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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, 2002

Commission File Number: 0-6094

NATIONAL COMMERCE FINANCIAL CORPORATION
(Exact name of issuer as specified in charter)

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 o

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.

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National Commerce Financial Corporation and Subsidiaries
INDEX TO FORM 10-Q

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

National Commerce Financial Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001

Commitments and contingencies (note 8)

See accompanying notes to consolidated financial statements

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National Commerce Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 2002 and 2001
(Unaudited)

See accompanying notes to consolidated financial statements

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National Commerce Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(Unaudited)

See accompanying notes to consolidated financial statements.

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National Commerce Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Nine Months Ended September 30, 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 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, 2001. Operating results for the three- and nine-month periods ended September 30, 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 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 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 to NCF’s balance sheet $1.4 billion in deposits, $450 million in loans, $24.8 million in fixed assets and $1 billion in available for sale investment securities which were subsequently sold to restructure the balance sheet. Net cash paid in this business combination totaled $324 million. Core deposit intangible and goodwill recorded from the branches acquired amounted to $55.4 million and $125.4 million, respectively. Under the terms of the acquisition agreement with Wachovia, NCF is required to make a contingent purchase price payment in February 2003 based on the retention of specifically identified deposit accounts. At September 30, 2002, based on the then outstanding retained balances of the specific deposit accounts, the contingent payment would have been approximately $11.1 million. The ultimate payment under this contingency, if any, is likely to change as some of the currently outstanding specific deposit accounts may be closed before final settlement of the contingency. The amount of any contingent payment will be an addition to goodwill. The acquisition continues NCF’s strategic expansion into high growth areas of the 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 from these acquisitions are included in NCF’s operating results only from the dates of acquisition.

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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, 2002 and 2001 and accumulated other comprehensive income as of September 30, 2002, December 31, 2001 and September 30, 2001 are comprised of unrealized gains and losses on investment securities available for sale and certain hedging instruments and adjustments of minimum pension liability.

(2) LOANS

Management internally classifies the loan portfolio by the purpose of the borrowing. Such classification is presented below as of September 30, 2002 and December 31, 2001. 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.

Mortgage loans held for sale totaled $200.8 million at September 30, 2002 and $103.4 million at December 31, 2001.

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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, 2002 and 2001:

(4) NONPERFORMING ASSETS

Following is a summary of nonperforming assets as of September 30, 2002 and December 31, 2001:

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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, 2002 and year ended December 31, 2001 are as follows:

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:

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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- and nine-month periods ended September 30, 2002 compared to the adjusted net income for the same periods ended September 30, 2001:

(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, 2002 and 2001:

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National Commerce Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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, 2002 and 2001. Dilutive common shares arise from the potentially dilutive effect of NCF’s stock options outstanding.

(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 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.

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.

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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:

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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, 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 non-bank subsidiaries. This Quarterly Report on Form 10-Q should be read in conjunction with NCF’s 2001 Annual Report onForm 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 theestimated results is subject to a number of risks and uncertainties. Such risks include:

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.

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Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States. 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 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 be tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed for impairment. In accordance with Statement 142, we tested our recorded goodwill for impairment and found no impairment losses. See additional discussion under “Recently Issued Accounting Standards”.

As of September 30, 2002, we have unamortized goodwill totaling $1.1 billion and core deposit intangibles totaling $253.8 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.

Operating Cash Earnings

Non-recurring items and the amortization of intangibles that arose from prior acquisitions significantly impact our earnings under accounting principles generally accepted in the United States of America (“GAAP”). Management monitors our performance on both a net income basis determined in accordance with accounting principles GAAP, as well as on an operating cash basis before intangibles amortization and non-recurring items. We refer to this measure of performance as “operating cash earnings”. Operating cash earnings are presented in this report as supplemental information to enhance the reader’s understanding of, and highlight trends in, our financial results excluding the impact of intangibles amortization and non-recurring items. Operating cash earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with GAAP. Intangibles amortization and non-recurring items excluded from net income to derive operating cash earnings may be significant and may not be comparable to other companies. Table 1 provides a summary of the non-recurring items and intangibles amortization over the three- and nine-month periods ended September 30, 2002 and 2001 and their effect on earnings and diluted earnings per share.

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Table 1

OPERATING CASH EARNINGS
Three and Nine Months Ended September 30, 2002 and 2001
(Dollars in Thousands Except Per Share Data)

Results of Operations – Three Months Ended September 30, 2002 and 2001

Despite the effects of the lingering recession, our third quarter results exceeded results for the comparable period in 2001 due to our focus on revenue growth, asset quality and expense control while expanding our franchise. We experienced increased loan demand and higher levels of fee income.

