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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________ to ______________________
COMMISSION FILE NUMBER: 0-6094
NATIONAL COMMERCE FINANCIAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Tennessee 62-0784645
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
One Commerce Square, Memphis, Tennessee 38150
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(Address of principal executive offices)
Registrant's telephone number, including area code (901) 523-3434
Former Name of Registrant: National Commerce Bancorporation
Securities issued pursuant to Section 12(b) of the Act:
None
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Securities issued pursuant to Section 12(g) of the Act:
Common Stock, $2 par value
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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.
[X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 2002 was $5,344,679,812. On March 20, 2002, there
were 205,930,037 outstanding shares of the Registrant's $2.00 par value Common
Stock.
DOCUMENT INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT OF REGISTRANT FOR THE ANNUAL MEETING OF
SHAREHOLDERS HELD ON APRIL 24, 2002 ARE INCORPORATED IN PART III OF THIS REPORT.
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CROSS REFERENCE INDEX
Page
PART I. ----
Item 1. Business............................................................................. 3
Description.......................................................................... 3
Average Balance Sheets............................................................... 14
Net Interest Income Analysis -- Taxable Equivalent Basis............................. 14
Net Interest Income and Volume/Rate Variance -- Taxable Equivalent Basis............. 15
Investment Securities Portfolio...................................................... 20
Investment Securities -- Maturity/Yield Schedule..................................... 20
Types of Loans....................................................................... 18
Maturities and Sensitivities of Loans to Changes in Interest Rates................... 18
Nonperforming and Risk Assets........................................................ 26
Loan Loss Experience................................................................. 24
Average Deposits..................................................................... 21
Maturity Distribution of Large Denomination Time Deposits............................ 30
Return on Equity and Assets.......................................................... 8
Short-Term Borrowings................................................................ 46
Item 2. Properties........................................................................... 7
Item 3. Legal Proceedings.................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders.................................. 7
PART II.
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters............. 8
Item 6. Selected Financial Data.............................................................. 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 32
Item 8. Financial Statements and Supplementary Data.......................................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 63
PART III.
Item 10. Directors and Executive Officers of the Registrant................................... 63
Item 11. Executive Compensation............................................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 63
Item 13. Certain Relationships and Related Transactions....................................... 63
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 63
2
ITEM 1. BUSINESS
REGISTRANT
National Commerce Financial Corporation ("NCF") is a registered bank holding
company headquartered in Memphis, Tennessee. NCF's principal business is
providing banking and other financial services through its banking and
non-banking subsidiaries. NCF is the parent holding company of National Bank of
Commerce ("NBC") and NBC Bank, FSB (collectively referred to as the "Subsidiary
Banks"). NCF is a 49% owner of First Market Bank, FSB. First Market Bank is
based in Richmond, Virginia and operates 24 branch offices in the Richmond
area. Additionally, NCF owns all of the outstanding common stock of
TransPlatinum Service Corp. ("TransPlatinum"), Commerce Capital Management,
Inc., U.S.I. Alliance Corp., First Mercantile Trust, First Mercantile Capital
Management, Inc. ("First Mercantile Capital"), National Commerce Capital Trust
I, National Commerce Capital Trust II, Senior Housing Crime Prevention
Foundation Investment Corporation and Monroe Properties. The principal assets
of NCF are all of the outstanding shares of common stock of its subsidiaries.
NCF's principal sources of revenue are the interest income and dividends it
receives from the Subsidiary Banks. At December 31, 2001, NCF had consolidated
assets of approximately $19.3 billion.
In July 2000, NCF merged with the former CCB Financial Corporation ("CCBF"),
an $8.8 billion bank holding company headquartered in Durham, North Carolina,
whose primary subsidiary was Central Carolina Bank and Trust Company ("CCB").
In the merger, CCB became a wholly-owned subsidiary of NCF. The transaction was
accounted for as a purchase. On December 31, 2001, CCB was merged into NBC. The
former offices of CCB continue to operate under the name of Central Carolina
Bank, a division of NBC.
In November 2001, NCF acquired SouthBanc Shares, Inc., a $660 million South
Carolina financial institution with 10 branch offices. In August 2001, NCF
acquired First Vantage-Tennessee, a $165 million financial institution located
in Knoxville, Tennessee. Both transactions were accounted for as purchases. In
February 2002, NBC acquired 37 former Wachovia and First Union branches from
Wachovia Bank, N.A. and First Union National Bank. In the transaction, NBC
acquired loans of approximately $452 million and deposits of approximately $1.4
billion.
SUBSIDIARY BANKS
NBC is a nationally chartered bank headquartered in Memphis, Tennessee with
its operations headquarters in Durham, North Carolina. NBC offers commercial
and retail banking, savings and trust services through 234 CCB offices located
in North Carolina and South Carolina and 147 NBC offices located in Tennessee,
Mississippi, Arkansas, Georgia, Virginia and West Virginia. In addition, it
offers trust services through a subsidiary located in Florida. NBC had
approximately $19.1 billion in assets at December 31, 2001. NBC provides a full
range of financial products including demand and time deposits; secured and
unsecured commercial and consumer loans; safe deposit boxes; trust services for
corporations, employee benefit plans and individuals; and certain insurance and
securities brokerage services.
NBC Bank, FSB is a federally chartered bank headquartered in Memphis,
Tennessee. It offers commercial and retail banking through 2 offices located in
DeSoto County, Mississippi. NBC Bank, FSB had approximately $27 million in
assets at December 31, 2001.
NON-BANK SUBSIDIARIES
NCF has nine wholly-owned non-bank subsidiaries: TransPlatinum, Commerce
Capital Management, Inc., U.S.I. Alliance, First Mercantile Trust, First
Mercantile Capital, National Commerce Capital Trust I, National Commerce
Capital Trust II, Senior Housing Crime Prevention Foundation Investment
Corporation and Monroe Properties. TransPlatinum provides financial services to
the trucking and petroleum industries and bankcard services to merchants.
Commerce Capital Management, Inc. is an investment advisor registered with the
Securities and Exchange Commission under the Investment Advisor's Act of 1940.
U.S.I. Alliance and Senior Housing Crime Prevention Foundation Investment
Corporation are providers of security programs for the long-term care industry.
First Mercantile Trust provides processing and other services for retirement
plans. First Mercantile Capital provides professional money management services
for employee benefit plans. National Commerce Capital Trust I and National
Commerce Capital Trust II are special purpose entities formed to offer capital
trust pass-through securities. Monroe Properties is an inactive subsidiary that
has held foreclosed real estate.
NBC has fifteen wholly-owned non-bank subsidiaries:
National Commerce Bank Services, Inc. ("NCBS") and its wholly-owned
subsidiary, BankersMart, provide retail banking consulting services to other
financial institutions.
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NBC Insurance Services, Inc. provides life, property and casualty
insurance and annuities and through its division, CCBi, provides full
brokerage services through an independent discount brokerage firm.
Kenesaw Leasing Inc. and J & S Leasing, Inc, are both equipment-leasing
firms.
The following subsidiaries hold loans or are the parent companies of
companies that hold loans: National Commerce Real Estate Holding Company and
its wholly-owned subsidiary, Commerce Real Estate Holding Company and its
wholly-owned subsidiary, Commerce Real Estate Company, a real estate
investment trust; NBC Capital North, Inc. and its wholly-owned subsidiary
Corcoran Holdings, Inc, a real estate investment trust and its wholly-owned
subsidiary, Watts Properties, Inc., a real estate investment trust; NBC
Market South, Inc. and its wholly-owned subsidiary, NBC Management Co.,
Inc.; and NBC Investco, Inc. and its wholly-owned subsidiary, CCBDE, Inc.,
an investment holding company.
Salem Trust Company provides institutional trust services in Florida.
Sprunt Insurance, LTD. is an inactive company formed for reinsurance of
private mortgage insurance headquartered in the British Virgin Islands.
United Service Corporation, United Investment Services and Mortgage First
Service Corporation were acquired in the SouthBanc acquisition. United
Service Corporation develops real estate, United Investment Services and
Mortgage First Service Corporation are in the process of winding down.
Southland Associates, Inc. holds an investment in a commercial title
agency.
Additionally, NBC owns 80% of Fenesco Financial Enterprises, Inc. D/B/A
NBC Capital Markets Group ("Capital Markets") which provides retail and
institutional brokerage services.
TransPlatinum has two wholly-owned subsidiaries that provide financial
services to the transportation industry. FleetOne, L.L.C. is a provider of
fuel cards and related services and Prime Financial Services, Inc. is a
receivables financing company.
BUSINESS SEGMENTS
Management monitors NCF performance as two business segments, traditional
banking and financial enterprises. The traditional banking segment includes
sales and distribution of financial products and services to individuals. These
products and services include loan products such as residential mortgage, home
equity lending, automobile and other personal financing needs. Traditional
banking also offers various deposit products that are designed for customers'
saving and transaction needs. This segment also includes lending and related
financial services provided to small- and medium-sized corporations. Included
among these services are several specialty services such as real estate
finance, asset-based lending and residential construction lending. Traditional
banking also includes management of the investment portfolio and non-deposit
based funding. The financial enterprises segment is comprised of trust services
and investment management, transaction processing, retail banking
consulting/in-store licensing and broker/dealer activities. See Note 17 to the
Consolidated Financial Statements for segment information.
COMPETITION
Vigorous competition exists in all major geographic and product areas where
NCF is presently engaged in business. The Subsidiary Banks compete with other
major commercial banks, diversified financial institutions such as thrift
institutions, money market and other mutual funds, securities firms, mortgage
companies, leasing companies, finance companies and a variety of financial
services and advisory companies.Competitors are not limited to companies
located in NCF's immediate geographic markets as an increased variety of
financial services are being offered on the Internet. Larger competing
financial institutions may be able to offer services and products that are not
cost-efficient for our Subsidiary Banks to offer. Moreover, larger competitors
have access to greater financial resources that allow higher lending limits
than the Subsidiary Banks.
In the fourth quarter of 1999, the Gramm-Leach-Bliley Act became law. The
Gramm-Leach-Bliley Act permits bank holding companies to become financial
holding companies and, by doing so, affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature
or complementary thereto. A bank holding company may become a financial holding
company (a "FHC") if each of its subsidiary banks is (i) well-capitalized under
the FDICIA prompt corrective actions provisions, (ii) well-managed and (iii)
has at least a satisfactory rating under the Community Reinvestment Act.
No prior regulatory approval is required for a FHC to acquire a company,
other than a bank or savings association, engaged in activities permitted under
the Gramm-Leach-Bliley Act. Activities cited by the Gramm-Leach-Bliley Act as
being "financial in nature" include: securities underwriting, dealing and
market making; sponsoring mutual funds and investment companies; insurance
underwriting and agency; merchant banking activities; and activities that the
Federal Reserve Board has determined to be closely related to banking.
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A national bank may also engage, subject to limitation on investment, in
activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development and real estate
investment. A bank must engage in these activities through a financial
subsidiary or the bank, if the bank is well-capitalized, well-managed and has
at least a satisfactory Community Reinvestment Act rating. Subsidiary banks of
a FHC or national banks with financial subsidiaries must continue to be
well-capitalized and well-managed in order to continue to engage in activities
that are financial in nature. In addition, an FHC or a bank may not acquire a
company that is engaged in activities that are financial in nature unless each
of the subsidiary banks of the FHC or the bank has at least a satisfactory
Community Reinvestment Act rating.
The Gramm-Leach-Bliley Act will change the competitive environment of NCF
and its subsidiaries in substantial and unpredictable ways. We cannot
accurately predict the ultimate effect that this legislation, or implementing
regulations, will have upon the financial condition or results of operations of
NCF or any of its subsidiaries.
INTERSTATE BANKING AND BRANCHING
Federal law permits, bank holding companies to acquire banks and bank
holding companies located in any state, subject to certain concentration limits
and other requirements. Any subsidiary bank of a bank holding company may
receive deposits, renew time deposits, make loans, service loans and receive
loan payments as an agent for any other bank subsidiary, wherever located, of
that bank holding company. Banks may acquire branch offices outside their home
states by merging with out-of-state banks, purchasing branches in other states
and establishing de novo branch offices in other states. The ability of banks
to acquire branch offices through purchase or opening of other branches is
contingent, however, on the host state having adopted legislation "opting in"
to those applicable provisions of federal law. In addition, the ability of a
bank to merge with a bank located in another state is contingent on the host
state not having adopted legislation "opting out" of those applicable
provisions of federal law.
SUPERVISION AND REGULATION
Bank holding companies and their subsidiaries are subject to extensive
federal and state regulation. This regulatory framework is intended primarily
toprotect depositors and the federal deposit insurance funds and not security
holders or other owners of the institutions. The following is a summary of
regulations and statutes affecting NCF and its subsidiaries. To the extent that
the following information describes statutory and regulatory provisions, it is
qualified in its entirety by reference to those provisions. A change in the
statutes, regulations or regulatory policies applicable to NCF or its
subsidiaries may have a material effect on its businesses.
BANK HOLDING COMPANY REGULATION
As a bank holding company, NCF is subject to regulation under the Bank
Holding Company Act, and to inspection, examination and supervision by the
Federal Reserve Board. Under the Bank Holding Company Act ("BHCA"), bank
holding companies generally may not acquire the ownership or control of more
than 5% of the voting shares, or substantially all the assets, of any company,
including a bank or another bank holding company, without the Federal Reserve
Board's prior approval. Generally, bank holding companies may engage only in
banking and other activities that are determined by the Federal Reserve Board
to be closely related or incidental to banking. However, in the event a bank
holding company has elected to become a FHC, it would no longer be subject to
the general requirement that it obtain the Federal Reserve Board's approval
prior to acquiring more than 5% of the voting shares, or substantially all of
the assets, of a company that is not a bank or bank holding company. Moreover,
as a FHC, it would be permitted to engage in activities that are jointly
determined by the Federal Reserve Board and the Treasury Department to be
"financial in nature or incidental to such financial activity." FHC's may also
engage in activities that are determined by the Federal Reserve Board to be
"complementary to financial activities."
There are a number of obligations and restrictions imposed by law on a bank
holding company. These safety and soundesss measures are designed to minimize
potential loss to depositors and the Federal Deposit Insurance Corporation
("FDIC") insurance funds. For example, if an insured banking subsidiary becomes
"undercapitalized", the parent bank holding company is required to guarantee
(subject to certain limits) the subsidiary's compliance with the terms of any
capital restoration plan filed with the federal banking agency that is its
primary regulator. Also, a bank holding company is required to serve as a
source of financial strength to its banking subsidiaries and to commit
resources to support such institutions in circumstances where it might not do
so absent such policy. Under the BHCA, the Federal Reserve Board has the
authority to require a bank holding company to terminate any activity or to
relinquish control of a nonbank subsidiary upon the Federal Reserve Board's
determination that such activity or control constitutes a serious risk to the
financial soundness and stability of a banking subsidiary of the bank holding
company.
Bank holding companies are required to comply with the Federal Reserve
Board's risk-based capital guidelines which require a minimum ratio of total
capital to risk-weighted assets of 8%. At least half of the total capital is
required to be Tier 1 capital. In
5
addition to the risk-based capital guidelines, the Federal Reserve Board has
adopted a minimum leverage capital ratio under which a bank holding company
must maintain a level of Tier 1 capital to average total consolidated assets of
at least 3% in the case of a bank holding company which has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
capital ratio of at least 1% to 2% above the stated minimum.
REGULATION OF BANKING SUBSIDIARIES
NBC is a national bank chartered under the National Banking Act and, as
such, is subject to regulation and examination primarily by the Office of the
Comptroller of the Currency (the "OCC") and, secondarily, by the FDIC and the
Federal Reserve Board. NBC Bank, FSB and First Market Bank, FSB are federal
savings banks primarily regulated by the Office of Thrift Supervision (the
"OTS"). NCF and the Subsidiary Banks have other subsidiaries that are subject
to governmental regulation and supervision. Commerce Capital Management, Inc.
is registered with the SEC as an investment adviser pursuant to the Investment
Advisers Act of 1940, as amended. Capital Markets, as a registered securities
broker/dealer under the Exchange Act and member of the National Association of
Securities Dealers, is subject to regulation by the SEC and the NASD. Salem
Trust Company, as a Florida trust company that provides institutional trust
services, is subject to regulation and examination primarily by the Florida
banking regulators. Sprunt Insurance Company, Ltd., headquartered in the
British Virgin Islands, was formed to reinsure private mortgage insurance on
mortgage loans originated by CCB but is currently not reinsuring private
mortgage insurance. This company is subject to regulation and examination under
the laws of the British Virgin Islands. All regulatory agencies require
periodic audits and regularly scheduled reports of financial information.
Almost every aspect of the operations and financial condition of the
Subsidiary Banks are subject to extensive regulation and supervision and to
various requirements and restrictions under federal and state law. These
include requirements governing capital adequacy, liquidity, earnings,
dividends, reserves against deposits, management practices, branching, loans,
investments and provision of services. The federal banking agencies have broad
enforcement powers over the Subsidiary Banks. These agencies have the power to
terminate deposit insurance, to impose substantial fines and other civil and
criminal penalties, and to appoint a conservator or receiver if any of a number
of conditions are met.
INSURANCE ASSESSMENT
The Subsidiary Banks' deposits are insured up to regulatory limits by the
FDIC.These deposits are subject to deposit insurance assessments to maintain
the Bank Insurance Fund ("BIF") and/or the Savings Association Insurance Fund
("SAIF") administered by the FDIC. The FDIC has adopted regulations
establishing a permanent risk-related deposit insurance assessment system.
Under this system, the FDIC places each insured bank in one of nine risk
categories based on the bank's capitalization and supervisory evaluations
provided to the FDIC by the institution's primary federal regulator. Each
insured bank's insurance assessment rate is then determined by the risk
category in which it is classified by the FDIC.
The annual insurance premiums on bank deposits insured by the BIF and the
SAIF vary between $0.00 per $100 of deposits for banks classified in the
highest capital and supervisory evaluation categories to $.27 per $100 of
deposits for banks classified in the lowest capital and supervisory evaluation
categories. The Deposit Insurance Funds Act of 1996 provides for additional
assessments against insured depository institutions to fund the operations of
Financing Corporation ("FICO") funding. The FDIC established the FICO
assessment rates effective January 1, 1999 at $.012 per $100 annually for
BIF-assessable deposits and $.061 per $100 annually for SAIF-assessable
deposits. The FICO assessments do not vary depending upon a depository
institution's capitalization or supervisory evaluations.
