
Balance as of December 31, 2001 $ 911,185 34,972 946,157
=============================================================================================
Following is an analysis of core deposit intangibles which is an amortized
intangible asset:
Three months ended Year ended
March 31, 2002 December 31, 2001
-------------------------------- --------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
In Thousands Amount Amortization Amount Amortization
--------------------------------------------------------------------------------------------------------------------
Core deposit intangibles $ 405,128 (115,692) 349,745 (98,281)
Aggregate amortization expense for the period 17,410 58,775
Estimated annual amortization expense:
For year ended 12/31/02 $ 69,930
For year ended 12/31/03 61,469
For year ended 12/31/04 51,691
For year ended 12/31/05 41,954
For year ended 12/31/06 32,526
====================================================================================================================
8
National Commerce Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
The following is a reconciliation of the reported net income for the three month
period ended March 31, 2002 compared to the adjusted net income for March 31,
2001:
Three months ended
March 31
---------------------------
In Thousands Except Per Share Data 2002 2001
--------------------------------------------------------------------------------
Reported net income $ 74,899 52,290
Add back: goodwill amortization - 12,074
--------------------------------------------------------------------------------
Adjusted net income $ 74,899 64,364
--------------------------------------------------------------------------------
Basic EPS
Reported net income $ .36 .25
Goodwill amortization - .06
--------------------------------------------------------------------------------
Adjusted net income $ .36 .31
================================================================================
Diluted EPS
Reported net income $ .36 .25
Goodwill amortization - .06
--------------------------------------------------------------------------------
Adjusted net income $ .36 .31
================================================================================
(6) COMPREHENSIVE INCOME
The following table presents the components of other comprehensive income and
the related tax effects allocated for the three months ended March 31, 2002 and
2001:
2002 2001
------------------------------------ -------------------------------
Before Tax Net Before Tax Net
tax (expense) of tax tax (expense) of tax
In Thousands amount benefit amount amount benefit amount
----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising $ (31,797) 12,537 (19,260) 10,912 (4,310) 6,602
during holding period
Reclassification adjustment for
(gains) realized in net income (2,720) 1,074 (1,646) (720) 284 (436)
Minimum pension liability -
Adjustment to minimum pension liability 161 (63) 98 - - -
Unrealized losses on cash flow
hedging instruments:
Unrealized losses arising during
holding period - - - (1,159) 458 (701)
Reclassification adjustment for losses
realized in net income - - - 694 (274) 420
----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (34,356) 13,548 (20,808) 9,727 (3,842) 5,885
Net income 74,899 52,290
----------------------------------------------------------------------------------------------------------------------
Comprehensive income $54,091 58,175
======================================================================================================================
9
National Commerce Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) PER SHARE DATA
The following schedule reconciles the numerators and denominators of the basic
and diluted EPS computations for the three months ended March 31, 2002 and 2001.
Dilutive common shares arise from the potentially dilutive effect of NCF's stock
options outstanding.
Three Months Ended
March 31,
-------------------------
In Thousands Except Per Share Data 2002 2001
--------------------------------------------------------------------------------
Basic EPS
Average common shares 205,746 205,632
Net income $ 74,899 52,290
Earnings per share .36 .25
================================================================================
Diluted EPS
Average common shares 205,746 205,632
Average dilutive common shares 2,541 2,913
--------------------------------------------------------------------------------
Adjusted average common shares 208,287 208,545
Net income $ 74,899 52,290
Earnings per share .36 .25
================================================================================
(8) CONTINGENCIES
Certain legal claims have arisen in the normal course of business, which, in the
opinion of management and counsel, will have no material adverse effect on the
financial position of NCF or its subsidiaries.
(9) SEGMENT INFORMATION
Management monitors NCF performance as two business segments, traditional
banking and financial enterprises.
The traditional banking segment includes sales and distribution of financial
products and services to individuals. These products and services include loan
products such as residential mortgage, home equity lending, automobile and other
personal financing needs. Traditional banking also offers various deposit
products that are designed for customers' saving and transaction needs. This
segment also includes lending and related financial services provided to large
and medium-sized corporations. Included among these services are several
specialty services such as real estate finance, asset-based lending and
residential construction lending. Traditional banking also includes management
of the investment portfolio and non-deposit based funding.