Net income for the three months ended September 30, 2002 totaled $83.0 million compared to 2001’s $57.6 million. Basic and diluted net income per share were $.40 in third quarter 2002 and $.28 in the third quarter of 2001. Annualized returns on average assets and stockholders’ equity were 1.59% and 12.63%, respectively, in 2002 compared to 1.29% and 9.56%, respectively, for the three months ended September 30, 2001.

Operating cash earnings for the three months ended September 30, 2002 totaled $93.7 million compared to 2001’s $80.4 million. Basic and diluted operating cash earnings per share totaled $.45 for the third quarter of 2002 and $.39 in the third quarter of 2001. Annualized operating cash returns on average tangible assets and average tangible equity were 1.92% and 29.22%, respectively, in 2002 compared to 1.90% and 25.48%, respectively, for the same period in 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 2002 compared to 2001, as discussed below.

During October, we announced plans which will expedite the expansion of our banking presence in the Atlanta metropolitan area by entering into an agreement to purchase 15 traditional branch buildings from Wachovia and assume Wachovia’s lease obligations for seven additional branch buildings. These 22 branches complement our existing and planned 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. This agreement with Wachovia is expected to close in the first quarter of 2003. Under the terms of the agreement, we are not permitted to commence operations in these branches until the fourth quarter of 2003.

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We are focusing our efforts on capturing a five percent share of the $57 billion deposit market 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 MSA’s in the Southeast, we will now focus on increasing market share in each region.

NET INTEREST INCOME Average Balances and Net Interest Income Analyses on a taxable equivalent basis for each of the periods are included in Table 2. Taxable equivalent net interest income was $193.3 million in the third quarter of 2002, compared to $172.9 million for the third quarter of 2001, an 11.8% increase.

During 2001, the Federal Reserve decreased the target federal funds rate eleven times by a total of 475 basis points, of which 350 basis points occurred by the end of the third quarter of 2001. There have been no changes in this rate through September 30, 2002. Each time the Federal Reserve has decreased the target federal funds rate, our banking subsidiaries have lowered their prime lending rate to keep pace with the changes in funding costs. The prime rates charged by our banking subsidiaries have fallen from 9.50% at December 31, 2000 to 6.00% at September 30, 2001 and to 4.75% by December 31, 2001, the rate in effect at September 30, 2002. Our yield on interest-earning assets has fallen due to these interest rate changes. The rates paid on our interest-bearing liabilities correspondingly have decreased when repriced. Our balance sheet has historically been liability sensitive and in times of falling interest rates, the decrease in interest expense from the lower cost of interest- bearing liabilities exceeds the decrease in interest income from the lower yield on earning assets. Consequently, our interest rate spread widened to 3.95% in 2002 compared to third quarter 2001’s 3.90%.

NCF’s net interest margin declined to 4.27% for the third quarter of 2002 compared to third quarter 2001’s 4.42%. The contribution of “net free liabilities” to the net interest margin (computed as net interest margin less the interest rate spread) fell to 32 basis points in 2002 from 2001’s 52 basis points. Despite the increase in “net free liabilities” of approximately $366 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. Our Asset/Liability Management Committee (“ALCO”), which monitors our interest sensitivity and liquidity, has restructured our balance sheet to be slightly asset sensitive in recognition that interest rates will eventually rise again.

During November 2002, the Federal Reserve reduced the target federal funds rate by 50 basis points and we reduced our prime rate by 50 basis points; we do not anticipate any further rate changes in 2002. 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 with a gradual increase in interest rates beginning in the second half of 2003.

PROVISION FOR LOAN LOSSES The provision for loan losses during the third quarter of 2002 was $11.0 million compared to $9.6 million in the third quarter of 2001. Net loan charge-offs totaled $9.3 million in the third quarter of 2002 and $6.1 million in the third quarter of 2001 which represent .29% and .21% (annualized) net charge-offs to average loans for the respective periods. The allowance for loan losses as a percent of total loans was 1.28% at September 30, 2002 and 1.31% at September 30, 2001. The decrease in the percentage of allowance to total loans was partially attributable to the increase in mortgage loans held for sale included in total loans. The current level of the allowance for loan losses provides a coverage level of 4.44 times the current quarter’s annualized net charge-offs and 5.51 times nonperforming loans.

During the third quarter of 2002, we charged-off approximately $3.2 million of aircraft loans. These charge-offs in the aircraft lending portfolio were primarily responsible for the increase in the net charge-off ratio for the third quarter. The increase in aircraft charge-offs also resulted in a decline in the annualized net charge-off coverage ratio.

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Table 2

AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
Three Months Ended September 30, 2002 and 2001
(Taxable Equivalent Basis - Dollars in Thousands) (1)