In March 2002, the FDIC Board of Directors alerted the financial insitutions
industry to the possibility of higher deposit insurance premiums in the second
half of 2002. The higher premiums, if imposed, would likely affect only deposit
assessments for deposits insured under the BIF and the amount of any such
increase would be at most 5 basis points. The FDIC Board of Directors will
revisit the issue in the second quarter of 2002.
FISCAL AND MONETARY POLICY
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loan and
securities holdings, constitutes the major portion of its earnings. Thus, the
earnings and growth of NCF and its Subsidiary Banks are subject to the
influence of economic conditions generally, both domestic and foreign, and also
to the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve Board. The Federal Reserve Board regulates the
supply of money through various means, including open market dealings in United
States government securities, setting the discount rate at which banks may
borrow from
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the Federal Reserve Board, and setting the reserve requirements on deposits.
The nature and timing of any changes in such policies and their effect on NCF
and its subsidiaries cannot be predicted.
EXECUTIVE OFFICERS OF THE REGISTRANT
All officers of NCF are elected or appointed by the board of directors to
hold their offices at the pleasure of the board, subject to the terms of
employment agreements that are filed or incorporated as Exhibits to this Annual
Report. At February 28, 2002, the executive officers of NCF were as follows:
Name Age Office Held
---- --- -----------
Thomas M. Garrott... 64 Chairman of the Board and Director
Ernest C. Roessler.. 60 President, Chief Executive Officer and Director
William R. Reed, Jr. 55 Chief Operating Officer
Sheldon M. Fox...... 41 Chief Financial Officer
J. Scott Edwards.... 56 Chief Administrative Officer
Richard L. Furr..... 52 President, Central Carolina Bank
David T. Popwell.... 42 Executive Vice President and Secretary
The above officers have served as executive officers of NCF for more than
five years except for the following:
Mr. Roessler served as Chairman of the Board, President and Chief Executive
Officer of CCBF prior to July 2000;
Mr. Fox served as Executive Vice President and Chief Financial Officer of
CCBF prior to July 2000. Prior to October 1998, he was a Partner with
KPMG LLP;
Messrs. Edwards and Furr served as Senior Executive Vice Presidents of CCBF
prior to July 2000; and
Mr. Popwell was elected Executive Vice President of NCF in August 1998 and
Secretary in October 1999. Prior to that time, he was an attorney with
Baker, Donelson, Bearman and Caldwell for more than five years.
EMPLOYEE RELATIONS
As of December 31, 2001, NCF and its subsidiaries employed 5,463 full-time
equivalent employees. NCF and its subsidiaries are not parties to any
collective bargaining agreements and employee relations are considered to be
good.
ITEM 2. PROPERTIES
NCF's principal executive offices are located in leased space at One
Commerce Square, Memphis, Tennessee. NCF's Customer Service Center is a leased
building located in Durham, North Carolina. The Subsidiary Banks operate 407
banking offices, approximately 182 of which are either leased buildings or
leased property on which the Subsidiary Banks have constructed banking offices.
The Subsidiary Banks and First Market Bank, FSB have 483 ATM locations in
operation.
ITEM 3. LEGAL PROCEEDINGS
Certain legal claims have arisen in the normal course of business in which
NCF and certain of its Subsidiary Banks have been named as defendants. Although
the amount of any ultimate liability with respect to such matters cannot be
determined, in the opinion of management and counsel, any such liability will
have no material effect on NCF's financial position or results of operations.
In addition to legal actions in the normal course of business, a thrift
institution acquired by CCB Financial Corporation and subsequently merged into
CCB filed a claim against the United States of America in the Court of Federal
Claims in 1995. The complaint seeks compensation for exclusion of supervisory
goodwill from the calculation of regulatory capital requirements as a result of
enactment of the Financial Institution Reform, Recovery and Enforcement Act of
1989 ("FIRREA"). During the 1980's, in order to induce healthy thrift
institutions to buy troubled thrifts, regulatory agencies allowed the thrifts
to count supervisory goodwill as regulatory capital on their balance sheets and
amortize the purchase over several decades. Supervisory goodwill represented
the difference between the purchase price and the actual value of an insolvent
thrift's tangible assets. However, when the FIRREA legislation was enacted in
1989, the acquiring thrifts were required to write-off their supervisory
goodwill more rapidly, effectively wiping out a significant part of their
regulatory capital. Over 100 lawsuits have been filed by the acquiring thrifts
seeking compensation from the United States for the losses suffered from
capital restrictions. The thrift institution's supervisory goodwill arose from
acquisitions in 1982. NCF is vigorously pursuing this litigation. The amount of
recovery, if any, which could result if NCF were to prevail in its suit cannot
be determined at this time. Legal expenses incurred in pursuit of the claim
have not been significant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There has been no submission of matters to a vote of stockholders during the
quarter ended December 31, 2001.
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
See "Capital Resources" in Management's Discussion and Analysis of Financial
Condition and Results of Operations for NCF's stock prices and dividends
declared during 2001 and 2000 and discussion of other shareholder matters. On
January 15, 2002, a dividend of $.15 per share was declared for payment on
April 1, 2002 to stockholders of record as of March 8, 2002. As of December 31,
2001, there were 17,800 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
NCF's Consolidated Financial Statements and the accompanying notes presented
elsewhere herein. Results of operations from all entities acquired through
business combinations accounted for as purchases are included in the
consolidated results of operations from the date of acquisition. The 2000
merger with CCB Financial Corporation significantly impacts the selected
financial data presented below as average balances and earnings from the net
assets acquired are included for the full year 2001 and approximately one-half
year in 2000.
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Five Year Summary of Selected Financial Data
Years Ended December 31
----------------------------------------------
2001 2000 1999 1998
In Thousands Except Per Share Data ----------- ---------- --------- ---------
SUMMARY OF OPERATIONS
Interest income $ 1,222,865 937,976 455,974 379,730
Interest expense 571,752 517,204 229,334 193,005
- ------------------------------------------------------------------------ ----------- ---------- --------- ---------
Net interest income 651,113 420,772 226,640 186,725
Provision for loan losses 29,199 16,456 16,921 10,710
- ------------------------------------------------------------------------ ----------- ---------- --------- ---------
Net interest income after provision 621,914 404,316 209,719 176,015
Other income 318,253 184,982 90,322 83,588
Net investment securities gains (losses) 6,635 4,509 (3,095) (804)
Other expenses (469,739) (304,593) (151,149) (136,440)
- ------------------------------------------------------------------------ ----------- ---------- --------- ---------
Income before taxes, non-recurring items and amortization of intangibles 477,063 289,214 145,797 122,359
Income taxes 160,370 95,289 48,167 41,302
- ------------------------------------------------------------------------ ----------- ---------- --------- ---------
Operating cash earnings (1) 316,693 193,925 97,630 81,057
Non-recurring items, after-tax:
Merger-related expenses (7,304) (50,466) -- --
Unrealized (losses)gains on interest rate swaps -- (50,198) 907 --
Gain on sale of credit card receivables -- -- -- --
Amortization of intangibles, after-tax:
Goodwill (48,240) (26,884) (3,479) (1,043)
Core deposit intangibles (35,853) (21,067) (2,426) (1,147)
- ------------------------------------------------------------------------ ----------- ---------- --------- ---------
Net income in accordance with GAAP $ 225,296 45,310 92,632 78,867
- ------------------------------------------------------------------------ ----------- ---------- --------- ---------
PER SHARE DATA
Basic net income $ 1.10 .29 .88 .79
Diluted net income 1.09 .28 .87 .77
Cash dividends .56 .48 .38 .32
Book value 11.97 11.52 6.00 4.03
Average shares outstanding:
Basic 204,972 157,387 104,947 99,678
Diluted 207,484 159,254 106,807 101,984
AVERAGE BALANCES
Assets $17,907,012 12,401,982 6,358,828 5,383,017
Loans 11,332,177 7,427,320 3,489,625 3,040,662
Earning assets 15,636,578 11,033,301 5,905,404 4,983,531
Goodwill 920,738 520,525 66,922 20,357
Core deposit intangibles 263,273 163,899 26,299 14,267
Deposits 11,950,703 8,158,282 4,120,703 3,675,427
Trust preferred securities and long-term debt 93,656 72,529 66,275 152,994
Interest-bearing liabilities 13,624,276 9,707,525 5,255,601 4,413,349
Stockholders' equity 2,418,149 1,522,217 542,259 419,437
SELECTED PERIOD END BALANCES
Assets $19,273,713 17,745,792 6,913,786 5,811,054
Loans 11,974,765 11,008,419 3,985,789 3,197,673
Allowance for loan losses 156,401 143,614 59,597 49,122
Goodwill 946,157 934,467 96,213 46,188
Core deposit intangibles 251,464 287,707 18,939 9,634
Deposits 12,619,479 11,979,631 4,495,900 3,947,275
Trust preferred securities and long-term debt 282,018 89,301 56,281 56,268
Stockholders' equity 2,455,331 2,364,838 649,241 408,549
RATIOS
Return on average assets 1.26% .37 1.46 1.47
Return on average equity 9.32 2.98 17.08 18.80
Net interest margin, taxable equivalent 4.36 4.02 4.07 4.35
Net loan losses to average loans .21 .20 .24 .26
Dividend payout ratio 50.91 165.52 42.61 40.51
Average equity to average assets 13.50 12.27 8.53 7.79
RATIOS EXCLUDING NON-RECURRING ITEMS AND AMORTIZATION OF INTANGIBLES
Return on average tangible assets (2) 1.89% 1.65 1.56 1.52
Return on average tangible equity (2) 25.66 23.15 21.74 21.06
- ------------------------------------------------------------------------ ----------- ---------- --------- ---------
1997
In Thousands Except Per Share Data ---------
SUMMARY OF OPERATIONS
Interest income 336,993
Interest expense 176,841
- ------------------------------------------------------------------------ ---------
Net interest income 160,152
Provision for loan losses 17,013
- ------------------------------------------------------------------------ ---------
Net interest income after provision 143,139
Other income 74,485
Net investment securities gains (losses) (80)
Other expenses (120,237)
- ------------------------------------------------------------------------ ---------
Income before taxes, non-recurring items and amortization of intangibles 97,307
Income taxes 31,907
- ------------------------------------------------------------------------ ---------
Operating cash earnings (1) 65,400
Non-recurring items, after-tax:
Merger-related expenses --
Unrealized (losses)gains on interest rate swaps --
Gain on sale of credit card receivables 4,800
Amortization of intangibles, after-tax:
Goodwill (210)
Core deposit intangibles (210)
- ------------------------------------------------------------------------ ---------
Net income in accordance with GAAP 69,780
- ------------------------------------------------------------------------ ---------
PER SHARE DATA
Basic net income .71
Diluted net income .69
Cash dividends .23
Book value 3.60
Average shares outstanding:
Basic 97,998
Diluted 101,368
AVERAGE BALANCES
Assets 4,404,852
Loans 2,513,327
Earning assets 4,148,590
Goodwill 5,038
Core deposit intangibles 4,806
Deposits 2,954,813
Trust preferred securities and long-term debt 201,089
Interest-bearing liabilities 3,671,792
Stockholders' equity 333,528
SELECTED PERIOD END BALANCES
Assets 4,692,011
Loans 2,608,967
Allowance for loan losses 43,297
Goodwill 4,942
Core deposit intangibles 4,935
Deposits 3,251,242
Trust preferred securities and long-term debt 206,136
Stockholders' equity 352,148
RATIOS
Return on average assets 1.58
Return on average equity 20.92
Net interest margin, taxable equivalent 3.97
Net loan losses to average loans .39
Dividend payout ratio 32.39
Average equity to average assets 7.57
RATIOS EXCLUDING NON-RECURRING ITEMS AND AMORTIZATION OF INTANGIBLES
Return on average tangible assets (2) 1.49
Return on average tangible equity (2) 20.20
- ------------------------------------------------------------------------ ---------
(1) NCF analyzes its performance on a net income basis in accordance with
accounting principles generally accepted in the United States, as well as
on an operating cash basis before non-recurring items and amortization of
intangibles referred to as "operating cash earnings." Operating cash
earnings are presented as supplemental information to enhance the reader's
understanding of, and highlight trends in, NCF's financial results
excluding the impact of these items. Operating cash earnings should not be
viewed as a substitute for net income and earnings per share as determined
in accordance with accounting principles generally accepted in the United
States.
(2) Average tangible assets and equity are determined as average total assets
or equity, respectively, less average unamortized goodwill and core deposit
intangibles.
- --------------------------------------------------------------------------------
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
NCF is a registered bank holding company which provides diverse financial
services through a regional network of banking subsidiaries and a national
network of nonbank subsidiaries. Our banking subsidiaries are NBC, a $19.1
billion national bank based in Tennessee and NBC Bank, FSB, a $27 million
federal savings bank based in Mississippi (collectively, the "Subsidiary
Banks"). Additionally, NCF owns 49 percent of First Market Bank, FSB, a $703.4
million federal savings bank based in Virginia. NCF's other wholly-owned
subsidiaries are TransPlatinum Service Corp., a provider of financial services
to the trucking and petroleum industries and bankcard services to merchants;
Commerce Capital Management, Inc., an registered investment advisor; First
Mercantile Trust, a provider of processing and other services for retirement
plans; First Mercantile Capital, a provider of professional money management
services for employee benefit plans; U.S.I. Alliance and Senior Housing Crime
Prevention Foundation Investment Corporation, providers of security programs in
the long-term care industry; National Commerce Capital Trust I and National
Commerce Capital Trust II, special purpose entities formed to offer capital
trust pass-through securities; and Monroe Properties, an inactive subsidiary
that has held foreclosed real estate. Additionally, NBC has subsidiaries that
provide a variety of services including retail bank consulting, trust,
investment advisory, insurance, broker/dealer and leasing services.
TransPlatinum has wholly-owned subsidiaries which provide additional financial
services to the transportation industry. This discussion and analysis of
financial condition and results of operations should be read in conjunction
with the consolidated financial statements and accompanying notes appearing
elsewhere in this report.
In July 2000, NCF merged with the former CCB Financial Corporation, an $8.8
billion bank holding company headquartered in Durham, North Carolina, whose
primary subsidiary was CCB. The transaction was accounted for as a purchase.
CCB became a wholly-owned subsidiary of NCF. On December 31, 2001, CCB was
merged into NBC. The former offices of CCB continue to operate under the name
of Central Carolina Bank, a division of NBC.
The following discussion contains certain forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements relate to anticipated future operating and financial
performance measures, including net interest margin, credit quality, business
initiatives, growth opportunities and growth rates, among other things. Words
such as "expects," "plans," "estimates," "projects," "objectives" and "goals"
and similar expressions are intended to identify these forward-looking
statements. We caution readers that such forward-looking statements are
necessarily estimates based on management's judgment, and obtaining the
estimated results is subject to a number of risks and uncertainties. Such risks
are discussed below.
RISK FACTORS
Every company faces certain business risks that must be managed to achieve
desired financial results. We perceive the following to be our significant risk
factors:
. Increases in interest rates could have a material adverse effect on our
funding costs and our net interest margin and, consequently, our earnings per
share.
. Our markets are intensely competitive, and competition in loan and deposit
pricing, as well as the entry of new competitors in our markets through, among
other means, de novo expansion and acquisitions could have a material adverse
effect on our net interest margin, our ability to recruit and retain
associates, our non-interest income and our ability to grow our banking and
non-banking businesses at the same rate as we have historically grown.
Moreover, the Gramm-Leach-Bliley Act has removed many obstacles to bank holding
companies entering other financial services businesses. Several larger bank
holding companies could enter the transaction processing, asset management,
securities brokerage and capital markets businesses in our markets, deploying
capital resources that are significantly greater than ours. Such activities
could adversely affect our banking and non-banking businesses and have a
material adverse effect on our earnings.
. In 2001, we restated our earnings for 1998 through 2000 due to technical
violations of pooling of interest rules, and any failure to meet consensus
earnings estimates could have a more pronounced negative impact on our share
price than if we had not restated our earnings for those years.
. The events of September 11, 2001, in New York and Washington, D.C., as
well as the United States' war on terrorism, may have an unpredictable effect
on economic conditions in general and in our primary market areas. If the
recovery of the domestic economy does not occur as quickly as anticipated or is
less robust than anticipated, we could experience a decline in credit quality
which could have a material adverse effect on our earnings.
10
. In February 2002, we consummated the acquisition of 37 branch offices and
related ATM's from Wachovia. We may lose deposits or be unable to attract new
deposits to these branches. Moreover, we may lose key employees in these
branches who control key customer relationships. As part of the acquisition, we
recorded core deposit intangibles and goodwill that would be subject to future
impairment. Integration may also divert management's attention from operational
matters, which could adversely affect results of operations. These risks may
hinder our ability to attain the level of financial operating performance we
have historically achieved.
. We are subject to regulation by federal and state banking agencies and
authorities and the Securities and Exchange Commission. Changes in or new
regulations could make it more costly for us to do business or could force
changes to the way we do business, which could have a material adverse effect
on earnings. The NCF Parent Company relies on dividends from its subsidiaries
as a primary source of funds to pay dividends to shareholders and cover debt
service. Federal banking law restricts the ability of our Subsidiary Banks to
pay dividends to the Parent Company. Although we expect to continue receiving
dividends from our Subsidiary Banks sufficient to meet our current and
anticipated cash needs, a decline in the profitability of the Subsidiary Banks
could result in restrictions on the payment of future dividends to the Parent
Company.
A variety of factors, including those described above, could cause actual
results and experience to differ materially from the anticipated results or
other expectations expressed in this report. We do not assume any obligation to
update these forward-looking statements or to update the reasons why actual
results could differ from those projected in the forward-looking statements.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with
accounting policies generally accepted in the United States which require that
we make estimates and assumptions (see Note 1 to the Consolidated Financial
Statements) that affect the amounts reported in those financial statements. We
believe that our determination of the allowance for loan losses involves a
higher degree of judgment and complexity than our other significant accounting
policies. The allowance for loan losses is maintained at a level we consider
adequate to provide for estimated probable losses inherent in the loan
portfolio and is increased though a provision for loan losses charged against
earnings. The allowance is comprised of specific loan allocations, allocations
for non-accrual and classified loans and general allocations by loan type. The
allowance is a significant estimate and we regularly evaluate it for adequacy.
The use of different estimates or assumptions could produce different levels of
allowance and provisions for loan losses. Additionally, an extended economic
downturn could result in additional provision to the allowance per loan losses.
Determining the fair value of net assets acquired through business
combinations, including the recognition of intangible assets, is another area
that involves a high degree of judgment and complexity. Certain assets, such as
loans held for sale, are accounted for at the lower of cost or market value.