The financial enterprises segment is comprised of trust services and investment
management, transaction processing, retail banking consulting/in-store licensing
and broker/dealer activities.
The accounting policies of the individual segments are the same as those of NCF.
Transactions between business segments are conducted at fair value and are
eliminated for reporting consolidated financial position and results of
operations. Interest income for tax-exempt loans and securities is adjusted to a
taxable-equivalent basis. Expenses for centrally provided services such as data
processing, human resources and other support functions are allocated to each
segment.
10
National Commerce Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) SEGMENT INFORMATION (Continued)
The following tables present condensed income statements for each reportable
segment:
Traditional Financial Intersegment
In Thousands Banking Enterprises Eliminations Total
--------------------------------------------------------------------------------------------------------
Quarter ended March 31, 2002:
Net interest income (TE) $ 181,636 4,441 - 186,077
Provision for loan losses (5,514) - - (5,514)
Noninterest income 46,809 39,620 (1,152) 85,277
Intangibles amortization (17,410) - - (17,410)
Noninterest expense (101,402) (30,977) 1,152 (131,227)
--------------------------------------------------------------------------------------------------------
Income before income taxes (TE) 104,119 13,084 - 117,203
Income taxes (37,201) (5,103) - (42,304)
--------------------------------------------------------------------------------------------------------
Net income $ 66,918 7,981 - 74,899
========================================================================================================
Quarter ended March 31, 2001:
Net interest income (TE) $ 155,001 4,302 - 159,303
Provision for loan losses (6,380) - - (6,380)
Noninterest income 36,221 38,333 (677) 73,877
Intangibles amortization (26,668) (448) - (27,116)
Noninterest expense (82,620) (27,850) 677 (109,793)
--------------------------------------------------------------------------------------------------------
Income before income taxes (TE) 75,554 14,337 - 89,891
Income taxes (31,269) (6,332) - (37,601)
--------------------------------------------------------------------------------------------------------
Net income $ 44,285 8,005 - 52,290
========================================================================================================
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Our objective is to provide a concise but complete understanding of the
financial condition and results of operations of National Commerce Financial
Corporation ("NCF") and its wholly-owned subsidiaries for the three months ended
March 31, 2002 and 2001. NCF is a registered bank holding company which provides
diverse financial services through a regional network of banking subsidiaries
and a national network of nonbank subsidiaries. This Quarterly Report on Form
10-Q should be read in conjunction with NCF's 2001 Annual Report on Form 10-K
and serves to update previously reported information for current interim period
results.
The following discussion contains certain forward-looking statements as defined
in the Private Securities Litigation Reform Act of 1995. These forward-looking
statements relate to anticipated future operating and financial performance
measures, including net interest margin, credit quality, business initiatives,
growth opportunities and growth rates, among other things. Words such as
"expects," "plans," "estimates," "projects," "objectives" and "goals" and
similar expressions are intended to identify these forward-looking statements.
We caution readers that such forward-looking statements are necessarily
estimates based on management's judgment, and obtaining the estimated results is
subject to a number of risks and uncertainties. Such risks include:
. Increases in interest rates could have a material adverse effect on our
funding costs and our net interest margin and, consequently, our earnings
per share.
. Our markets are intensely competitive, and competition in loan and deposit
pricing, as well as the entry of new competitors in our markets through,
among other means, de novo expansion and acquisitions could have a material
adverse effect on our net interest margin, our ability to recruit and
retain associates, our non-interest income and our ability to grow our
banking and non-banking businesses at the same rate as we have historically
grown. Moreover, the Gramm-Leach-Bliley Act has removed many obstacles to
bank holding companies entering other financial services businesses.
Several larger bank holding companies could enter the transaction
processing, asset management, securities brokerage and capital markets
businesses in our markets, deploying capital resources that are
significantly greater than ours. Such activities could adversely affect our
banking and non-banking businesses and have a material adverse effect on
our earnings.
. In 2001, we restated our earnings for 1998 through 2000 due to technical
violations of pooling of interest rules, and any failure to meet consensus
earnings estimates could have a more pronounced negative impact on our
share price than if we had not restated our earnings for those years.
. The events of September 11, 2001, in New York and Washington, D.C., as well
as the United States' war on terrorism, may have an unpredictable effect on
economic conditions in general and in our primary market areas. If the
recovery of the domestic economy does not occur as quickly as anticipated
or is less robust than anticipated, we could experience a decline in credit
quality which could have a material adverse effect on our earnings.
. In February 2002, we completed the acquisition of 37 branch offices and
related ATM's from Wachovia. We may lose deposits or be unable to attract
new deposits to these branches. Moreover, we may lose key employees in
these branches who control key customer relationships. As part of the
acquisition, we recorded core deposit intangibles and goodwill that would
be subject to future impairment. Integration may also divert management's
attention from operational matters, which could adversely affect results of
operations. These risks may hinder our ability to attain the level of
financial operating performance we have historically achieved.
. We are subject to regulation by federal and state banking agencies and
authorities and the Securities and Exchange Commission. Changes in or new
regulations could make it more costly for us to do business or could force
changes to the way we do business, which could have a material adverse
effect on earnings. The NCF Parent Company relies on dividends from its
subsidiaries as a primary source of funds to pay dividends to shareholders
and cover debt service. Federal banking law restricts the ability of our
banking subsidiaries
12
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 which require that we make
estimates and assumptions that affect the amounts reported in those financial
statements. As discussed more fully in the 2001 Annual Report on Form 10-K, we
believe that our determination of the allowance for loan losses and the fair
value of assets, including the impairment of intangibles, involve a higher
degree of judgment and complexity than our other significant accounting
policies.
We adopted Statement No. 142, Goodwill and Other Intangible Assets on January 1,
2002. Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
be reviewed for impairment. See additional discussion under "Recently Issued
Accounting Standards".
As of March 31, 2002, we have unamortized goodwill totaling $1.1 billion and
core deposit intangibles totaling $289.4 million (see Note 5 to the Consolidated
Financial Statements). Intangible assets subject to amortization will be
reviewed for impairment in accordance with Statement 144. 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 March 31, 2002 and 2001
NCF acquired 37 divested Wachovia branches in February 2002, SouthBanc Shares,
Inc. in November 2001 and First Vantage-Tennessee in August 2001 in independent
transactions accounted for as purchases. Amortization of the core deposit
intangibles recorded in these transactions and adoption of Statement 142 had a
significant impact on the results of operations in first quarter of 2002
compared to the same period in 2001, as discussed below.
Net income for the three months ended March 31, 2002 totaled $74.9 million
compared to 2001's $52.3 million. Basic and diluted income per share totaled
$.36 in first quarter 2002 and $.25 in the first quarter of 2001. Annualized
returns on average assets and stockholders' equity were 1.55% and 12.21%,
respectively, in 2002 compared to 2001's 1.21% and 8.87%.
NET INTEREST INCOME Average Balances and Net Interest Income Analyses on a
taxable equivalent basis for each of the periods are included in Table 1.
Taxable equivalent net interest income was $186.1 million in the first quarter
of 2002, compared to $159.3 million for the first quarter of 2001, a 16.8%
increase.
During 2001, the Federal Reserve decreased the target federal funds rate eleven
times by a total of 475 basis points, 150 of which was during first quarter of
2001. There have been no changes in this rate during 2002. Upon each action by
the Federal Reserve, our banking subsidiaries lowered their prime lending rate
to keep pace with the changes in funding costs. Our banking subsidiaries' prime
rates have fallen from 9.50% at December 31, 2000 to 8.00% at March 31, 2001 and
to 4.75% by December 31, 2001, the current rate. With the liability sensitive
nature of our balance sheet, in times of falling interest rates, the decrease in
interest expense from lower cost of interest-bearing liabilities exceeds the
decrease in interest income from the lower yield on earning assets.