Some of these assets do not have readily available market quotations and
require our estimation of their fair value. Additionally, certain recorded
assets, such as goodwill and core deposit intangibles, are subject to
impairment. As of December 31, 2001, we have unamortized goodwill totaling
$946.1 million and core deposit intangibles totaling $251.4 million. With the
acquisition of the Wachovia branches in 2002, we will record additional
goodwill and core deposit intangibles. These intangible assets will be
evaluated for impairment periodically.
ACQUISITIONS
In November 2001, NCF acquired SouthBanc Shares, Inc., a $660 million South
Carolina financial institution with 10 branch offices. Also in August 2001, NCF
acquired First Vantage-Tennessee, a $165 million financial institution located
in Knoxville, Tennessee. Both transactions were accounted for as purchases.
Results of operations of these acquired companies have been included in NCF's
consolidated statements of income from the dates of acquisition. In February
2002, NBC acquired 37 former Wachovia and First Union branches. In the
transaction, NBC acquired loans of approximately $452 million and deposits of
approximately $1.4 billion.
In a March 2000 transaction, TransPlatinum Service Corp. acquired Prime
Financial Services, Inc., a receivables financing company serving the
transportation industry. NCF acquired Piedmont Bancorp, Inc., a $151 million
bank holding company headquartered in Hillsborough, North Carolina in April
2000. In addition to the CCB Financial Corporation merger, NCF acquired First
Mercantile Trust and First Mercantile Capital in July 2000. These transactions
("the 2000 acquisitions") resulted in the issuance of 97.3 million shares of
common stock. Each of these transactions has been accounted for as a purchase,
and, accordingly, results of operations of the acquired companies have been
included in the consolidated statements of income from the date of purchase.
11
RESULTS OF OPERATIONS
Performance Overview
The 2000 acquisitions provided NCF with an expanded customer base,
additional avenues of revenue generation and opportunities for greater
operating efficiencies which we began to realize in 2001. With regulatory
changes allowing new competition into the financial services industry, we
continually monitor the services and products offered as well as investigate
new sources of revenue. We believe that our multi-channel distribution strategy
will serve us well in our ever-changing competitive environment. Our delivery
channels include in-store and traditional branches, direct mail, telephone, ATM
and internet banking. We feel that these options allow us to deliver
high-quality products, customer service and convenience at a low cost.
The comparability of net income for 2001 and 2000 was significantly impacted
by the CCB merger in July 2000 as only six months of its operations are
included in our 2000 income but a full year of earnings are included in 2001.
Comparisons between the two years were also impacted by significant merger
costs and other non-recurring expenses recorded in 2000, as discussed below.
Net income in 2001 totaled $225.3 million compared to 2000's $45.3 million
which equated to $1.09 per diluted share in 2001 versus $.28 in 2000. Net
income per diluted share was $.87 in 1999. Returns on average assets and
average stockholders' equity in 2001 were 1.26 percent and 9.32 percent,
respectively, compared to 2000's .37 percent and 2.98 percent. These ratios
were 1.46 percent and 17.08 percent in 1999.
Items identified as non-recurring were comprised of:
. In 2001, we recognized $11.4 million of merger-related expense to effect
the SouthBanc and First Vantage mergers and the acquisition of 37 divested
Wachovia branches (which was consummated in February 2002). To effect the
mergers in 2000, we incurred $70.7 million of merger-related expense which
included severance and other employee benefit costs, excess facilities costs
and system conversion costs.
. In 2000, we recognized $77.2 million of unrealized losses on interest rate
swaps which did not qualify for hedge accounting under SFAS No. 133. We entered
into the swaps in the first half of the year during a rising interest rate
environment. By entering into these contracts, we reduced our interest rate
sensitivity to wholesale funding. When the rate environment changed in the
latter half of 2000, we incurred losses on the swaps which were recognized as a
charge to earnings. The swaps were terminated in the first quarter of 2001. In
1999, we recognized $1.5 million of unrealized gains on similar interest rate
swap contracts. These contracts were called in the first quarter of 2000.
. In 1997, we realized gains of $8 million on the sale of credit card
receivables.
As further discussed under the heading "Other Accounting Matters," effective
January 1, 2002 we adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets." As a result, goodwill associated with
corporate acquisitions will no longer be amortized, but rather will be tested
for impairment no less frequently than annually. Goodwill amortization totaled
$48.2 million in 2001 or $.23 per diluted share. Core deposit intangibles
recorded in acquisitions will continue to be amortized over the estimated
remaining life of the deposit base assumed.
Operating Cash Earnings
Non-recurring items and the amortization of intangibles that arose from
acquisitions significantly impact our earnings. Management monitors our
performance on both a net income basis determined in accordance with accounting
principles generally accepted in the United States, as well as on an operating
cash basis before intangibles amortization and non-recurring items. We refer to
this measure of performance as "operating cash earnings". Operating cash
earnings are presented in this report as supplemental information to enhance
the reader's understanding of, and highlight trends in, our financial results
excluding the impact of intangibles amortization and non-recurring items.
Operating cash earnings should not be viewed as a substitute for net income and
earnings per share as determined in accordance with accounting principles
generally accepted in the United States. Intangibles amortization and
non-recurring items excluded from net income to derive operating cash earnings
may be significant and may not be comparable to other companies. Excluding
these items, our diluted operating cash earnings per share totaled $1.53
compared to 2000's $1.22 and operating cash returns on average tangible assets
and average tangible equity were 1.89 percent and 25.66 percent compared to
2000's 1.65 percent and 23.15 percent. Table 1 provides a summary of the
non-recurring items and intangibles amortization over the prior 5 years.
12
TABLE 1
Operating Cash Earnings
Years Ended December 31
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- -------------- --------------- ------------- ---------------
Before After Before After Before After Before After Before After
In Thousands Except Per Share Data Tax Tax Tax Tax Tax Tax Tax Tax Tax Tax
- ------------------------------------------ ------- -------- ------ ------- ------ ------ ------ ------ ------ ------
Net income $225,296 45,310 92,632 78,867 69,780
Non-recurring items:
Merger-related expense $11,364 7,304 70,657 50,466 -- -- -- -- -- --
Losses (gains) on interest rate swaps -- -- 77,227 50,198 (1,499) (907) -- -- -- --
Gains on sale of credit card receivables -- -- -- -- -- -- -- -- (8,000) (4,800)
Intangibles amortization:
Goodwill 48,240 48,240 26,884 26,884 3,479 3,479 1,043 1,043 210 210
Core deposit intangibles 58,775 35,853 34,536 21,067 3,977 2,426 1,880 1,147 344 210
- ------------------------------------------ ------- -------- ------ ------- ------ ------ ------ ------ ------ ------
Operating cash earnings $316,693 193,925 97,630 81,057 65,400
- ------------------------------------------ ------- -------- ------ ------- ------ ------ ------ ------ ------ ------
Effect on diluted earnings per share:
Net income $ 1.09 .28 .87 .77 .69
Non-recurring items:
Merger-related expense $ .05 .04 .44 .32 -- -- -- -- -- --
Losses (gains) on interest rate swaps -- -- .48 .32 (.01) (.01) -- -- -- --
Gains on sale of credit card receivables -- -- -- -- -- -- -- -- (.08) (.05)
Intangibles amortization:
Goodwill .23 .23 .17 .17 .03 .03 .01 .01 -- --
Core deposit intangibles .28 .17 .22 .13 .04 .02 .02 .01 -- --
- ------------------------------------------ ------- -------- ------ ------- ------ ------ ------ ------ ------ ------
Operating cash earnings $ 1.53 1.22 .91 .79 .64
- ------------------------------------------ ------- -------- ------ ------- ------ ------ ------ ------ ------ ------
Net Interest Income
Net interest income is one of the major determining factors in a financial
institution's performance as it is generally the principal source of earnings.
It is impacted by the volume, yield/cost and relative mix of both earning
assets and interest-bearing and non-interest-bearing sources of funds. The
difference between earning asset yields (with a taxable equivalent adjustment
made to provide comparability between tax-exempt and taxable income) and the
average rate paid for interest-bearing funds is measured by the interest rate
spread and net interest margin.
The tragic events of September 11/th dramatically accelerated a weakening
economic environment. The long-term impact of reduced consumer confidence,
corporate job reductions and increased costs of security are still being
assessed but are expected to result in decreased spending and negative gross
domestic product growth into 2002. Additionally, the U.S. economic downturn is
expected to negatively impact the international economy. All of these factors
may have a negative effect on our earnings and asset quality. Management
believes that tempering forces may improve the long-term outlook. For example,
the Federal Reserve cut the target federal funds rate during the fourth quarter
of 2001 by 125 basis points to combat recession fears and slowdowns in the
economy. The prime rate our Subsidiary Banks charge has fallen from 9.50
percent at December 31, 2000 to 4.75 percent at December 31, 2001. /
With the liability sensitive nature of our balance sheet, in times of
falling interest rates, the decrease in interest expense from the lower cost of
interest-bearing liabilities exceeds the decrease in interest income from the
lower yield on earning assets. Consequently, our net interest margin improved
to 4.36 percent for 2001 compared to 2000's 4.02 percent. Our interest rate
spread widened to 3.82 percent compared to 2000's 3.38 percent. See Table 2 for
an analysis of the net interest margin.
While a liability-sensitive balance sheet is accretive to net interest
income in periods of falling interest rates, management wants to control the
downside effect that would be experienced when interest rates begin to rise
again. Consequently, following the termination of interest rate swaps we
entered into in 2000, management restructured $1.2 billion of wholesale
liabilities (non-core funding) to make our balance sheet less liability
sensitive. Our Asset/Liability Management Committee, comprised of senior
management, continually monitors our interest sensitivity and liquidity. Based
on its view of existing and expected market conditions, it adopts strategies
that are intended to optimize net interest income to the extent possible while
minimizing the risk associated with changes in interest rates. See Table 3 for
an analysis of the impact of changes in volume and rate on our net interest
margin.
13
The following analysis of average balances and net interest income is
significantly impacted by the July 2000 acquisitions of CCB. CCB's average
balances and net interest income are included for the full year 2001 and
approximately one-half year in 2000.
TABLE 2
Average Balances and Net Interest Income Analysis
Years Ended December 31
-------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- --------------------------- --------------------------
INTEREST AVERAGE Interest Average Interest Average
Taxable Equivalent Basis -- AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/
In Thousands (1) BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate
- --------------------------------------- ----------- ---------- ------- ---------- -------- ------- --------- -------- -------
EARNING ASSETS:
Loans (2) $11,332,177 957,939 8.45% 7,427,320 698,614 9.41 3,489,625 306,213 8.77
U.S. Treasury and U.S. Government
agencies and corporations (3) 2,997,402 205,741 6.87 2,488,612 177,307 7.12 1,510,661 100,628 6.66
States and political subdivisions 165,652 13,729 8.29 158,693 12,815 8.08 137,523 11,521 8.38
Equity and other securities (3) 984,023 69,383 7.05 754,632 59,581 7.90 637,899 43,064 6.75
Trading account securities 67,389 3,230 4.79 40,064 2,482 6.20 42,285 2,336 5.52
Federal funds sold and other short-term
investments 62,065 2,927 4.72 136,043 8,893 6.54 63,804 4,877 7.64
Time deposits in other banks 27,870 1,257 4.51 27,937 1,597 5.72 23,607 951 4.03
- --------------------------------------- ----------- ---------- ------- ---------- -------- ------- --------- -------- -------
Total earning assets 15,636,578 1,254,206 8.02% 11,033,301 961,289 8.71 5,905,404 469,590 7.95
---------- ------- -------- ------- -------- -------
NON-EARNING ASSETS:
Cash and due from banks 401,214 293,618 174,582
Premises and equipment 205,401 123,688 42,337
Goodwill 920,738 520,525 66,922
Core deposit intangibles 263,273 163,899 26,299
All other assets, net 479,808 266,951 143,284
- --------------------------------------- ----------- ---------- ---------
Total assets $17,907,012 12,401,982 6,358,828
- --------------------------------------- ----------- ---------- ---------
INTEREST-BEARING LIABILITIES:
Savings and time deposits $10,502,689 429,623 4.09% 7,227,569 364,433 5.04 3,673,287 153,120 4.17
Short-term borrowed funds 1,079,070 39,066 3.62 1,159,814 69,577 6.00 683,833 31,177 4.56
Federal Home Loan Bank advances 1,948,861 97,838 5.02 1,247,613 77,912 6.24 832,206 41,432 4.98
Trust preferred securities and
long-term debt 93,656 5,225 5.58 72,529 5,282 7.28 66,275 3,605 5.44
- --------------------------------------- ----------- ---------- ------- ---------- -------- ------- --------- -------- -------
Total interest-bearing liabilities 13,624,276 571,752 4.20% 9,707,525 517,204 5.33 5,255,601 229,334 4.36
- --------------------------------------- ---------- ------- -------- ------- -------- -------
OTHER LIABILITIES AND STOCKHOLDERS'
EQUITY:
Demand deposits 1,448,014 930,713 447,416
Other liabilities 416,573 241,527 113,552
Stockholders' equity 2,418,149 1,522,217 542,259
- --------------------------------------- ----------- ---------- ---------
Total liabilities and stockholders'
equity $17,907,012 12,401,982 6,358,828
- --------------------------------------- ----------- ---------- ---------
NET INTEREST INCOME AND NET INTEREST
MARGIN (4) $ 682,454 4.36% 444,085 4.02 240,256 4.07
- --------------------------------------- ---------- ------- -------- ------- -------- -------
INTEREST RATE SPREAD (5) 3.82% 3.38 3.59
- --------------------------------------- ------- ------- -------
(1) The taxable equivalent basis is computed using 35% federal and applicable
state tax rates in 2001, 2000 and 1999.
(2) The average loan balances include non-accruing loans.
(3) The average balances for debt and equity securities exclude the effect of
their mark-to-market adjustment, if any.
(4) Net interest margin is computed by dividing net interest income by total
earning assets.
(5) Interest rate spread equals the earning asset yield minus the
interest-bearing liability rate.
- --------------------------------------------------------------------------------
The 2001 growth in the earning asset portfolio was primarily due to the 2000
acquisitions' assets being included for a full year in 2001 and approximately
six months in 2000. Our mix of earning assets shifted to higher yielding
categories, with loans constituting 72.5 percent of average earning assets
during 2001 compared to 2000's 67.3 percent and 1999's 59.1 percent. Management
anticipates continued loan growth in 2002. Average earning assets as a
percentage of average tangible assets (average total assets reduced by goodwill
and core deposit intangibles) has maintained at 94 percent over the last three
years.
14
Deposits are our primary source of funding earning asset growth. Core
deposits totaled $11.2 billion at December 31, 2001 compared to $10 billion the
prior year. Approximately $563 million of the core deposit growth was due to
acquisitions consummated in 2001. Substantially all deposits originate within
the Subsidiary Banks' market areas. As discussed earlier, we decided in 2001 to
reduce our levels of time deposits greater than $100,000. Due in part to the
adverse equity market returns experienced in 2001, our deposit growth rates
were higher in 2001 than in prior years where we were competing with other
savings and investment opportunities that generated greater returns.
We use both short- and long-term borrowings to fund growth of earning assets
in excess of deposit growth. Short-term borrowings include federal funds
purchased, securities sold under agreements to repurchase and master notes.
Long-term borrowings include trust preferred securities, subordinated debt and
FHLB advances. The increase in long-term borrowings reflects favorable funding
costs during 2001's declining interest rate environment relative to the rate
reductions for shorter-term borrowings or large denomination deposits.
TABLE 3
Volume and Rate Variance Analysis
Years Ended December 31
-------------------------------------------------------
2001 2000
--------------------------- --------------------------
VOLUME RATE TOTAL Volume Rate Total
Taxable Equivalent Basis -- In Thousands (1) (2) VARIANCE VARIANCE VARIANCE Variance Variance Variance
- ----------------------------------------------------------- -------- -------- -------- -------- -------- --------
INTEREST INCOME:
Loans $336,611 (77,286) 259,325 368,565 23,836 392,401
U.S. Treasury and U.S. Government agencies and corporations 34,886 (6,452) 28,434 69,287 7,392 76,679
States and political subdivisions 574 340 914 1,719 (425) 1,294
Equity and other securities 16,715 (6,913) 9,802 8,554 7,963 16,517
Trading account securities 1,408 (660) 748 (128) 274 146
Federal funds sold and short-term investments (3,946) (2,020) (5,966) 4,808 (792) 4,016
Time deposits in other banks (4) (336) (340) 197 449 646
- ----------------------------------------------------------- -------- -------- -------- -------- -------- --------
Increase (decrease) in interest income 386,244 (93,327) 292,917 453,002 38,697 491,699
- ----------------------------------------------------------- -------- -------- -------- -------- -------- --------
INTEREST EXPENSE:
Savings and time deposits 143,022 (77,832) 65,190 173,832 37,481 211,313
Short-term borrowed funds (4,555) (25,956) (30,511) 26,416 11,984 38,400
Federal Home Loan Bank advances 16,166 3,760 19,926 24,209 12,271 36,480
Trust preferred securities and long-term debt 1,337 (1,394) (57) 366 1,311 1,677
- ----------------------------------------------------------- -------- -------- -------- -------- -------- --------
Increase (decrease) in interest expense 155,970 (101,422) 54,548 224,823 63,047 287,870
- ----------------------------------------------------------- -------- -------- -------- -------- -------- --------
INCREASE (DECREASE) IN NET INTEREST INCOME $230,274 8,095 238,369 228,179 (24,350) 203,829
- ----------------------------------------------------------- -------- -------- -------- -------- -------- --------
(1) The taxable equivalent basis is computed using 35% federal and applicable
state tax rates.
(2) The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage
of the rate or volume variance to the sum of the absolute value of the two
variances.
- --------------------------------------------------------------------------------
Non-Interest Income and Expense
Our levels of non-interest income are, and will continue to be, a
significant factor in determining our financial success. Non-interest income
from our Financial Enterprises segment provides the largest percentage of
non-interest income. This segment is comprised of our transaction processing,
asset management, broker/dealer and retail banking consulting businesses.
Financial Enterprises generated 51.3 percent of total non-interest income in
2001 compared to 2000's 49.3 percent. Service charges on deposit accounts
continue to be our largest source of non-interest income from our Banking
segment. Non-interest income as a percentage of total revenues (taxable
equivalent basis) grew to 32 percent in 2001 compared to 2000's 30 percent and
1999's 27 percent.