13
Table 1
National Commerce Financial Corporation and Subsidiaries
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
Three Months Ended March 31, 2002 and 2001
(Taxable Equivalent Basis - Dollars in Thousands) (1)
2002 2001
-------------------------------------- ----------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------------------------------------------------------------------------------------------------------------------------------
Earning assets:
Loans (2) $ 12,108,855 220,821 7.38 % 11,033,307 249,355 9.14
U.S. Treasury and agency obligations (3) 3,892,164 54,016 5.55 2,890,477 54,301 7.51
States and political subdivision obligations (3) 145,750 2,990 8.21 183,132 3,011 6.58
Other securities (3) 791,865 11,495 5.81 1,130,856 20,818 7.36
Trading securities 75,722 442 2.33 64,191 921 5.74
Time deposits in other banks 28,133 168 2.42 28,200 394 5.67
Federal funds sold and other short-term
investments 28,898 149 2.09 100,589 1,461 5.89
--------------------------------------------------------------------------------------------------------------------------------
Total earning assets 17,071,387 290,081 6.86 15,430,752 330,261 8.64
-------------------- -------------------
Non-earning assets:
Cash and due from banks 472,661 346,416
Bank owned life insurance 213,996 83,321
Investment in First Market Bank 24,722 22,378
Premises and equipment 230,541 205,552
Goodwill 1,010,192 930,169
Core deposit intangibles 271,068 282,510
All other assets, net 253,312 280,450
--------------------------------------------------------------------------------------------------------
Total assets $ 19,547,879 17,581,548
========================================================================================================
Interest-bearing liabilities:
Savings and time deposits $ 11,558,789 74,834 2.63 % 10,657,118 130,159 4.95
Short-term borrowed funds 971,252 3,500 1.46 1,179,763 15,831 5.44
FHLB advances 2,093,957 23,189 4.49 1,544,128 23,416 6.15
Trust preferred securities and long-term debt 282,050 2,481 3.52 89,222 1,552 6.96
--------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 14,906,048 104,004 2.83 13,470,231 170,958 5.15
-------------------- -------------------
Other liabilities and stockholders' equity:
Demand deposits 1,746,302 1,284,045
Other liabilities 407,948 435,508
Stockholders' equity 2,487,581 2,391,764
--------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 19,547,879 17,581,548
========================================================================================================
Net interest income and net interest
margin (4) $ 186,077 4.39 % 159,303 4.14
================================================================================================================================
Interest rate spread (5) 4.03 % 3.49
================================================================================================================================
(1) The taxable equivalent basis is computed using 35% federal and applicable
state tax rates in 2002 and 2001.
(2) The average loan balances include non-accruing loans. Loan fees of
$5,514,000 and $5,186,000 for 2002 and 2001, 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.
14
Consequently, our net interest margin improved to 4.39% for the first quarter of
2002 compared to first quarter 2001's 4.14%. Our interest rate spread widened to
4.03% compared to the first quarter 2001's 3.49%. However, our Asset Liability
Management Committee, which monitors our interest sensitivity and liquidity, has
restructured our balance sheet to be less liability sensitive in recognition
that interest rates will eventually rise again.
We do not anticipate that the Federal Reserve will raise interest rates during
the second quarter of 2002. Historically, the Federal Reserve has not increased
interest rates until the national unemployment rate is on a sustained downward
trend. Economists are predicting that with the moderate recovery experienced in
the first quarter of 2002 and the continuation of higher worker productivity and
low inflation, the Federal Reserve might raise rates in the latter half of 2002.
Adjusting for acquisitions accounted for under the purchase method of
accounting, average loans and average core deposits increased 2.9% and 6.3%,
respectively, over the year ago quarter. Average loans for the quarter were
adversely affected by the increased level of payoffs from re-financed mortgage
loans compared to our experience in 2001 and the continuing managed decline in
our State Farm indirect auto portfolio. Excluding these two categories, and
loans acquired in purchase acquisitions, average loan growth increased 8.2%
versus first quarter 2001 and 6.2% annualized versus fourth quarter 2001.
Average core deposits, excluding purchased deposits, increased 1.1% annualized
versus fourth quarter 2001.
PROVISION FOR LOAN LOSSES The provision for loan losses during the first quarter
of 2002 was $5.5 million compared to $6.9 million in the fourth quarter of 2001
and $6.4 million in the first quarter of 2001. Net loan charge-offs totaled $7.8
million in the first quarter of 2002, $7.5 million in the fourth quarter of 2001
and $6 million in the first quarter of 2001 which represent .26%, .25%, and .22%
net charge-offs to average loans (annualized) for the respective periods. The
allowance for loan losses as a percent of total loans and leases was 1.31% at
March 31, 2002 and December 31, 2001. At March 31, 2001, the allowance amounted
to 1.30% of total loans and leases.