To increase our levels of non-interest income, we have invested in several
fee-related businesses. We believe that these businesses offer high returns,
high earnings growth and will be a stable source of fee income. These
fee-related businesses include Fenesco Financial Enterprise, Inc. D/B/A NBC
Capital Markets ("Capital Markets"), a provider of retail and institutional
brokerage services; First Mercantile Trust, a provider of retirement plan
administration, record-keeping and individual investment services to 2,200
companies; our Chapter 13 bankruptcy trustee services which provide reporting
and cash management services nationally; and, National Commerce Bank Services,
a provider of in-store/retail banking consulting to over 300 financial
institutions and 50 retailers. Not only will these businesses generate fee
income, but we believe that they will be a significant source of referral
business to our traditional banking subsidiaries.
15
All categories of non-interest income and expense were significantly
impacted by the 2000 acquisitions as their revenues and expenses were included
in our results only from their dates of acquisition. Service charges on deposit
accounts as a percentage of average deposits were 1.0 percent in 2001 compared
to 2000's .8 percent and 1999's .5 percent. We review our service charge
structure periodically to ensure that our charges are competitive with the
marketplace.
Trust and custodian fees increased to $51.1 million in 2001 from $33 million
in 2000 and $8.1 million in 1999 due to trust businesses acquired and growth of
assets managed. For the six months that their operations were included in
2000's operating results, First Mercantile and CCB collectively contributed
$25.3 million of the $33 million of trust and custodian fees recognized in
2000. Including these trust operations for the full year 2001 was the primary
reason for 2001's increased trust and custodian fees. Managed and custodial
assets totaled $13.2 billion and $10.5 billion at December 31, 2001 and 2000,
respectively. We anticipate further growth in the Trust area as trust
offices/operations acquired in 2000 and new offices opened in 2001 continue to
mature.
Broker/dealer revenue and other commissions income totaled $68 million in
2001, $28.8 million in 2000 and $18.1 million in 1999. Institutional
broker/dealer revenue increased $30.6 million from 2000's $20.5 million due to
higher volume of transactions. As interest rates declined during 2001, many
investments were called and institutions that had held those investments in
their portfolio, purchased securities from Capital Markets to replace the
called investments. The 2000 acquisitions contributed $6.4 million of
broker/dealer revenue and other commissions income in 2000 and the remainder of
2000's increase over 1999 was due to internal growth. Retail brokerage services
are offered through an affiliation with an independent brokerage firm.
Management anticipates stronger growth in retail brokerage operations with an
expected improved equity market environment and a decline in institutional
broker/dealer revenues due to a flat or increasing interest rate environment.
Personnel expense is our largest non-interest expense. We devote significant
resources to attracting and retaining qualified personnel. With our
sales-oriented focus, more and more of our employee compensation plan is geared
toward incentive pay for high performance.
Table 4 presents various operating cash efficiency ratios for the prior five
years (excluding the impact of amortization of intangibles and non-recurring
items). Our goal is to achieve an operating cash efficiency ratio of less than
45 percent in 2002.
TABLE 4
Operating Cash Efficiency Ratios
Years Ended December 31
------------------------------
2001 2000 1999 1998 1997
----- ----- ----- ----- -----
As a percentage of average tangible assets:
Non-interest income (1) 1.94% 1.62 1.39 1.55 1.69
- -------------------------------------------------------------------------------------- ----- ----- ----- ----- -----
Personnel expense 1.49 1.37 1.32 1.35 1.29
Occupancy and equipment expense .37 .38 .33 .32 .35
Other operating expense (2) .95 .85 .76 .88 1.11
- -------------------------------------------------------------------------------------- ----- ----- ----- ----- -----
Total non-interest expense 2.81 2.60 2.41 2.55 2.75
- -------------------------------------------------------------------------------------- ----- ----- ----- ----- -----
Net overhead (non-interest expense less non-interest income) .87% .98 1.02 1.00 1.06
- -------------------------------------------------------------------------------------- ----- ----- ----- ----- -----
Non-interest expense as a percentage of net interest income and noninterest income (3) 46.63% 48.08 46.15 45.56 50.49
- -------------------------------------------------------------------------------------- ----- ----- ----- ----- -----
(1) Excludes the gain on sale of credit card receivables.
(2) Excludes the amortization of intangibles, losses on interest rate swaps,
and merger-related expense.
(3) Presented using taxable equivalent net interest income. The taxable
equivalent basis is computed using a 35% federal tax rate and applicable
state tax rates.
- --------------------------------------------------------------------------------
Income Taxes
Income tax expense was $133.4 million in 2001 compared to $34.6 million in
2000 and $47.2 million in 1999. NCF's effective income tax rates were 37.2
percent, 43.3 percent and 33.8 percent in 2001, 2000 and 1999, respectively.
The higher effective tax rate in 2000 is attributable to non-deductible
merger-related expense. Net deferred tax liabilities totaled $135.2 million as
of December 31, 2001. NCF has determined that no valuation allowance for
deferred tax assets was warranted at December 31, 2001.
Fourth Quarter Results
During the fourth quarter of 2001, we recorded net income of $59.9 million
or $.29 per diluted share compared to 2000's net loss of $8.4 million.
Non-recurring merger-related expense totaling $5.4 million (after-tax) was
recorded during the fourth quarter of 2001. In 2000's fourth quarter,
non-recurring losses on interest rate swaps of $37.8 million (after-tax) and
merger-related expense of $15.8 million (after-tax) were recorded. Excluding
the effect of these non-recurring items and amortization of intangibles,
diluted operating cash earnings per share totaled $.42 compared to 2000's $.32
per diluted share. Income statements for each of the quarters in the
five-quarter period ended December 31, 2001 are included in Table 5.
16
TABLE 5
Income Statements for Five Quarters Ended December 31, 2001
Three Months Ended
---------------------------------------------
In Thousands Except Per Share Data 12/31/01 9/30/01 6/30/01 3/31/01 12/31/00
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
Total interest income $287,262 302,492 310,020 323,091 334,073
Total interest expense 114,826 137,425 148,543 170,958 183,231
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
NET INTEREST INCOME 172,436 165,067 161,477 152,133 150,842
Provision for loan losses 6,892 9,623 6,304 6,380 5,317
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
NET INTEREST INCOME AFTER PROVISION 165,544 155,444 155,173 145,753 145,525
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
Service charges on deposits 34,061 29,639 30,460 27,290 26,063
Trust and custodian fees 12,498 11,422 13,382 13,882 13,977
Other service charges and fees 9,476 9,427 9,064 8,736 9,823
Broker/dealer revenue and other commissions 21,624 15,114 16,202 15,066 10,751
Other operating 12,250 11,042 9,435 8,183 8,773
Securities gains (losses), net 2,752 2,588 575 720 (141)
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
Total other income (1) 92,661 79,232 79,118 73,877 69,246
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
Personnel 69,155 58,063 62,447 59,900 60,626
Net occupancy and equipment 15,008 16,009 15,294 15,157 16,924
Other operating 45,051 39,028 39,891 34,736 37,668
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
Total other expenses (1) 129,214 113,100 117,632 109,793 115,218
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
INCOME BEFORE TAXES, NON-RECURRING ITEMS AND AMORTIZATION OF INTANGIBLES 128,991 121,576 116,659 109,837 99,553
Income taxes 42,690 41,224 40,159 36,297 32,907
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
Operating cash earnings (1) 86,301 80,352 76,500 73,540 66,646
Non-recurring items, after-tax:
Merger-related expenses (5,400) (1,904) -- -- (15,773)
Unrealized losses (gains) on interest rate swaps -- -- -- -- (37,794)
Amortization of intangibles, after-tax:
Goodwill (12,060) (12,060) (12,046) (12,074) (12,060)
Core deposit intangibles (8,981) (8,777) (8,919) (9,176) (9,431)
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
NET INCOME IN ACCORDANCE WITH GAAP $ 59,860 57,611 55,535 52,290 (8,412)
- ------------------------------------------------------------------------ -------- ------- ------- ------- --------
EARNINGS PER COMMON SHARE
Net income (loss):
Basic $ .29 .28 .27 .25 (.04)
Diluted .29 .28 .27 .25 (.04)
Operating cash earnings (1):
Basic .42 .39 .37 .36 .32
Diluted .42 .39 .37 .35 .32
(1) NCF analyzes its performance on a net income basis in accordance with
accounting principles generally accepted in the United States, as well as
on an operating cash basis before non-recurring items and amortization of
intangibles referred to as "operating cash earnings." Operating cash
earnings are presented as supplemental information to enhance the reader's
understanding of, and highlight trends in, NCF's financial results
excluding the impact of these items. Operating cash earnings should not be
viewed as a substitute for net income and earnings per share as determined
in accordance with accounting principles generally accepted in the United
States.
- --------------------------------------------------------------------------------
17
FINANCIAL POSITION
Loans
Loans are the largest category of earning assets and generate the highest
yields. Loan growth and maintenance of a high quality loan portfolio are key
ingredients to improving our earnings. We believe our strategy of lending to
small- to medium-sized commercial customers and consumers allows a higher
interest rate spread which helps support the net interest margin as well as
limiting our credit losses. Table 6 presents the year-end breakdown of the
major categories of the loan portfolio for the previous five years based upon
regulatory classifications. The 2000 acquisitions contributed over $6 billion
to outstanding loans.
TABLE 6
Loan Portfolio
As of December 31
----------------------------------------------------
In Thousands 2001 2000 1999 1998 1997
- -------------------------------------- ----------- ---------- --------- --------- ---------
Commercial, financial and agricultural $ 1,325,049 1,223,032 689,945 592,136 512,534
Real estate -- construction 2,195,516 1,907,533 283,033 242,993 241,334
Real estate -- mortgage 6,926,805 5,959,114 1,625,374 1,153,717 781,826
Consumer 1,329,721 1,730,940 1,356,824 1,181,659 1,045,420
Revolving credit 61,713 58,840 -- -- --
Lease financing 152,918 145,883 33,405 29,568 30,046
- -------------------------------------- ----------- ---------- --------- --------- ---------
Total gross loans 11,991,722 11,025,342 3,988,581 3,200,073 2,611,160
Less: Unearned income 16,957 16,923 2,792 2,400 2,193
- -------------------------------------- ----------- ---------- --------- --------- ---------
Total loans $11,974,765 11,008,419 3,985,789 3,197,673 2,608,967
- -------------------------------------- ----------- ---------- --------- --------- ---------
Loans in the commercial, financial and agricultural category consist
primarily of short-term and/or floating rate commercial loans made to small- to
medium-sized companies. There is no substantial loan concentration in any one
industry or to any one borrower. Real estate-construction loans are primarily
made to commercial developers and residential contractors on a floating rate
basis. Cash flow analyses for each project are the primary decision factor,
with additional reliance upon collateral values. We expect moderate growth in
these categories during 2002 while maintaining our focus on quality credit
underwriting.
Real estate-mortgage loans consist of loans secured by first or second deeds
of trust on primary residences ($3.7 billion or 54% of total real
estate-mortgage loans), multifamily residential properties and commercial
properties. Our general policy is to sell current originations of 30-year,
fixed-rate residential mortgages and retain only certain loans in the
portfolio. Consequently, we expect very modest growth in 2002 in the first lien
residential mortgage segment. However, in the second lien/home equity line
segment, we expect higher growth rates.
Consumer loans consist primarily of loans secured by automobiles and other
consumer personal property. Lending officers consider the customer's debt
obligations, ability and willingness to repay and general economic trends in
their decision to extend credit. We anticipate continued declines in our
consumer indirect lending portfolio having exited our affiliation with State
Farm during 2001. Revolving credit includes overdraft protection and
traditional credit card products. We expect only moderate growth during 2002.
The leasing portfolio is not concentrated in any one line of business or
type of equipment. We anticipate moderate growth in this category during 2002.
TABLE 7
Maturities and Sensitivities of Loans to Changes in Interest Rates
As of December 31, 2001
------------------------------------
Commercial,
Financial and Real Estate-
In Thousands Agricultural Construction Total
-------------------------------------- ------------- ------------ ---------
Due in one year or less $ 584,644 329,567 914,211
Due after one year through five years:
Fixed interest rates 339,051 497,772 836,823
Floating interest rates 126,751 329,839 456,590
Due after five yeras:
Fixed interest rates 103,009 227,589 330,598
Floating interest rates 171,594 810,749 982,343
-------------------------------------- ------------- ------------ ---------
Total $1,325,049 2,195,516 3,520,565
-------------------------------------- ------------- ------------ ---------
18
Securities
We segregate debt and equity securities that have readily determinable fair
values into one of three categories for accounting and reporting purposes. Debt
and equity securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in earnings. Trading
securities totaled $197.2 million at December 31, 2001, which result
exclusively from our institutional broker/dealer business. Debt securities that
we have the positive intent and ability to hold until maturity are classified
as held to maturity securities and are reported at amortized cost. Securities
held to maturity totaled $900.8 million, comprising 20 percent of the total
investment securities portfolio at December 31, 2001. Debt and equity
securities not classified as either trading or held to maturity are classified
as available for sale and are reported at fair value, with unrealized gains and
losses excluded from earnings and reported in a separate component of
stockholders' equity, net of taxes. At December 31, 2001, securities available
for sale totaled $3.6 billion, which represented 80 percent of the total
investment securities portfolio. See Table 8 for additional information about
our investment securities portfolio.
The mark-to-market adjustment for available for sale securities totaled
$22.1 million in net unrealized gains at December 31, 2001. After considering
applicable tax benefits, the mark-to-market adjustment resulted in a $12.7
million increase to total stockholders' equity. As of December 31, 2000, the
mark-to-market adjustment for unrealized gains on available for sale securities
totaled $38.5 million and resulted in a net $22.8 million increase to
stockholders' equity after applying applicable taxes. We do not currently
anticipate selling a significant amount of the securities available for sale in
the near future. Future fluctuations in stockholders' equity may occur due to
changes in the market values of debt and equity securities classified as
available for sale.
19
TABLE 8
Investment Securities Portfolio
As of December 31
------------------------------------------
2001 2000
-------------------- --------------------
AMORTIZED CARRYING Amortized Carrying
In Thousands COST VALUE Cost Value
- --------------------------------------------------- ---------- ---------- --------- ----------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 44,194 46,065 54,580 55,295
U.S. Government agencies and corporations 3,036,377 3,051,893 1,550,026 1,582,051
States and political subdivisions 86,466 88,987 111,222 113,831
Debt and equity securities 422,541 424,761 647,182 650,349
- --------------------------------------------------- ---------- ---------- --------- ----------
Total securities available for sale $3,589,578 3,611,706 2,363,010 2,401,526
- --------------------------------------------------- ---------- ---------- --------- ----------
MATURITY AND YIELD SCHEDULE AS OF DECEMBER 31, 2001
WEIGHTED
CARRYING AVERAGE
VALUE YIELD (1)
---------- ----------
U.S. Treasury:
Within 1 year $ 34,471 6.52%
After 1 but within 5 years 11,594 8.11
- --------------------------------------------------- ---------- ----------
Total U.S. Treasury 46,065 6.89
- --------------------------------------------------- ---------- ----------
U.S. Government agencies and corporations:
Within 1 year 1,163 7.88
After 1 but within 5 years 1,410,261 5.10
After 5 but within 10 years 378,898 6.25
After 10 years (2) 1,261,571 6.13
- --------------------------------------------------- ---------- ----------
Total U.S. Government agencies and corporations 3,051,893 5.67
- --------------------------------------------------- ---------- ----------
States and political subdivisions:
Within 1 year 15,754 17.15
After 1 but within 5 years 26,469 7.37
After 5 but within 10 years 38,172 8.78
After 10 years 8,592 8.91
- --------------------------------------------------- ---------- ----------
Total State and political subdivisions 88,987 9.88
- --------------------------------------------------- ---------- ----------
Debt and equity securities 424,761 5.93
- --------------------------------------------------- ---------- ----------
Total securities available for sale $3,611,706 5.81%
- --------------------------------------------------- ---------- ----------
As of December 31
------------------------------------------
2001 2000
-------------------- --------------------
CARRYING Carrying
VALUE FAIR VALUE Value Fair Value
---------- ---------- --------- ----------
SECURITIES HELD TO MATURITY
U.S. Government agencies and corporations $ 408,593 415,701 1,434,282 1,407,912
States and political subdivisions 65,008 66,572 75,702 77,109
Debt securities 427,149 431,410 506,811 499,679
- --------------------------------------------------- ---------- ---------- --------- ----------
Total securities held to maturity $ 900,750 913,683 2,016,795 1,984,700
- --------------------------------------------------- ---------- ---------- --------- ----------
MATURITY AND YIELD SCHEDULE AS OF DECEMBER 31, 2001
WEIGHTED
CARRYING AVERAGE
VALUE YIELD (1)
---------- ----------
U.S. Government agencies and corporations:
After 1 but within 5 years $ 93,015 5.93%
After 5 but within 10 years 115,390 5.71
After 10 years (2) 200,188 5.95
- --------------------------------------------------- ---------- ----------
Total U.S. Government agencies and corporations 408,593 5.90
- --------------------------------------------------- ---------- ----------
States and political subdivisions:
Within 1 year 1,965 24.21
After 1 but within 5 years 24,464 8.70
After 5 but within 10 years 38,054 8.62
After 10 years 525 7.06
- --------------------------------------------------- ---------- ----------
Total State and political subdivisions 65,008 9.12
- --------------------------------------------------- ---------- ----------
Debt securities 427,149 6.96
- --------------------------------------------------- ---------- ----------
Total securities held to maturity $ 900,750 6.64%
- --------------------------------------------------- ---------- ----------
(1) Where applicable, the weighted average yield is computed on a taxable
equivalent basis using a 35% federal tax rate and applicable state tax
rates.
(2) The amount shown consists primarily of mortgage-backed securities which
have monthly curtailments of principal even though the final maturity of
each security is in excess of 10 years.
20
Deposits
Interest-bearing deposits as a percentage of total deposits have been stable
over the past three years at 88 to 89 percent. Non-interest bearing deposits to
total deposits improved 1 percent in 2001 due to introduction of a
free-checking product and the deposit mix of our 2001 acquisitions. See Table 9
for average deposits by type for the three-year period ended December 31, 2001.
Table 9 is significantly impacted by the July 2000 acquisitions of CCB. CCB's
average balances are included for the full year 2001 and approximately one-half
year in 2000.
TABLE 9
Average Deposits
Years Ended December 31
-------------------------------------------------------
2001 2000 1999
------------------ ----------------- -----------------
AVERAGE AVERAGE Average Average Average Average
In Thousands BALANCE RATE Balance Rate Balance Rate
- -------------------------------------- ----------- ------- --------- ------- --------- -------
SAVINGS AND TIME DEPOSITS:
Savings, NOW and money market accounts $ 4,665,362 2.98% 2,960,959 3.85 1,641,984 3.63
Time 5,837,327 5.48 4,266,610 6.31 2,031,303 5.08
- -------------------------------------- ----------- ------- --------- ------- --------- -------
Total savings and time deposits 10,502,689 4.09% 7,227,569 5.04 3,673,287 4.17
---- ---- ----
DEMAND DEPOSITS 1,448,014 930,713 447,416
- -------------------------------------- ----------- --------- ---------
Total deposits $11,950,703 8,158,282 4,120,703
- -------------------------------------- ----------- --------- ---------
Borrowings
In December 2001, we issued $200 million of trust preferred securities whose
proceeds will be used for additional capital infusion into the Subsidiary Banks
and other corporate purposes. The trust preferred securities qualify as Tier 1
capital under the risk-based capital guidelines. FHLB advances increased $657.5
million from December 31, 2000 due to the previously discussed re-positioning
of our liability-sensitive balance sheet and to fund loan growth. The new
borrowings are primarily FHLB advances with maturities in excess of one year.
CAPITAL RESOURCES
Equity Capital
Management plans to continue its efforts to increase the return on average
equity while providing stockholders with a reasonable cash return. A stock
repurchase plan was authorized beginning in 1996 for purposes of offsetting
stock issuances planned for stock option and other employee benefit plans.
During the three years ended December 31, 2001, over 7 million shares have been
repurchased, of which 4.3 million were repurchased in 2001 at an average cost
of $24.02 per share. Management plans to maintain a dividend payout ratio
between 30 and 40 percent of operating cash earnings in order to achieve
continued internal capital growth. Our average tangible equity to average
tangible assets ratio remains strong at 7.4 percent and 7.1 percent for 2001
and 2000, respectively.
NCF's stock is traded on the New York Stock Exchange under the symbol NCF.
The stock prices listed in Table 10 represent the high, low and closing sales
prices and cash dividends declared per share for the indicated periods.
TABLE 10
Stock Prices and Dividends
Prices Cash
------------------ Dividends
High Low Close Declared
------ ----- ----- ---------
2001
FIRST QUARTER $27.44 21.56 24.81 .13
SECOND QUARTER 25.55 22.15 24.37 .13
THIRD QUARTER 27.05 22.00 26.10 .15
FOURTH QUARTER 26.10 22.29 25.30 .15
-------------- ------ ----- ----- ---------
2000
First Quarter $22.69 15.50 18.50 .11
Second Quarter 19.94 16.06 16.06 .11
Third Quarter 20.13 15.25 19.94 .13
Fourth Quarter 25.19 17.65 24.75 .13
-------------- ------ ----- ----- ---------
21
Regulatory Capital
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines requiring a minimum leverage ratio relative to
total assets and minimum capital ratios relative to risk-adjusted assets. The
minimum leverage ratio is 3 percent if the holding company has the highest
regulatory rating and meets other requirements but the leverage ratio required
may be raised from 100 to 200 basis points if the holding company does not meet
these requirements. The minimum risk-adjusted capital ratios are 4 percent for
Tier I capital and 8 percent for total capital. Additionally, the Federal
Reserve may set capital requirements higher than the minimums we have described
for holding companies whose circumstances warrant it. NCF and the Subsidiary
Banks continue to maintain higher capital ratios than required under regulatory
guidelines. Table 11 discloses NCF's components of capital, risk-adjusted asset
information and capital ratios.
T A B L E 11
Capital Information and Ratios
As of December 31
-----------------------
In Thousands 2001 2000
------------------------------ ----------- ----------
Tier I capital $ 1,492,718 1,169,780
Tier II capital:
Allowable loan loss reserve 156,401 143,614
Subordinated debt 6,600 13,194
Other 76 --
------------------------------ ----------- ----------
Total capital $ 1,655,795 1,326,588
------------------------------ ----------- ----------
Risk-adjusted assets $13,516,622 12,292,660
Average regulatory assets 17,261,097 16,365,141
Tier I capital ratio 11.04% 9.52
Total capital ratio 12.25 10.79
Leverage ratio 8.65 7.15
------------------------------ ----------- ----------
Each of the Subsidiary Banks are subject to similar risk-based and leverage
capital requirements adopted by their applicable federal banking agency. Each
was in compliance with the applicable capital requirements as of December 31,
2001.
CORPORATE RISK PROFILE
Managing the risks of our financial services businesses is essential for
successful operations. Our primary risks are credit, interest rate, market and
liquidity. Credit risk is the risk of not collecting principal and interest on
loans or investments when due. Interest rate risk is the risk of economic loss
resulting from adverse changes in interest rates. Market risks primarily arise
from fluctuations in interest rates that may result in changes in the value of
financial instruments that are accounted for on a mark-to-market basis, such as
trading account securities. Liquidity risk is the possibility that we are
unable to meet obligations to our depositors, shareholders or borrowers
including deposit withdrawals, funding of loan commitments and payment of
dividends.
Credit Risk Management
Our credit risk management begins with our loan underwriting policies. Our
loan portfolio is comprised primarily of secured credits with no significant
borrower or industry concentration. We have insignificant shared national
credit exposure. Substantially all loans are made on a secured basis with the
exception of certain revolving credit accounts and are generally originated for
retention in the portfolio, with the exception of marketable mortgage loans.
Lending officers of the Subsidiary Banks generally consider the cash flow or
earnings power of the borrower as the primary source of repayment. The
Subsidiary Banks do not engage in highly leveraged transactions or foreign
lending activities.
In evaluating loan credit risk, management considers changes, if any, in
internal loan grades based on loan review, the nature and volume of the loan
portfolio, actual and projected credit quality trends (including delinquency,
charge-off and bankruptcy rates) and current economic conditions that may
impact a borrower's ability to pay. Generally, the domestic economy has
experienced slower growth rates than those of 2000. The stagnant economic
growth is evidenced by the Federal Reserve Board's actions in 2001 to stimulate
economic growth through a series of interest rate reductions. While our credit
review procedures are proactive and take into account changing economic
conditions, we did an extensive review of the industries we felt were most
impacted by the declining economic environment experienced in the third to
fourth quarters including hospitality, entertainment and aviation. Through our
reviews, we confirmed that we did not have extensive concentrations of credit
in these industries and that no specific customers in those industries required
a credit review downgrade.
22
ALLOWANCE FOR LOAN LOSSES
Management performs an analysis of the loan portfolio quarterly to determine
the adequacy of the allowance for loan losses. The overall allowance analysis
considers the results of the loan reviews, quantitative and qualitative
indicators of the current quality of the loan portfolio and the inherent risk
not captured in the reviews and assessments of pools of loans. Management
responsible for credit and financial matters perform the assessment and
establish the amount of the allowance for loan losses. Our quarterly evaluation
process provides for self-correction through periodic adjustment of loss
factors based on actual experience if unanticipated events are encountered
within an individual or group of credits.
The analysis of individual credit relationships is the first factor in the
evaluation process. Individual credit relationships in excess of $500,000 or
with specific credit characteristics are evaluated for collectibility and for
potential impairment by our independent loan review staff. Impaired loans are
measured using the approach specified by SFAS No. 114.
Commercial, residential construction, small business and consumer loans not
reviewed for impairment under SFAS 114, or not considered impaired after an
SFAS 114 review, are considered on a portfolio basis as the second factor in
the evaluation process. These loans are evaluated as pools of loans based on
payment status for the consumer portfolio and an internal credit risk grading
system for commercial and small business loans. An allowance is calculated for
each consumer loan pool using loss factors based on a monthly analysis of
delinquency trends and historical loss experience. Loss factors for the
commercial and small business loan pools are based on average historical yearly
loss experience. Various credit quality trends (i.e., internal grading changes,
delinquencies, charge-offs, non-accruals, and criticized/classified assets),
which may impact portfolio performance, are also considered in determining the
loss factors for each loan pool.
The third factor in the evaluation process is the unallocated allowance
which considers factors including industry, borrower or collateral
concentrations; changes in lending policies and underwriting; current loan
volumes; experience of our lending staff; current general economic data and
conditions; fraud risk; and risk inherent in the loss estimation process for
pools of loans.
Table 12 presents a summary of loss experience and the allowance for loan
losses for the previous five years. Net charge-offs in the five-year period
ended 2001 occurred primarily in the consumer loan portfolio. With our
conservative underwriting of primarily small- to medium-sized, secured loans,
we have maintained low net charge-off ratios in a challenging economic
environment. Net charge-offs and the provision for loan losses were impacted
significantly by the July 2000 merger with CCB. CCB's net charge-offs and
provision are included for the full year 2001 and approximately one-half of
2000.
23
TABLE 12
Summary of Loan Loss Experience
and the Allowance for Loan Losses
Years Ended December 31
--------------------------------------------------------
In Thousands 2001 2000 1999 1998 1997
- -------------------------------------------------------- ----------- ---------- --------- --------- ---------
BALANCE AT BEGINNING OF YEAR $ 143,614 59,597 49,122 43,297 35,514
Loan losses charged to allowance:
Commercial, financial and agricultural (4,486) (1,826) (896) (522) (250)
Real estate -- construction (176) (29) (40) (946) (95)
Real estate -- mortgage (1,951) (3,418) (2,346) (808) (222)
Consumer (21,088) (12,354) (8,440) (8,430) (10,850)
Revolving credit (2,496) (1,863) -- -- --
Lease financing (1,440) (193) (744) (943) (1,382)
- -------------------------------------------------------- ----------- ---------- --------- --------- ---------
Total loan losses charged to allowance (31,637) (19,683) (12,466) (11,649) (12,799)
- -------------------------------------------------------- ----------- ---------- --------- --------- ---------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 816 258 66 1,152 73
Real estate -- construction 11 2 473 197 57
Real estate -- mortgage 55 878 222 51 33
Consumer 5,235 2,809 2,631 2,219 2,221
Revolving credit 1,258 819 -- -- --
Lease financing -- 250 584 420 560
- -------------------------------------------------------- ----------- ---------- --------- --------- ---------
Total recoveries of loans previously charged-off 7,375 5,016 3,976 4,039 2,944
- -------------------------------------------------------- ----------- ---------- --------- --------- ---------
Net charge-offs (24,262) (14,667) (8,490) (7,610) (9,855)
Provision charged to operations 29,199 16,456 16,921 10,710 17,013
Allowance related to acquired financial institutions 7,850 82,228 2,044 2,725 625
- -------------------------------------------------------- ----------- ---------- --------- --------- ---------
BALANCE AT END OF YEAR $ 156,401 143,614 59,597 49,122 43,297
- -------------------------------------------------------- ----------- ---------- --------- --------- ---------
Loans outstanding at end of year $11,974,765 11,008,419 3,985,789 3,197,673 2,608,967
Ratio of allowance for loan losses to loans
outstanding at end of year 1.31% 1.30 1.50 1.54 1.66
Coverage of allowance for loan losses to net charge-offs 6.45X 9.79 7.02 6.45 4.39
Average loans outstanding $11,332,177 7,427,320 3,489,625 3,040,662 2,513,327
Ratio of net charge-offs of loans to average loans .21% .20 .24 .25 .39
Ratio of recoveries to charge-offs 23.31 25.48 31.89 34.67 23.00
NCF's provision for loan losses increased from $16.5 million in 2000 to
$29.2 million in 2001. The ratio of the allowance for loan losses to loans
outstanding was 1.31 percent and 1.30 percent at December 31, 2001 and 2000,
respectively. The increase in loan loss provision in 2001 as compared to 2000
was primarily attributable to an increase in net charge-offs of approximately
$10 million in 2001 compared to 2000 (.21 percent of average loans compared to
.20 percent in 2000) and growth in our total loan portfolio of approximately
3.6 percent, adjusted for the increase attributable to 2001 acquisitions. We
experienced a favorable change in our loan mix whereby the loan segment with
the highest losses historically, consumer loans, made up a smaller percentage
of the total portfolio and two segments, real estate--construction and real
estate--mortgage, which historically have had lower loss rates, made up a
larger percentage of the portfolio. See Table 13 for an analysis of the
percentage of each loan segment to total loans. Offsetting the favorable mix
change, we felt that it was prudent to increase the unallocated portion of the
allowance by $2.5 million in recognition of worsening economic conditions and
higher levels of nonperforming assets and total risk assets.
The 2000 provision for loan losses and the ratio of the allowance for loan
losses to loans outstanding were impacted significantly by our merger with CCB.
The decreases in the provision and the ratio of the allowance to loans
outstanding reflected improvements in asset quality evidenced by the reduction
in net charge-offs as a percentage of average loans, from .24 percent in 1999
to .20 percent in 2000, and a favorable change in mix of the loan portfolio.
Both trends were direct results of the CCB merger; CCB experienced a lower
ratio of net charge-offs to average loans than NCF and CCB's portfolio consists
predominantly of real estate -- construction and real estate -- mortgage loans.
These categories of loans have historically experienced a low level of net
charge-offs; as a result, CCB's ratio of the allowance for loan losses to loans
outstanding of 1.27 percent at the time the merger was completed was lower than
NCF's ratio. As a result of the merger and other activity in the loan portfolio
in 2000, the combined real estate -- construction and real estate -- mortgage
portfolios increased from 48 percent of total loans at December 31, 1999 to 71
percent of total loans at December 31, 2000. Similarly, in 2000, the consumer
loan portfolio, which had ac-
24
counted for approximately 80 percent of NCF's net charge-offs in past years,
declined from 34 percent of total loans at December 31, 1999 to 16 percent at
December 31, 2000. This decline is attributable to the relatively smaller
consumer portfolio of CCB and also to a decision to exit our business
affiliation with State Farm, which was a source of indirect auto loans. As a
result of the improved mix and decline in net charge-off ratio, we reduced our
unallocated allowance component by $5.1 million in 2000. The improved portfolio
mix and decline in net charge-off ratio were partially offset by higher levels
of total risk assets at December 31, 2000 as compared to December 31, 1999 and
higher levels of internally classified assets, primarily in the commercial,
financial and agricultural loan category.
Management believes that the allowance for loan losses is adequate to absorb
estimated probable losses inherent in the loan portfolio. The most recent
regulatory agency examinations have not revealed any material problem credits
that had not been previously identified; however, future regulatory
examinations may result in the regulatory agencies requiring additions to the
allowance for loan losses based on information available at the date of
examination.
Table 13 presents an allocation of the allowance for loan losses as of the
end of the previous five years. In conjunction with the CCB merger into NBC in
2001, we conformed the factors used by the two banks. Presentation of prior
years' allocations have not been restated. The allocation is based on the
regulatory classification of our portfolios, which focuses on the loan
collateral, and differs from our internal classification, which focuses on the
purpose of the loan.
TABLE 13
Allocation of the Allowance for Loan Losses
As of December 31
---------------------------------------------------------------------------
2001 2000 1999 1998
----------------- ------------------ ------------------ ------------------
Amount % of Amount % of Amount % of Amount % of
of Loans of Loans of Loans of Loans
Allowance in Each Allowance in Each Allowance in Each Allowance in Each
In Thousands Allocated Category Allocated Category Allocated Category Allocated Category
- -------------------------------------- --------- -------- --------- -------- --------- -------- --------- --------
Commercial, financial and agricultural $ 35,782 11.0% 33,866 11.1 7,471 17.3 4,675 18.5
Real estate -- construction 23,829 18.3 15,410 17.3 1,640 7.1 1,017 7.6
Real estate -- mortgage 25,203 57.8 20,183 54.1 15,324 40.8 11,366 36.1
Consumer 17,184 11.1 22,086 15.7 10,739 34.0 8,227 36.9
Revolving credit 3,144 .5 4,280 .5 -- -- -- --
Lease financing 2,028 1.3 1,011 1.3 1,492 .8 1,374 .9
Unallocated portion of allowance 49,231 -- 46,778 -- 22,931 -- 22,463 --
- -------------------------------------- --------- -------- --------- -------- --------- -------- --------- --------
Total $156,401 100.0% 143,614 100.0 59,597 100.0 49,122 100.0
- -------------------------------------- --------- -------- --------- -------- --------- -------- --------- --------
1997
------------------
Amount % of
of Loans
Allowance in Each
In Thousands Allocated Category
- -------------------------------------- --------- --------
Commercial, financial and agricultural 1,934 19.6
Real estate -- construction 579 9.2
Real estate -- mortgage 7,223 30.0
Consumer 5,056 40.0
Revolving credit -- --
Lease financing 2,634 1.2
Unallocated portion of allowance 25,871 --
- -------------------------------------- --------- --------
Total 43,297 100.0
- -------------------------------------- --------- --------
The allocation for loan losses for commercial, financial and agricultural
loans increased from $33.9 million in 2000 to $35.8 million in 2001,
representing 2.70 percent of outstanding loans in 2001, down from 2.77 percent
in 2000.
The allocated portion related to the real estate -- construction segment
increased from $15.4 million in 2000 to $23.8 million in 2001 primarily due to
growth in the portfolio and a rise in delinquencies. The real estate --
construction portfolio continues to experience a low level of net charge-offs.
The allocated allowance amounted to 1.09 percent of outstanding loans in 2001
compared to .81 percent in 2000 due to the increase in delinquencies and the
conforming of factors between CCB and NBC mentioned earlier.
The increase in the allocated loss reserves for real estate -- mortgage,
from $20.2 million in 2000 to $25.2 million in 2001, reflect increases in
commercial mortgage loans, second mortgages and home equity credit lines. These
categories of loans have experienced higher losses than residential first
mortgages. The allowance allocation amounts to .36 percent of outstanding loans
in 2001 compared to .34 percent in 2000.
The allocation for loan losses in the consumer loan segment decreased from
$22.1 million in 2000 to $17.2 million in 2001 due primarily to the decline in
our automobile portfolio. As noted earlier, our largest category of net
charge-offs relates to consumer loans. The allowance for consumer loans amounts
to 1.29 percent of outstanding loans in 2001, up slightly from 1.28 percent in
2000.
The unallocated allowance increased from $46.8 million in 2000 to $49.2
million at December 31, 2001 due to increases in non-performing assets and
total risk assets and in recognition of worsening economic conditions. At
December 31, 2001, the unallocated reserve equaled .41 percent of total loans
compared to .42 percent at December 31, 2000 and .58 percent for NCF at
December 31, 1999, prior to the CCB merger.
25
In discussing the changes in the allocation of the allowance for loan losses
between 1999 and 2000, the CCB merger on July 5, 2000, makes the year-to-year
analysis somewhat more complex. The CCB loan portfolio comprised approximately
62 percent of the total loan portfolio at December 31, 2000; accordingly, the
allocated portion of the allowance for loan losses related to all loan
categories increased significantly from 1999 to 2000. The overall approach and
methodology used in establishing the allowance for loan losses for CCB was
substantially the same as that used by NCF during the period. The unallocated
reserve increased by $23.9 million in 2000 from December 31, 1999's $22.9
million. This increase included the addition of CCB's $29 million unallocated
reserve at the date the merger was consummated net of a decrease in the
provision for unallocated loan losses of $5.1 million. The reduction in
provision related to the unallocated reserve reflected the improved net
charge-off profile and portfolio mix following the CCB merger, among other
factors.