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 deteriorated as
dramatically. The following table summarizes indicators of portfolio quality and
the allowance for loan losses as of and for the five quarters ended March 31,
2002 (dollars in thousands):
15
2002 2001
--------------- -------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------------------------------------
Loans outstanding $ 12,264,784 11,974,765 11,516,651 11,236,246 11,092,775
Ratio of allowance for loan losses to
loans outstanding 1.31 % 1.31 1.31 1.30 1.30
Average loans outstanding for the period $ 12,108,855 11,773,105 11,370,853 11,142,888 11,033,307
Ratio of annualized net charge-offs to
average loans for the period .26 % .25 .21 .17 .22
Ratio of recoveries to charge-offs for the 18.18 % 21.18 21.09 29.57 22.77
period
Ratio of non-performing assets to:
Loans outstanding and other assets acquired
through loan foreclosures .36 % .28 .21 .17 .15
Total assets .22 % .17 .13 .11 .09
Ratio of total risk assets to:
Loans outstanding and other assets acquired
through loan foreclosures .81 % .68 .49 .44 .36
Total assets .50 % .43 .30 .27 .23
Allowance for loan losses to total risk assets 1.61 x 1.91 2.68 2.97 3.57
---------------------------------------------------------------------------------------------------------------------------
The ratio of non-performing assets (consisting of nonaccrual loans and
foreclosed real estate) to loans outstanding and other assets acquired through
foreclosure have increased to .36% at March 31, 2002 from .28% at December 31,
2001 and .15% at March 31, 2001. This increase is due to an increase in
nonaccrual loans primarily attributable to two secured commercial relationships,
neither of which is expected to result in significant charge-off. Accordingly,
no additional allowance was allocated for these borrowing relationships.
At March 31, 2002, total risk assets (consisting of non-performing assets,
restructured loans and accruing loans 90 days or more past due) amounted to
$99.6 million or .81% of outstanding loans plus other assets acquired through
foreclosure. This compares to $82 million or .68% at December 31, 2001 and $40.4
million or .36% at March 31, 2001. The allowance for loan losses to risk assets
was 1.61x at March 31, 2002 compared to 1.91x at December 31, 2001 and 3.57x at
March 31, 2001. Looking forward, management anticipates that further increases
in nonperforming and risk assets could be experienced over the next several
quarters as a result of previously discussed economic conditions. Despite the
increase in total risk assets, Management anticipates that net charge-offs for
2002 will range between 25 and 30 basis points and believes that additional
provision to the allowance for loan losses is not warranted.
Based on its review, Management believes that the allowance for loan losses at
March 31, 2002 is adequate to absorb estimated probable losses inherent in the
loan portfolio. The allocation of components of the allowance at March 31, 2002
are consistent with the amounts at December 31, 2001. The most recent regulatory
agency examinations have not revealed any material problem credits that had not
been previously identified; however, future regulatory examinations may result
in the regulatory agencies requiring additions to the allowance for loan losses
based on information available at the date of examination.
NONINTEREST INCOME AND EXPENSE Non-interest income, excluding investment
securities transactions, increased from $73.2 million in first quarter 2001 to
$82.6 million in first quarter 2002. Service charges on deposit accounts
increased $6.5 million from $27.3 million in first quarter of 2001 to $33.8
million in first quarter 2002 due to higher volume of commercial accounts and
changes in our overdraft policies and fee structure. Other income increased $3
million in first quarter 2002 compared to 2001 due primarily to increased
earnings on bank owned life insurance and secondary mortgage income. Annualized
noninterest income as a percentage of average tangible assets improved to 1.89%
for first quarter 2002 compared to 1.83% in the same period of 2001.
16
Due to the significant impact non-recurring expenses and amortization of
intangibles has on our financial results, management monitors our financial
information on a cash operating basis. Noninterest cash operating expense is
computed as total noninterest expense less non-recurring expense and
amortization of intangibles. Noninterest cash operating expense increased to
$126.3 million in first quarter 2002 from $109.8 million in first quarter 2001.