Although the allocation of the allowance is an important management process,
no portion of the allowance is restricted to any individual or group of loans;
rather the entire allowance is available to absorb losses for the entire loan
portfolio.
ASSET QUALITY
Non-performing assets (non-accrual loans and other real estate acquired
through loan foreclosures) and total risk assets (non-performing assets plus
accruing loans 90 days or more past due and restructured loans) at the end of
each of the previous five years are presented in Table 14. CCB's non-performing
and risk assets are not included prior to December 31, 2000. Non-performing and
risk assets have both increased since December 2000 as a result of the economic
conditions discussed earlier. Risk assets as a percentage of total loans
outstanding plus other real estate were .68 percent at December 31, 2001
compared to .38 percent at December 31, 2000. Sixty percent of the non-accrual
loans are loans secured by real estate: construction/land development,
one-to-four family residential properties and commercial real estate. The next
largest category of non-accrual loans is commercial and industrial. While
accruing loans 90 days or more past due have increased $22.2 million over
2000's level, the majority of these loans are comprised of the three categories
of loans secured by real estate listed previously. Consequently, we do not
anticipate significant losses on these loans. Consumer loans are the next
largest category.
Our allowance for loan losses to risk assets was 1.91 times at December 31,
2001 compared to 3.46 times at December 31, 2000. Risk assets and the ratio of
the allowance for loan losses to risk assets have been impacted significantly
by our July 5, 2000 merger with CCB as its risk assets and allowance for loan
losses are not included prior to December 31, 2000. CCB's allowance for loan
losses represented 2.48 times total risk assets at the time of the merger.
Non-performing assets and total risk assets are only one of several asset
quality measures we analyze. Despite the increase throughout 2001 in these
measures, our net charge-offs remained low at .21 percent of average loans in
2001 compared to .20 percent in 2000. Our allowance for loan losses was 6.45
times annual net charge-offs at December 31, 2001 compared to 9.79 times annual
net charge-offs at December 31, 2000.
TABLE 14
Non-Performing and Risk Assets
As of December 31
----------------------------------
In Thousands 2001 2000 1999 1998 1997
- -------------------------------------------------------- ------- ------ ------ ----- -----
Nonaccrual loans $22,800 7,219 -- 533 --
Other real estate acquired through loan foreclosures 10,687 5,652 271 442 --
- -------------------------------------------------------- ------- ------ ------ ----- -----
Total non-performing assets 33,487 12,871 271 975 --
Restructured loans -- 2,232 -- -- --
Accruing loans 90 days or more past due 48,553 26,362 5,470 4,218 3,134
- -------------------------------------------------------- ------- ------ ------ ----- -----
Total risk assets $82,040 41,465 5,741 5,193 3,134
- -------------------------------------------------------- ------- ------ ------ ----- -----
Ratio of non-performing assets to:
Loans outstanding and other real estate
acquired through loan foreclosures .28% .12 .01 .03 --
Total assets .17 .07 -- .02 --
Ratio of total risk assets to:
Loans outstanding and other real estate
acquired through loan foreclosures .68 .38 .14 .16 .12
Total assets .43 .23 .08 .09 .07
Allowance for loan losses to total non-performing assets 4.67 11.16 219.92 50.38 --
Allowance for loan losses to total risk assets 1.91 3.46 10.38 9.46 13.82
- -------------------------------------------------------- ------- ------ ------ ----- -----
26
Our general non-accrual policy is to place credits in a non-accrual status
when the collectibility of principal or interest is doubtful or when payment of
principal or interest is 90 days or more past due (unless determined that the
collectibility is not reasonably considered in doubt).
Loans are considered impaired if it is probable that we will be unable to
collect all amounts due under the terms of the loan agreement. The value of the
impaired loan is based on discounted cash flows or the fair value of the
collateral for a collateral-dependent loan. Any impairment losses are
recognized through charges to the allowance for loan losses. At December 31,
2001 impaired loans amounted to $62.3 million, of which $14.9 million were not
accruing interest. At December 31, 2000, these amounts were $12.5 million and
$6 million, respectively. The related allowance for loan losses on these loans
amounted to $16.8 million and $3.6 million at December 31, 2001 and 2000,
respectively.
Interest Rate Risk Management
We are concerned with managing interest sensitivity so as to avoid
significant net interest margin fluctuations while promoting consistent net
income increases during periods of changing interest rates. Interest
sensitivity is our primary market risk and is defined as the risk of economic
loss resulting from adverse changes in interest rates. This risk of loss can be
reflected in reduced potential net interest income in future periods. The
structure of our loan and deposit portfolios is such that a significant
increase or decline in interest rates may adversely impact net interest income.
Responsibility for managing interest rate, market and liquidity risks rests
with the Asset/Liability Management Committee ("ALCO") comprised of senior
management. ALCO reviews interest rate and liquidity exposures and, based on
its view of existing and expected market conditions, adopts balance sheet
strategies that are intended to optimize net interest income to the extent
possible while minimizing the risk associated with changes in interest rates.
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds, on which
rates change daily, and loans which are tied to the prime rate are much more
interest rate sensitive than fixed-rate securities and loans. Similarly, time
deposits of $100,000 and over and money market accounts are much more interest
rate sensitive than savings accounts. The shorter-term interest rate
sensitivities are the key to measurement of the interest sensitivity gap, or
difference between interest-sensitive earning assets and interest-sensitive
liabilities. Trying to minimize this gap is a continual challenge in a changing
interest rate environment and one of the objectives of the ALCO. ALCO uses Gap
Analysis as one method to determine and monitor the appropriate balance between
interest-sensitive assets and interest-sensitive liabilities.
Gap Analysis measures the interest sensitivity of assets and liabilities at
a given point in time. The interest sensitivity of assets and liabilities is
based on the timing of contractual maturities and repricing opportunities. A
positive interest-sensitive gap occurs when interest-sensitive assets exceed
interest-sensitive liabilities. The reverse situation results in a negative
gap. Management feels that an essentially balanced position (+/- 15 percent of
tangible assets) between interest-sensitive assets and liabilities is necessary
in order to protect against wide fluctuations in interest rates, which was
achieved at December 31, 2001. An analysis of our interest sensitivity position
at December 31, 2001 is presented in Table 15. At December 31, 2001, we had a
cumulative "negative gap" (interest-sensitive liabilities and interest rate
swaps exceed interest-sensitive assets) of $1.2 billion or 7.40 percent of
total earning assets over a twelve-month horizon. The ratio of
interest-sensitive assets to interest-sensitive liabilities and interest rate
swaps was .87x.
27
T A B L E 15
Interest Sensitivity Analysis
As of December 31, 2001 (1)
---------------------------------------------------------------------
6 Months Beyond 1
30 Days 6 Months to 1 Year Total Year
In Thousands Sensitive Sensitive Sensitive Sensitive Sensitive Total
- ----------------------------- ---------- ---------- ---------- ---------- --------- ----------
EARNING ASSETS:
Time deposits in other banks $ 31,118 -- -- 31,118 -- 31,118
Federal funds sold and other
short-term investments 51,873 -- -- 51,873 -- 51,873
Investment securities (2) 587,924 707,844 543,502 1,839,270 2,651,058 4,490,328
Trading securities 197,214 -- -- 197,214 -- 197,214
Loans 4,050,204 870,268 942,369 5,862,841 6,111,924 11,974,765
- ----------------------------- ---------- ---------- ---------- ---------- --------- ----------
Total earning assets 4,918,333 1,578,112 1,485,871 7,982,316 8,762,982 16,745,298
- ----------------------------- ---------- ---------- ---------- ---------- --------- ----------
INTEREST-BEARING LIABILITIES:
Savings deposits 1,192,982 625,869 625,869 2,444,720 2,785,901 5,230,621
Time deposits 1,009,868 2,672,921 1,068,315 4,751,104 905,614 5,656,718
Short-term borrowed funds 1,131,617 -- -- 1,131,617 10,000 1,141,617
FHLB advances and long-term
debt 368,560 280,579 45,493 694,632 1,893,940 2,588,572
- ----------------------------- ---------- ---------- ---------- ---------- --------- ----------
Total interest-bearing
liabilities 3,703,027 3,579,369 1,739,677 9,022,073 5,595,455 14,617,528
- ----------------------------- ---------- ---------- ---------- ---------- --------- ----------
INTEREST RATE SWAPS:
Pay floating/receive fixed -- 200,000 -- 200,000 (200,000) --
- ----------------------------- ---------- ---------- ---------- ---------- --------- ----------
Total interest rate swaps -- 200,000 -- 200,000 (200,000) --
- ----------------------------- ---------- ---------- ---------- ---------- --------- ----------
Interest sensitivity gap $1,215,306 (2,201,257) (253,806) (1,239,757)
- ----------------------------- ---------- ---------- ---------- ----------
Cumulative gap $1,215,306 (985,951) (1,239,757)
- ----------------------------- ---------- ---------- ----------
Cumulative ratio of
interest-sensitive assets to
interest-sensitive
liabilities and interest
rate swaps 1.33x .87 .87
- ----------------------------- ---------- ---------- ----------
Cumulative gap to total
earning assets 7.26 % (5.89) (7.40)
- ----------------------------- ---------- ---------- ----------
(1) Assets and liabilities that mature in one year or less and/or have interest
rates that can be adjusted during this period are considered
interest-sensitive. The interest sensitivity position has meaning only as
of the date for which it is prepared.
(2) Investment securities are presented at their amortized cost. The
mark-to-market adjustment of $22.1 million for available for sale
securities is not included.
- --------------------------------------------------------------------------------
Management uses both on- and off-balance sheet strategies to manage the
balance sheet. The most efficient and cost-effective method of on-balance sheet
management is creating desired maturity and repricing streams through the
tactical pricing of interest-earning and interest-bearing on-balance sheet
products. ALCO reviews the interest-earning and interest-bearing portfolios to
ensure a proper mix of fixed and variable rate products. Emphasis will continue
to be placed on granting loans with short maturities and floating rates where
possible. This strategy increases liquidity and is necessitated by the
continued shortening of maturities and more frequent repricing opportunities of
our funding sources.
Estimating the amount of interest rate risk requires using assumptions about
the future. These estimates will be different from actual results for many
reasons, including but not limited to, changes in the growth of the overall
economy, changes in credit spreads, market interest rates moving in patterns
other than the patterns chosen for analysis, changes in customer preferences,
changes in tactical and strategic plans and changes in Federal Reserve policy.
Stress testing is performed on all market risk measurement analyses to help
understand the relative sensitivity of key assumptions and thereby better
understand our risk profile.
Management will continue to monitor our interest sensitivity position with
the goals of ensuring adequate liquidity while at the same time seeking
profitable spreads between the yields on funding uses and the rates paid for
funding sources.
Market Risk Management
Market risk arises from fluctuations in interest rates that may result in
changes in the value of financial instruments that are accounted for on a
mark-to-market basis, such as trading account securities. NCF's market risk
arises primarily from interest rate risk inherent in its lending and
deposit-taking activities.
NCF utilizes derivative financial instruments to manage interest rate
sensitivity and market risk by modifying the repricing or maturity of assets or
liabilities. By their nature, derivative instruments are subject to market
risk. We do not utilize derivative instruments for speculative purposes. All
interest rate derivatives that qualify for hedge accounting are recorded at
fair values as other assets or other liabilities on the balance sheet and are
designated as either "fair value" or "cash flow hedges". As of December 31,
28
2001, we had derivative financial instruments in the form of fair value hedges
related to the trust preferred securities issued in 2001. The notional amount
of the hedge is $200 million. Notional amounts do not represent amounts to be
exchanged between parties and are not a measure of financial risks, but only
provide the basis for calculating interest payments between the counterparties.
Net interest received or paid on an interest rate swap agreement is recognized
over the life of the contract as an adjustment to interest income (expense) of
the modified or "hedged" financial asset or liability.
Table 16 provides information about our financial instruments (used for
purposes other than trading) that are sensitive to changes in interest rates as
of December 31, 2001. Principal cash flow and related weighted average interest
rates by contractual maturities for loans, securities and liabilities with
contractual maturities are presented. We included assumptions of the impact of
interest rate fluctuations on prepayment of residential and home equity loans
and mortgage-backed securities based on our historical experience. For core
deposits that have no contractual maturity, the principal cash flows and
related weighted average interest rates presented are based upon our historical
experience, management's judgment and statistical analysis, as applicable,
concerning their most likely withdrawal behaviors. Weighted average variable
rates are based on the rates in effect at December 31, 2001.
Liquidity Risk Management
Liquidity ensures that adequate funds are available to meet deposit
withdrawals, fund loan and capital expenditure commitments, maintain reserve
requirements, pay operating expenses, provide funds for dividends, debt service
and other commitments and operate the organization on an ongoing basis. Funds
are primarily provided by our Subsidiary Banks through financial resources from
operating activities, expansion of the deposit base, borrowing funds in money
market operations and through the sale or maturity of assets.
Net cash provided by operating activities and deposits from customers have
been our primary sources of liquidity. Correspondent relationships are
maintained with several larger banks enabling the Subsidiary Banks to purchase
federal funds when needed. Also available as liquidity sources are access to
the Federal Reserve discount window and the Subsidiary Banks' lines of credit
maintained with the FHLB. These lines of credit are secured by blanket
collateral agreements on the Subsidiary Banks' mortgage loan portfolios and
certain securities.
TABLE 16
Market Risk Disclosure
Principal Amount Maturing in Approximate Fair
---------------------------------------------------------- Value at
In Thousands 2002 2003 2004 2005 2006 Thereafter Total December 31, 2001
- ----------------------------------- ---------- --------- --------- ------- ------- ---------- --------- -----------------
RATE SENSITIVE ASSETS:
Fixed interest rate loans $1,559,171 1,412,447 1,336,992 848,457 941,549 1,203,052 7,301,668 7,697,000
Average interest rate 8.13% 8.08 7.96 8.23 7.60 7.92 8.00
Variable interest rate loans $1,070,835 448,587 344,694 360,144 454,603 1,994,234 4,673,097 4,673,000
Average interest rate 5.43% 5.41 5.46 5.16 5.05 5.14 5.25
Fixed interest rate securities $1,139,031 801,041 336,836 448,602 688,666 388,979 3,803,155 3,816,000
Average interest rate 6.12% 6.21 5.87 5.04 4.86 6.74 5.83
Variable interest rate securities $ 116,474 90,902 70,825 55,080 42,749 333,271 709,301 709,000
Average interest rate 3.38% 3.22 3.06 2.98 2.98 4.18 3.65
RATE SENSITIVE LIABILITIES:
Non-interest-bearing deposits $ 425,530 391,983 391,983 130,661 130,661 261,322 1,732,140 1,732,000
Average interest rate -- -- -- -- -- -- --
Savings and NOW accounts $1,009,465 1,468,240 1,468,240 321,169 321,169 642,338 5,230,621 5,231,000
Average interest rate 2.15% 1.43 1.43 1.05 1.05 1.05 1.47
Time deposits $4,751,104 514,557 330,039 22,412 23,690 14,916 5,656,718 5,766,000
Average interest rate 4.14% 3.95 4.46 5.55 4.64 2.49 4.14
Fixed interest rate borrowings $ 401,988 216,460 150,430 15,280 150,254 1,365,127 2,299,539 2,281,000
Average interest rate 3.22% 5.32 4.79 4.67 4.61 5.18 4.79
Variable interest rate borrowings $1,223,858 157,759 -- -- -- 49,033 1,430,650 1,431,000
Average interest rate 1.74% 1.54 -- -- -- 2.86 1.75
RATE SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
Pay variable/receive fixed interest
rate swaps $ 200,000
Average pay rate 2.69%
Average receive rate 7.70
29
Certificates of deposit in denominations of $100,000 or more are an
additional source of liquidity. At December 31, 2001, these accounts totaled
$1.4 billion compared to $2 billion at December 31, 2000. During 2001, the
maximum month-end balance for certificates of deposit in amounts of $100,000 or
more was $2.1 billion. The following is a remaining maturity schedule of these
deposits at December 31, 2001 (in thousands):
OVER 3 OVER 6
3 MONTHS THROUGH THROUGH OVER
OR LESS 6 MONTHS 12 MONTHS 1 YEAR TOTAL
-------- -------- --------- ------ ----------
JUMBO AND BROKERED DEPOSITS $455,298 467,467 432,390 10,879 $1,366,034
Maturities of securities held for investment and sales and maturities of
securities categorized as available for sale are other sources of liquidity.
Securities with carrying values of $1.3 billion mature in 2002. Securities
categorized as available for sale are considered in our asset/liability
management strategies and may be sold in response to changes in interest rates,
liquidity needs and/or significant prepayment risk.
The Parent Company's liquidity is provided though cash dividends from the
Subsidiary Banks and its other non-bank subsidiaries as well as its capacity to
raise additional borrowed funds as needed. Additionally, the Parent Company has
a $50 million unsecured line of credit with a commercial bank available as
needed.
In the ordinary course of business, we enter into various off-balance sheet
commitments and other arrangements to extend credit. At December 31, 2001, we
had commitments to extend credit totaling $2.9 billion. These amounts include
unused revolving credit lines and home mortgage equity lines of $12 million and
$1.1 billion, respectively, at December 31, 2001. Standby letters of credit are
commitments issued by the Subsidiary Banks to guarantee the performance of a
customer to a third party. The standby letters of credit are generally secured
by non-depreciable assets. The Subsidiary Banks had approximately $162 million
and $128 million in outstanding standby letters of credit at December 31, 2001
and 2000. Since many of these commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. These commitments expose us to the risk of deteriorating
credit quality of borrowers to whom a commitment to extend credit has been
made; however, no significant credit losses are expected from these commitments
and arrangements.
In addition to our commitments to extend credit to customers, we have
noncancellable, long-term lease commitments totaling $81.1 million at December
31, 2001. Our institutional broker/dealer enters into transactions involving
financial instruments with off-balance sheet risk in order to meet the
financing and hedging needs of its customers and to reduce its own exposure to
fluctuations in interest rates. The contract amounts of those instruments
reflect the extent of involvement in particular classes of financial
instruments. Risks arise from the possible inability of counterparties to meet
the terms of their contracts and from movements in securities' market values
and interest rates. At December 31, 2001, forward contracts for commitments to
purchase totaled $190.2 million and commitments to sell totaled $198.7 million.
When-issued contracts for commitments to purchase totaled $4.1 million and
commitments to purchase totaled $17.2 million at December 31, 2001.