Personnel expenses increased $9 million in the first quarter of 2002 primarily
due to increased salaries and wages as well as higher incentives and
commissions, a result of our increased sales emphasis. Occupancy and equipment
expense increased $2 million due in part to our larger branch network. Other
expenses increased $5.5 million in the first quarter of 2002 due in part to
increased cardholder/merchant processing expense. Additionally, our expanded
branch network resulted in increased general operating expenses.
As a result of the aforementioned changes, net overhead (noninterest cash
operating expense less noninterest income) as a percentage of average tangible
assets increased to .91% for the three months ended March 31, 2002 from .83% for
the three months ended December 31, 2001 and .89% for the three months ended
March 31, 2001. Our cash efficiency ratio (noninterest cash operating expense as
a percentage of taxable equivalent net interest income and noninterest income)
was 46.54% for the three months ended March 31, 2002, and 47.07% and 47.09% for
the three months ended December 31 and March 31, 2001, respectively. The
following schedule presents noninterest income and noninterest cash operating
expense as a percentage of average tangible assets for the five quarters ended
March 31, 2002.
2002 2001
---------------- ----------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------------------------------
Noninterest income 1.89 % 2.12 1.88 1.93 1.83
---------------------------------------------------------------------------------------------------------------------
Personnel expense 1.53 1.58 1.38 1.53 1.48
Occupancy and equipment expense .38 .34 .38 .37 .38
Other operating expense, cash basis .89 1.03 .93 .97 .86
---------------------------------------------------------------------------------------------------------------------
Noninterest expense, cash basis 2.80 2.95 2.69 2.87 2.72
---------------------------------------------------------------------------------------------------------------------
Net overhead, cash basis .91 % .83 .81 .94 .89
---------------------------------------------------------------------------------------------------------------------
In the first quarter of 2002, core deposit intangibles amortization totaled
$17.4 million compared to first quarter 2001's $15 million. Due to the change in
accounting standards relating to intangibles discussed earlier, we recorded no
goodwill amortization in the first quarter of 2002. This compares to $12.1
million of goodwill amortization recognized in the first quarter of 2001.
Conversion/merger expenses incurred in the first quarter of 2002 totaled $4.9
million and were related to NCF's acquisition of the divested Wachovia branches,
First Vantage-Tennessee and SouthBanc Shares, Inc. We anticipate no additional
merger expenses related to these acquisitions.
Financial Condition; Liquidity and Capital Resources
Total assets have increased to $20.1 billion at March 31, 2002 from $17.8
billion one year earlier. Quarterly average assets increased to $19.5 billion
for the first quarter of 2002 from $17.6 billion for the same quarter in 2001.
Federal Home Loan Bank advances have decreased $428.3 million since December 31,
2001, primarily due to increases in other sources of borrowed funds. This source
of liquidity had an average rate of 4.49% for the three months ended March 31,
2002.
Our capital position has historically been strong as evidenced by the ratio of
average tangible equity to average tangible assets of 6.60% and 7.20% for the
three months ended March 31, 2002 and 2001, respectively. The unrealized gains
on investment securities available for sale, net of applicable tax expense,
decreased $20.8 million from December 31, 2001 to result in an after-tax
unrealized loss at March 31, 2002 of $8.1 million. As of March 31, 2002,
unrealized gains on investment securities available for sale, net of
applicable tax expense, decreased book value by $.04 per share.