Management believes that it has adequate resources available to manage our
liquidity needs.
OTHER ACCOUNTING MATTERS
In July, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Other Intangible Assets. Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a purchase
business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce
may not be accounted for separately. Statement 142 will require that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Any impairment charges from the initial impairment
test at the time of adoption would be recognized as a "cumulative effect of
change in accounting principles" in the income statement. Statement 142 will
also require that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to the estimated residual values,
and reviewed for impairment in accordance with Statement 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
NCF is required to adopt the provisions of Statement 142 effective January
1, 2002. The amortization provisions of Statement 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the amortization provisions
of Statement 142 are effective upon adoption of the Statement.
30
Statement 141 will require, upon adoption of Statement 142, that NCF
evaluate its existing intangible assets and goodwill that were acquired in
prior purchase business combinations, and make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition
apart from goodwill. Upon adoption of Statement 142, NCF will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, NCF will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require NCF to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, NCF must identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the
date of adoption. NCF will then have up to six months from the date of adoption
to determine the fair value of each reporting unit and compare it to the
reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and NCF must perform the second step of the
transitional impairment test. In the second step, NCF must compare the implied
fair value of the reporting unit's goodwill, determined by allocating the
reporting unit's fair value to all of its assets (recognized and unrecognized)
and liabilities in a manner similar to a purchase price allocation in
accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in NCF's statement of income.
As of the date of adoption of Statement 142, NCF will have unamortized
goodwill in the amount of $946.2 million and unamortized identifiable
intangible assets in the amount of $251.5 million. Amortization expense related
to goodwill totaled $48.2 million and $26.9 million for the years ended
December 31, 2001 and 2000, respectively. Because of the extensive effort
needed to comply with adoption of Statements 141 and 142, it is not practicable
to reasonably estimate the impact of adopting these Statements on NCF's
consolidated financial statements at the date of this report; however,
management does not anticipate that any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in accounting
principle.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. Statement No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Statement No. 143 is effective for fiscal years beginning after June 15, 2002,
with earlier application encouraged. The provisions of Statement No. 143 are
not expected to have a material impact on the NCF's consolidated financial
statements.
In August 2001, FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes both Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business (as
previously defined in that Opinion). Statement 144 retains the fundamental
provisions in Statement 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how
to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated
for impairment under Statement 142, as discussed above.
31
NCF is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on our financial
statements because the impairment assessment under Statement 144 is largely
unchanged from Statement 121. The provisions of the Statement for assets held
for sale or other disposal generally are required to be applied prospectively
after the adoption date to newly initiated disposal activities. Therefore,
management cannot determine the potential effects that adoption of Statement
144 will have on NCF's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk Management" in Management's Discussion and Analysis of
Financial Condition and Results of Operations for further information about
market risk.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
(a) The following audited consolidated financial statements and related documents are set forth in this Annual Report
on Form 10-K on the pages indicated:
National Commerce Financial Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 2001 and 2000........................................................... 34
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2001............ 35
Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years in the three-year
period ended December 31, 2001.................................................................................... 36
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001........ 37
Notes to Consolidated Financial Statements.......................................................................... 38
(b) The following supplementary data is set forth in this Annual Report on Form 10-K on the page indicated:
Quarterly Financial Data.......................................................................................... 58
Report of Management Regarding Responsibility for Financial Statements............................................... 60
Reports of Independent Auditors...................................................................................... 61
33
NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
----------------------
In Thousands Except Share Data 2001 2000
- ------------------------------------------------------------------ ----------- ----------
Assets:
Cash and due from banks $ 561,429 446,712
Time deposits in other banks 31,118 32,183
Federal funds sold and other short-term investments 51,873 52,572
Investment securities:
Available for sale (amortized cost of $3,589,578 and $2,363,010) 3,611,706 2,401,526
Held to maturity (market values of $913,683 and $1,984,700) 900,750 2,016,795
Trading account securities 197,214 74,417
Loans 11,974,765 11,008,419
Less allowance for loan losses 156,401 143,614
- ------------------------------------------------------------------ ----------- ----------
Net loans 11,818,364 10,864,805
- ------------------------------------------------------------------ ----------- ----------
Premises and equipment 219,595 204,903
Goodwill 946,157 934,467
Core deposit intangibles 251,464 287,707
Other assets 684,043 429,705
- ------------------------------------------------------------------ ----------- ----------
Total assets $19,273,713 17,745,792
- ------------------------------------------------------------------ ----------- ----------
Liabilities:
Deposits:
Demand (noninterest-bearing) $ 1,732,140 1,366,178
Savings, NOW and money market accounts 5,230,621 4,474,114
Jumbo and brokered certificates of deposit 1,366,034 2,006,741
Time deposits 4,290,684 4,132,598
- ------------------------------------------------------------------ ----------- ----------
Total deposits 12,619,479 11,979,631
Short-term borrowed funds 1,141,617 1,212,903
Federal Home Loan Bank advances 2,306,554 1,649,055
Trust preferred securities and long-term debt 282,018 89,301
Other liabilities 468,714 450,064
- ------------------------------------------------------------------ ----------- ----------
Total liabilities 16,818,382 15,380,954
- ------------------------------------------------------------------ ----------- ----------
Stockholders' equity:
Serial preferred stock. Authorized 5,000,000 shares; none issued -- --
Common stock of $2 par value. Authorized 400,000,000 shares;
205,058,713 and 205,246,098 shares issued 410,117 410,492
Additional paid-in capital 1,756,128 1,765,723
Retained earnings 276,342 165,829
Accumulated other comprehensive income 12,744 22,794
- ------------------------------------------------------------------ ----------- ----------
Total stockholders' equity 2,455,331 2,364,838
- ------------------------------------------------------------------ ----------- ----------
Total liabilities and stockholders' equity $19,273,713 17,745,792
- ------------------------------------------------------------------ ----------- ----------
Commitments and contingencies (note 15)
See accompanying notes to consolidated financial statements.
34
NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31
--------------------------
In Thousands Except Per Share Data 2001 2000 1999
- --------------------------------------------------------------- ---------- ------- -------
Interest income:
Interest and fees on loans $ 945,628 688,304 301,063
Interest and dividends on investment securities:
U.S. Treasury 2,892 4,168 2,049
U.S. Government agencies and corporations 191,528 169,300 97,521
States and political subdivisions (primarily tax-exempt) 9,084 8,398 7,485
Equity and other securities 66,527 54,903 39,746
Interest and dividends on trading account securities 3,134 2,437 2,282
Interest on time deposits in other banks 1,257 1,597 951
Interest on federal funds sold and other short-term investments 2,815 8,869 4,877
- --------------------------------------------------------------- ---------- ------- -------
Total interest income 1,222,865 937,976 455,974
- --------------------------------------------------------------- ---------- ------- -------
Interest expense:
Deposits 429,623 364,433 153,120
Short-term borrowed funds 39,066 69,577 31,177
Federal Home Loan Bank advances 97,838 77,912 41,432
Trust preferred securities and long-term debt 5,225 5,282 3,605
- --------------------------------------------------------------- ---------- ------- -------
Total interest expense 571,752 517,204 229,334
- --------------------------------------------------------------- ---------- ------- -------
Net interest income 651,113 420,772 226,640
Provision for loan losses 29,199 16,456 16,921
- --------------------------------------------------------------- ---------- ------- -------
Net interest income after provision for loan losses 621,914 404,316 209,719
- --------------------------------------------------------------- ---------- ------- -------
Other income:
Service charges on deposit accounts 121,450 68,766 21,020
Trust and custodian fees 51,184 32,964 8,100
Other service charges and fees 36,703 29,919 20,024
Broker/dealer revenue and other commissions 68,006 28,816 18,092
Other operating 40,910 24,517 23,086
Investment securities gains (losses) 6,635 4,509 (3,095)
- --------------------------------------------------------------- ---------- ------- -------
Total other income 324,888 189,491 87,227
- --------------------------------------------------------------- ---------- ------- -------
Other expenses:
Personnel 249,565 160,136 82,927
Net occupancy 37,302 27,251 13,800
Equipment 24,166 17,367 7,050
Losses (gains) on interest rate swaps 672 77,227 (1,499)
Merger-related expense 11,364 70,657 --
Goodwill amortization 48,240 26,884 3,479
Core deposit intangibles amortization 58,775 34,536 3,977
Other operating 158,034 99,839 47,372
- --------------------------------------------------------------- ---------- ------- -------
Total other expenses 588,118 513,897 157,106
- --------------------------------------------------------------- ---------- ------- -------
Income before income taxes 358,684 79,910 139,840
Income taxes 133,388 34,600 47,208
- --------------------------------------------------------------- ---------- ------- -------
Net income $ 225,296 45,310 92,632
- --------------------------------------------------------------- ---------- ------- -------
Earnings per common share:
Basic $ 1.10 .29 .88
Diluted 1.09 .28 .87
Weighted average shares outstanding:
Basic 204,972 157,387 104,947
Diluted 207,484 159,254 106,807
See accompanying notes to consolidated financial statements.
35
NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and
Comprehensive Income
Years Ended December 31, 2001, 2000, and 1999
Accumulated
Additional Other
Number of Common Paid-In Retained Comprehensive
In Thousands Except Per Share Data Shares Stock Capital Earnings Income (Loss)
- --------------------------------------------------------------- ----------- -------- ---------- -------- -------------
Balance December 31, 1998 101,442,799 $202,885 101,838 143,832 1,398
Net income -- -- -- 92,632 --
Other comprehensive loss --
Unrealized loss on securities, net of deferred tax benefit of
$3,546 -- -- -- -- (5,566)
Total comprehensive income
Stock options exercised, net of shares tendered 1,063,472 2,127 9,725 -- --
Stock offering 3,564,529 7,129 73,119 -- --
Common stock issued for acquisitions 3,085,486 6,171 75,462 -- --
Purchase and retirement of shares (1,051,500) (2,103) (20,822) -- --
Other transactions, net 118,500 237 886 (12) --
Cash dividends ($.38 per share) -- -- -- (39,697) --
- --------------------------------------------------------------- ----------- -------- ---------- -------- -------------
Balance December 31, 1999 108,223,286 216,446 240,208 196,755 (4,168)
Net income -- -- -- 45,310 --
Other comprehensive gain --
Unrealized gain on securities, net of deferred tax expense of
$18,387 -- -- -- -- 26,962
Total comprehensive income
Restricted stock transactions, net 434,415 869 807 -- --
Stock options exercised, net of shares tendered 1,192,298 2,385 11,213 -- --
Common stock issued in acquisitions 97,342,874 194,686 1,546,339 -- --
Purchase and retirement of shares (1,724,805) (3,450) (28,558) -- --
Other transactions, net (221,970) (444) (4,286) -- --
Cash dividends ($.48 per share) -- -- -- (76,236) --
- --------------------------------------------------------------- ----------- -------- ---------- -------- -------------
Balance December 31, 2000 205,246,098 410,492 1,765,723 165,829 22,794
Net income -- -- -- 225,296 --
Other comprehensive loss --
Unrealized loss on securities, net of deferred tax benefit of
$5,217 -- -- -- -- (10,050)
Total comprehensive income
Restricted stock transactions, net 26,159 52 2,769 -- --
Stock options exercised, net of shares tendered 1,658,120 3,316 21,022 -- --
Common stock issued in acquisitions 2,384,695 4,769 61,727 -- --
Purchase and retirement of shares (4,255,132) (8,510) (93,702) -- --
Other transactions, net (1,227) (2) (1,411) 55 --
Cash dividends ($.56 per share) -- -- -- (114,838) --
- --------------------------------------------------------------- ----------- -------- ---------- -------- -------------
Balance December 31, 2001 205,058,713 $410,117 1,756,128 276,342 12,744
- --------------------------------------------------------------- ----------- -------- ---------- -------- -------------
Total
Stockholders'
In Thousands Except Per Share Data Equity
- --------------------------------------------------------------- -------------
Balance December 31, 1998 449,953
Net income 92,632
Other comprehensive loss --
Unrealized loss on securities, net of deferred tax benefit of
$3,546 (5,566)
-------------
Total comprehensive income 87,066
Stock options exercised, net of shares tendered 11,852
Stock offering 80,248
Common stock issued for acquisitions 81,633
Purchase and retirement of shares (22,925)
Other transactions, net 1,111
Cash dividends ($.38 per share) (39,697)
- --------------------------------------------------------------- -------------
Balance December 31, 1999 649,241
Net income 45,310
Other comprehensive gain --
Unrealized gain on securities, net of deferred tax expense of
$18,387 26,962
-------------
Total comprehensive income 72,272
Restricted stock transactions, net 1,676
Stock options exercised, net of shares tendered 13,598
Common stock issued in acquisitions 1,741,025
Purchase and retirement of shares (32,008)
Other transactions, net (4,730)
Cash dividends ($.48 per share) (76,236)
- --------------------------------------------------------------- -------------
Balance December 31, 2000 2,364,838
Net income 225,296
Other comprehensive loss --
Unrealized loss on securities, net of deferred tax benefit of
$5,217 (10,050)
-------------
Total comprehensive income 215,246
Restricted stock transactions, net 2,821
Stock options exercised, net of shares tendered 24,338
Common stock issued in acquisitions 66,496
Purchase and retirement of shares (102,212)
Other transactions, net (1,358)
Cash dividends ($.56 per share) (114,838)
- --------------------------------------------------------------- -------------
Balance December 31, 2001 2,455,331
- --------------------------------------------------------------- -------------
See accompanying notes to consolidated financial statements.
36
NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31
---------------------------------
In Thousands 2001 2000 1999
- --------------------------------------------------------------------------------- ----------- ---------- --------
OPERATING ACTIVITIES:
Net income $ 225,296 45,310 92,632
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net 105,216 (13,692) 17,169
Provision for loan losses 29,199 16,456 16,921
Net loss (gain) on sales of investment securities (6,635) (4,509) 3,095
Net loss (gain) on interest rate swaps 672 77,227 (1,499)
Deferred income taxes 20,407 27,051 (4,778)
Changes in:
Trading account securities (122,797) (44,123) 32,443
Other assets (220,870) 17,759 (48,376)
Other liabilities 2,521 31,332 28,229
Other operating activities, net 2,926 (2,517) 3,771
- --------------------------------------------------------------------------------- ----------- ---------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 35,935 150,294 139,607
- --------------------------------------------------------------------------------- ----------- ---------- --------
INVESTING ACTIVITIES:
Proceeds from:
Maturities and issuer calls of investment securities held to maturity 1,213,809 151,243 72,370
Sales of investment securities available for sale 152,760 1,449,337 265,466
Maturities and issuer calls of investment securities available for sale 1,352,900 123,153 130,349
Purchases of:
Investment securities held to maturity (92,720) (334,518) (454,651)
Investment securities available for sale (2,585,766) (1,631,343) (194,328)
Premises and equipment (22,702) (23,927) (12,037)
Net originations of loans (413,291) (539,862) (596,660)
Net cash acquired in acquisitions and dispositions (21,616) 318,633 7,660
- --------------------------------------------------------------------------------- ----------- ---------- --------
NET CASH USED BY INVESTING ACTIVITIES (416,626) (487,284) (781,831)
- --------------------------------------------------------------------------------- ----------- ---------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 73,803 511,590 295,090
Net increase (decrease) in short-term borrowed funds (85,329) (25,900) 291,194
Net increase (decrease) in Federal Home Loan Bank advances 513,901 221,475 (18,239)
Retirement of long-term debt (7,276) -- --
Issuance of trust preferred securities 200,000 -- --
Issuances of common stock from exercise of stock options, net 15,595 8,498 4,888
Stock offering -- -- 80,248
Purchase and retirement of common stock (102,212) (32,008) (22,925)
Other equity transactions, net -- (258) 1,111
Cash dividends paid (114,838) (76,236) (39,697)
- --------------------------------------------------------------------------------- ----------- ---------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 493,644 607,161 591,670
- --------------------------------------------------------------------------------- ----------- ---------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 112,953 270,171 (50,554)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 531,467 261,296 311,850
- --------------------------------------------------------------------------------- ----------- ---------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 644,420 531,467 261,296
- --------------------------------------------------------------------------------- ----------- ---------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the year $ 595,423 503,514 237,412
Income taxes paid during the year 103,675 44,789 53,315
See accompanying notes to consolidated financial statements.
37
NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts and results of
operations of National Commerce Financial Corporation ("NCF", formerly National
Commerce Bancorporation) and its subsidiaries. NCF is a bank holding company
that provides diverse financial services through a regional network of banking
affiliates and a national network of nonbanking affiliates. NCF's wholly-owned
bank subsidiaries include National Bank of Commerce, ("NBC") and NBC Bank, FSB
(collectively, the "Subsidiary Banks"). On December 31, 2001, NCF's subsidiary
Central Carolina Bank and Trust Company was merged into NBC. The consolidated
financial statements also include the accounts and results of operations of the
wholly-owned non-bank subsidiaries of NCF: TransPlatinum Service Corp.,
Commerce Capital Management, Inc., First Mercantile Trust, First Mercantile
Capital Management, Inc., USI Alliance, National Commerce Capital Trust I,
National Commerce Capital Trust II, Senior Housing Crime Prevention Foundation
Investment Corporation and Monroe Properties. Also included in the consolidated
financial statements are the subsidiaries of NBC and TransPlatinum.
Additionally, NBC owns 80 percent of Fenesco Financial Enterprise, Inc., D/B/A
NBC Capital Markets ("Capital Markets"). All significant intercompany
transactions and accounts are eliminated in consolidation. NCF has two business
segments: traditional banking and financial enterprises.
The Subsidiary Banks provide a full range of banking services to individual
and corporate customers through their branch networks based in Tennessee,
Mississippi, Arkansas, Georgia, North Carolina, South Carolina, Virginia and
West Virginia. Neither NCF nor its Subsidiary Banks have active foreign
operations. NCF believes that there is no concentration of risk with any single
customer or supplier, or small group of customers or suppliers, whose failure
or nonperformance would materially affect NCF's results. Products and services
offered to customers include traditional banking services such as accepting
deposits; making secured and unsecured loans; renting safety deposit boxes;
performing trust functions for corporations, employee benefit plans and
individuals; and providing certain insurance and brokerage services. The
Subsidiary Banks are subject to competition from other financial entities and
are subject to the regulations of certain Federal agencies and undergo periodic
examinations by those regulatory agencies.
The financial enterprises segment is comprised of trust services and
investment management, transaction processing, retail banking
consulting/in-store licensing and broker/dealer activities. Many of these
services are offered on a national level.