17
On January 15, 2002, NCF's Board of Directors declared a quarterly cash dividend
of $.15 per common share. The dividend is payable April 1, 2002, to stockholders
of record as of March 8, 2002. On July 25, 2001, NCF's common stock was listed
on the New York Stock Exchange and began trading under the symbol NCF. Prior to
that date, NCF's common stock was traded on the Nasdaq National Market under the
symbol NCBC.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines requiring a minimum leverage ratio relative to
total assets and minimum capital ratios relative to risk-adjusted assets. The
minimum leverage ratio is 3% if the holding company has the highest regulatory
rating and meets other requirements but the leverage ratio required may be
raised from 100 to 200 basis points if the holding company does not meet these
requirements. The minimum risk-adjusted capital ratios are 4% for Tier I capital
and 8% for total capital. Additionally, the Federal Reserve may set capital
requirements higher than the minimums we have described for holding companies
whose circumstances warrant it. NCF and our banking subsidiaries continue to
maintain higher capital ratios than required under regulatory guidelines. The
following table discloses NCF's components of capital, risk-adjusted asset
information and capital ratios at March 31, 2002 (dollars in thousands):
Tier I capital $ 1,398,702
Tier II capital:
Allowable loan loss reserve $ 160,194
Subordinated debt 6,600
Other 68
-------------------------------------------------------------------------------
Total capital $ 1,565,564
===============================================================================
Risk-adjusted assets $13,852,629
Average regulatory assets 18,201902
Tier I capital ratio 10.10%
Total capital ratio 11.30
Leverage ratio 7.68
===============================================================================
Each of our banking subsidiaries are subject to similar risk-based and leverage
capital requirements adopted by their applicable federal banking agency. Each
was in compliance with the applicable capital requirements as of March 31, 2002.
Impact of Recently Issued Accounting Standards
In July, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, Goodwill and Other Intangible Assets. Statement 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to the estimated residual values, and reviewed for
impairment in accordance with Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. NCF adopted Statement 142 on January 1, 2002.
Upon adoption of Statement 142, NCF reassessed the useful lives and residual
values of intangible assets acquired in purchase business combinations. No
amortization period adjustments or reclassification entries were considered
necessary. NCF has not recorded any intangible assets identified as having
indefinite useful lives.
In connection with the transitional goodwill impairment evaluation, Statement
142 requires NCF to perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. To accomplish this, NCF must
identify its reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of adoption. NCF
will then have up to six months from the date of adoption to determine the fair
value of each reporting unit and compare it to the reporting unit's carrying
amount. To the extent a reporting unit's carrying amount exceeds its fair value,
an indication exists that the reporting unit's goodwill may be impaired and
18
NCF must perform the second step of the transitional impairment test. In the
second step, NCF must compare the implied fair value of the reporting unit's
goodwill, determined by allocating the reporting unit's fair value to all of its
assets (recognized and unrecognized) and liabilities, to its carrying amount,
both of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in NCF's statement of
income.
As the transitional goodwill impairment evaluation has not been completed as of
the date of this report, it is not practicable to reasonably estimate the impact
of this testing on NCF's consolidated financial statements; however, management
does not anticipate that any transitional impairment losses will be required to
be recognized as the cumulative effect of a change in accounting principle.
NCF adopted Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets effective January 1, 2002. Statement 144 supersedes both
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement 142, as discussed above. Management does not expect
the adoption of Statement 144 for long-lived assets held for use to have a
material impact on our financial statements because the impairment assessment
under Statement 144 is largely unchanged from Statement 121. The provisions of
the Statement for assets held for sale or other disposal generally are required
to be applied prospectively after the adoption date to newly initiated disposal
activities. Therefore, management cannot determine the potential effects that
adoption of Statement 144 will have on NCF's financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk reflects the risk of economic loss resulting from adverse changes in
market price and interest rates. This risk of loss can be reflected in
diminished current market values and/or reduced potential net interest income in
future periods.
NCF's market risk arises primarily from interest rate risk inherent in its
lending and deposit-taking activities. The structure of NCF's loan and deposit
portfolios is such that a significant rise or decline in interest rates may
adversely impact net market values and net interest income. NCF is not subject
to currency exchange risk or commodity price risk. Responsibility for monitoring
interest rate risk rests with the Asset/Liability Management Committee ("ALCO"),
comprised of senior management. ALCO regularly reviews NCF's interest rate risk
position and adopts balance sheet strategies that are intended to optimize net
interest income while maintaining market risk within a set of Board-approved
guidelines.
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, 2001.
19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
None.
(b). Reports on Form 8-K
A Current Report on Form 8-K dated January 29, 2002, filed under Item
7 - Financial Statements and Exhibits and Item 9 - Regulation FD
Disclosure, reported the text of a presentation made by management.
20
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: May 13, 2002 /s/ ERNEST C. ROESSLER
----------------------
Ernest C. Roessler
President and Chief Executive Officer
Date: May 13, 2002 /s/ SHELDON M. FOX
------------------
Sheldon M. Fox
Chief Financial Officer
21