Financial Statement Presentation
In preparing the financial statements in conformity with accounting
principles generally accepted in the United States, management makes estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Certain amounts for prior years have been reclassified to conform to the
2001 presentation.
For purposes of the Statements of Cash Flows, NCF considers time deposits in
other banks, federal funds sold and other short-term investments to be cash
equivalents.
Investment Securities
Securities available for sale are carried at fair value. Unrealized gains or
losses are excluded from earnings and reported as a separate component of
stockholders' equity. Debt securities that NCF has the positive intent and
ability to hold to maturity are classified as held for maturity and reported at
amortized cost. Trading account securities consist of securities inventories
held for the purpose of brokerage activities and are carried at fair value with
changes in fair value included in earnings. Broker/dealer revenue includes the
effects of adjustments to market values of trading account securities. The
adjusted cost of the specific securities sold is used to compute gains or
losses on the sale of securities.
Loan Portfolio
The loan portfolio is comprised of the following: commercial, financial and
agricultural; real estate-construction; real estate-mortgage; consumer,
revolving credit accounts and leases. The lease portfolio includes rolling
stock such as automobiles, trucks and trailers as well as a broadly diversified
base of equipment.
38
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Interest income on loans is recorded on the accrual basis. Accrual of
interest on loans (including impaired loans) is discontinued at the time the
loan is 90 days delinquent unless the credit is well secured and in the process
of collection. Consumer and other retail loans are typically charged-off no
later than 120 days past due. In all cases, loans are placed on non-accrual or
charged-off at an earlier date if collection of principal or interest is
considered doubtful.
Interest accrued but not collected on loans that are placed on non-accrual
or are charged-off is reversed against interest income. Subsequent interest
collected is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual status. Loans are returned to accrual status
when all principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to expense
and reduced by loan charge-offs, net of recoveries. The allowance is maintained
at a level considered adequate by management to provide for probable loan
losses. The allowance is comprised of specific loan loss allocations,
non-accrual loan and classified loan allocations, and general allocations by
loan type for all other loans. Specific loan loss allocations are determined
for significant credits where management believes that a risk of loss exists.
The evaluation of the allowance is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
While management uses the best information available on which to base
estimates, future adjustments to the allowance may be necessary if economic
conditions, particularly in the Subsidiary Banks' markets, differ substantially
from the assumptions used by management. Additionally, bank regulatory agency
examiners periodically review the loan portfolio and may require the Subsidiary
Banks to charge-off loans and/or increase the allowance for loan losses to
reflect their assessment of the collectibility of loans based on available
information at the time of their examination.
For all specifically reviewed loans for which it is probable that the
Subsidiary Banks will be unable to collect all amounts due according to the
terms of the loan agreement, the Subsidiary Banks determine a value at either
the present value of expected cash flows discounted at the loan's effective
interest rate, or if more practical, the market price or value of the
collateral. If the resulting value of the impaired loan is less than the
recorded balance, impairment is recognized by creating a valuation allowance
for the difference and recognizing a corresponding bad debt expense.
Derivatives and Hedging Activities
NCF records derivatives at fair value in "other assets" (or "other
liabilities") on the Consolidated Balance Sheets depending on whether the fair
value is an unrealized gain or loss. Derivatives that are not hedges are
adjusted to fair value through earnings. If the derivative is a hedge,
depending on the nature of the hedge, changes in fair value of the derivatives
are either offset through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value is immediately recognized in earnings.
Derivative contracts are accounted for on the accrual basis and the net
interest differential, including premiums paid, if any, are recognized as an
adjustment to interest income or interest expense of the related asset or
liability.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed over the estimated lives of the assets
on accelerated and straight-line methods. Leasehold improvements are amortized
over the term of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
Intangibles Arising from Acquisitions
Intangible assets arising from acquisitions result from paying amounts in
excess of fair value for businesses, core deposits and tangible assets
acquired. Such amounts are being amortized by systematic charges to income over
a period no greater than the estimated remaining life of the assets acquired or
not exceeding the estimated remaining life of the existing deposit base
assumed. For all purchase acquisitions completed prior to July 1, 2001,
goodwill is amortized on a straight-line basis over 20 years. For purchase
acquisitions completed subsequent to June 30, 2001, goodwill is not amortized.
Core deposit intangibles are amortized over a period of up to 10 years using
the sum of the quarters' digits method, an accelerated method.
Unamortized intangibles are reviewed for impairment whenever the facts and
circumstances indicate that the carrying amount may not be recoverable. NCF
assesses the recoverability of these intangible assets by determining whether
the unamortized balance can be recovered through the future operating cash
flows of the acquired institution over the remaining life of the intangible.
Impairment, if any, is measured based on projected future operating cash flows
using a discount rate reflecting NCF's average cost of funds.
39
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Comprehensive Income
Comprehensive income is the change in NCF's equity during the period from
transactions and other events and circumstances from non-owner sources. Total
comprehensive income is divided into net income and other comprehensive income
(loss). "Other comprehensive income (loss)" for the three-year period ended
December 31, 2001 and "accumulated other comprehensive income (loss)" as of
December 31, 2001 and 2000 are comprised of unrealized gains and losses on
certain investments in debt and equity securities.
Income Taxes
The provision for income taxes is based on income and expense reported for
financial statement purposes after adjustment for permanent differences such as
tax-exempt interest income. Deferred income taxes are provided when there is a
difference between the periods items are reported for financial statement
purposes and when they are reported for tax purposes and are recorded at the
enacted tax rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or settled. Subsequent
changes in tax rates will require adjustment to these assets and liabilities.
Each subsidiary provides for income taxes based on its contribution to income
tax expense (benefit) of the consolidated group.
Incentive Plans
NCF has incentive plans covering certain officers of NCF and its
subsidiaries. The market value of shares issued under the incentive plans are
being charged to operating expense over periods of up to three years.
Generally, NCF grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares on the
date of grant. NCF has elected to account for these stock option grants in
accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and accordingly, recognizes no compensation
expense for these stock option grants. For all variable stock option grants,
compensation expense is recognized in accordance with APB Opinion No. 25 over
the period the employee performs related service, the vesting period.
An employer that continues to apply APB No. 25, which utilizes the intrinsic
value accounting method rather than the "fair value based method" promulgated
under Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-based Compensation, must disclose certain pro forma information.
Under the fair value based method, compensation cost is measured at the grant
date of the option based on the value of the award and is recognized over the
service period, which is usually the vesting period. The required pro forma
amounts reflect the difference between compensation cost, if any, included in
net income and the related cost measured by the fair value based method,
including tax effects, that would have been recognized in the income statement
if the fair value based method had been used.
Earnings Per Share
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income available to common shareholders by the weighted average
number of common shares outstanding during each period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. Diluted EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding plus dilutive stock options (as
computed under the treasury stock method) assumed to have been exercised during
the period.
Fair Value of Financial Instruments
The financial statements include disclosure of fair value information about
financial instruments, whether or not recognized on the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the financial instrument. As the
fair value of certain financial instruments and all nonfinancial instruments
are not presented, the aggregate fair value amounts presented do not represent
the underlying value of NCF.
(2) ACQUISITIONS
In 2001, NCF consummated two acquisitions that were accounted for as
purchases. Results of operations of the acquired companies were included in
NCF's 2001 consolidated statement of income from the respective dates of
acquisition. In August,
40
(2) ACQUISITIONS -- Continued
NCF acquired First Vantage-Tennessee, a $165 million financial institution
located in Knoxville, Tennessee. Goodwill of $11.3 million was recorded in the
cash transaction. In November, NCF acquired SouthBanc Shares, Inc., a $660
million South Carolina financial institution. Approximately 2.4 million shares
of NCF common stock were issued and $48.5 million of goodwill was recorded in
the transaction. Proforma financial information relating to these acquisitions
has not been provided, as the acquisitions are not considered material to NCF's
financial position or results of operations as of December 31, 2001.
In 2000, NCF consummated four acquisitions that were accounted for as
purchases. Results of operations of the acquired companies were included in
NCF's 2000 consolidated statement of income from the respective dates of
acquisition. In July, NCF completed its merger with CCB Financial Corporation
("CCBF"), an $8.8 billion bank holding company based in Durham, North Carolina.
Approximately 93.8 million shares of NCF common stock were issued and $814.2
million of goodwill was recorded. Also in July, NCF completed its merger with
First Mercantile Trust and First Mercantile Capital Management, Inc., a $7
million trust company based in Germantown, Tennessee. Approximately 1.7 million
shares of NCF stock were issued and $28.4 million of goodwill was recorded in
the transaction. In April, NCF completed its merger with Piedmont Bancorp,
Inc., a $151 million bank holding company based in Hillsborough, North
Carolina. Approximately 1.5 million shares of NCF common stock were issued and
$12.7 million of goodwill was recorded in the transaction. In March,
TransPlatinum acquired Prime Financial Services, Inc., a receivables financing
company serving the transportation industry in a cash transaction.
In connection with the mergers discussed above, NCF incurred merger and
integration charges in 2001 and 2000. The components of the charges are shown
below:
In Thousands 2001 2000
-------------------------------------------------- ------- ------
Severance costs $ 1,040 2,211
Employee retention costs -- 186
Restricted stock acceleration -- 759
Change-in-control related costs -- 30,891
Other costs accrued 123 1,943
-------------------------------------------------- ------- ------
Total personnel-related costs 1,163 35,990
Occupancy and equipment write-downs 47 5,952
Systems and other integration costs 10,154 26,713
Securities losses from balance sheet restructuring -- 2,002
-------------------------------------------------- ------- ------
Total merger and integration costs $11,364 70,657
-------------------------------------------------- ------- ------
Personnel-related costs include accrued termination benefits, severance and
employee retention costs. Occupancy and equipment write-downs include
impairment of assets and lease termination costs related to closed branches,
plus redundant equipment resulting from integration of technology platforms.
Systems and other integration costs include incremental costs such as
consultants and contract labor related to the conversion of systems, customer
communications and employee benefits integration costs.
The following summarizes activity within NCF's merger accrual account during
the years ended December 31, 2001 and 2000:
In Thousands 2001 2000
-------------------------------------- -------- -------
Balance at beginning of period $ 10,610 --
Provision charged to operating expense 11,364 70,657
Cash outlays (16,134) (52,220)
Non-cash write-downs -- (7,827)
-------------------------------------- -------- -------
Balance at end of period $ 5,840 10,610
-------------------------------------- -------- -------
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
The Subsidiary Banks are required to maintain reserve and clearing balances
with the Federal Reserve Bank. These balances are included in "cash and due
from banks" on the Consolidated Balance Sheets. For the reserve maintenance
periods in effect at both December 31, 2001 and 2000, the Subsidiary Banks were
required to maintain average reserve and clearing balances of $23 million and
$32.3 million, respectively.
(4) INVESTMENT SECURITIES
Investment securities with amortized costs of approximately $2.8 billion at
December 31, 2001 and $2.4 billion at December 31, 2000 were pledged to secure
public funds on deposit, repurchase agreements and for other purposes required
by law. The investment securities portfolio is segregated into securities
available for sale and securities held to maturity.
41
(4) INVESTMENT SECURITIES -- Continued
Securities Available for Sale
Securities available for sale are carried at estimated fair value. The
amortized cost and approximate fair values of these securities at December 31,
2001 and 2000 were as follows:
2001 2000
------------------------------------------ -----------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR Amortized Unrealized Unrealized Fair
In Thousands COST GAINS LOSSES VALUE Cost Gains Losses Value
- ----------------------------------------- ---------- ---------- ---------- --------- --------- ---------- ---------- ---------
U.S. Treasury $ 44,194 1,871 -- 46,065 54,580 725 (10) 55,295
U.S. Government agencies and corporations 1,528,887 18,455 (16,964) 1,530,378 528,460 12,998 (587) 540,871
Mortgage-backed securities 1,507,490 20,805 (6,780) 1,521,515 1,021,566 20,996 (1,382) 1,041,180
States and political subdivisions 86,466 2,704 (183) 88,987 111,222 2,881 (272) 113,831
Debt and equity securities 422,541 2,769 (549) 424,761 647,182 4,581 (1,414) 650,349
- ----------------------------------------- ---------- ---------- ---------- --------- --------- ---------- ---------- ---------
Total $3,589,578 46,604 (24,476) 3,611,706 2,363,010 42,181 (3,665) 2,401,526
- ----------------------------------------- ---------- ---------- ---------- --------- --------- ---------- ---------- ---------
Gross gains realized on sales of available for sale securities totaled $6.7
million and gross losses totaled $110,000 for 2001.
Equity securities include the Subsidiary Banks' required investment in stock
of the Federal Home Loan Bank (the "FHLB") which totaled $150.5 million at
December 31, 2001 and $100.4 million at December 31, 2000. No ready market
exists for this stock and it has no quoted market value. However, redemption of
this stock has historically been at par value. Accordingly, the carrying
amounts were deemed to be a reasonable estimate of fair value.
Following is a maturity schedule of securities available for sale at
December 31, 2001:
AMORTIZED FAIR
In Thousands COST VALUE
-------------------------------------- ---------- ---------
Within 1 year $ 49,154 50,225
After 1 but within 5 years 1,302,439 1,295,321
After 5 but within 10 years 299,390 311,292
After 10 years 8,564 8,592
-------------------------------------- ---------- ---------
Subtotal 1,659,547 1,665,430
Mortgage-backed securities 1,507,490 1,521,515
Debt and equity securities 422,541 424,761
-------------------------------------- ---------- ---------
Total securities available for sale $3,589,578 3,611,706
-------------------------------------- ---------- ---------
Securities Held to Maturity
The carrying values and approximate market values of securities held to
maturity at December 31, 2001 and 2000 were as follows:
2001 2000
-------------------------------------- -----------------------------------------
CARRYING UNREALIZED UNREALIZED FAIR Carrying Unrealized Unrealized Fair
In Thousands VALUE GAINS LOSSES VALUE Value Gains Losses Value
- ----------------------------------------- -------- ---------- ---------- ------- --------- ---------- ---------- ---------
U.S. Government agencies and corporations $151,132 4,022 -- 155,154 1,130,663 1,774 (22,411) 1,110,026
Mortgage-backed securities 257,461 3,177 (91) 260,547 303,619 1,795 (7,528) 297,886
States and political subdivisions 65,008 1,580 (16) 66,572 75,702 1,434 (27) 77,109
Debt securities 427,149 10,788 (6,527) 431,410 506,811 5,573 (12,705) 499,679
- ----------------------------------------- -------- ---------- ---------- ------- --------- ---------- ---------- ---------
Total $900,750 19,567 (6,634) 913,683 2,016,795 10,576 (42,671) 1,984,700
- ----------------------------------------- -------- ---------- ---------- ------- --------- ---------- ---------- ---------
Following is a maturity schedule of securities held to maturity at December
31, 2001:
CARRYING FAIR
In Thousands VALUE VALUE
--------------------------------- -------- -------
Within 1 year $ 1,965 2,005
After 1 but within 5 years 115,404 117,500
After 5 but within 10 years 88,054 90,900
After 10 years 10,717 11,321
--------------------------------- -------- -------
Subtotal 216,140 221,726
Mortgage-backed securities 257,461 260,547
Debt securities 427,149 431,410
--------------------------------- -------- -------
Total securities held to maturity $900,750 913,683
--------------------------------- -------- -------
42
(4) INVESTMENT SECURITIES -- Continued
Unrealized gains and losses on certain investments in debt and equity
securities included in other comprehensive income (loss) for the years ended
December 31, 2001, 2000, and 1999 follows:
2001 2000
--------------------------- ------------------------- --------
BEFORE TAX NET OF Before Tax Net of Before
TAX (EXPENSE) TAX tax (expense) tax tax
In Thousands AMOUNT BENEFIT AMOUNT amount benefit amount amount
- --------------------------------------------------------- -------- --------- ------- ------ --------- ------ -------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during holding
period $ (8,632) 2,596 (6,036) 49,858 (20,168) 29,690 (12,207)
Reclassification adjustment for losses (gains) realized
in net income (6,635) 2,621 (4,014) (4,509) 1,781 (2,728) 3,095
- --------------------------------------------------------- -------- --------- ------- ------ --------- ------ -------
Other comprehensive income (loss) $(15,267) 5,217 (10,050) 45,349 (18,387) 26,962 (9,112)
- --------------------------------------------------------- -------- --------- ------- ------ --------- ------ -------
Tax Net of
(expense) tax
In Thousands benefit amount
- --------------------------------------------------------- --------- ------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during holding
period 4,769 (7,438)
Reclassification adjustment for losses (gains) realized
in net income (1,223) 1,872
- --------------------------------------------------------- --------- ------
Other comprehensive income (loss) 3,546 (5,566)
- --------------------------------------------------------- --------- ------
Unrealized net gains on trading securities were $2 million and $245,000 at
December 31, 2001 and 2000, respectively, and were immaterial in 1999.
(5) LOANS
Management internally classifies the loan portfolio by the purpose of the
borrowing and such classification is presented below as of December 31, 2001
and 2000. This classification basis places the emphasis on the source of
repayment rather than the collateral source, which is the basis for regulatory
classification purposes.
In Thousands 2001 2000
------------------------------------------ ----------- ----------
Consumer, net of unearned $ 3,602,013 3,533,471
Commercial, net of unearned 2,900,346 2,658,406
Construction and miscellaneous real estate 3,361,232 2,831,228
Credit cards 9,368 14,671
Check protection 52,363 50,382
Mortgage 1,912,345 1,791,033
Leases receivable, net of unearned 137,098 129,228
------------------------------------------ ----------- ----------
Total loans $11,974,765 11,008,419
------------------------------------------ ----------- ----------
Loans totaling $22.8 million at December 31, 2001 were not accruing
interest. Loans with outstanding balances of $12.1 million in 2001 were
transferred from loans to other real estate acquired through loan foreclosure.
Other real estate acquired through loan foreclosures amounted to $10.7 million
and $5.7 million at December 31, 2001 and 2000, respectively, and is included
in "other assets" on the Consolidated Balance Sheets.
43
(5) LOANS -- Continued
The following is an analysis of interest income related to loans on
nonaccrual status for the years ended December 31, 2001, 2000 and 1999:
In Thousands 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------- ------ ---- -----
Interest income that would have been recognized if the loans had been current at original contractual rates $1,481 727 1,307
Amount recognized as interest income 619 291 322
- ----------------------------------------------------------------------------------------------------------- ------ ---- -----
Difference $ 862 436 985
- ----------------------------------------------------------------------------------------------------------- ------ ---- -----
Substantially all loans are made on a secured basis and, with the exception
of marketable mortgage loans, are originated for retention in the Subsidiary
Banks' portfolios. Loans held for sale carried at lower of cost or market
totaled $103.4 million at December 31, 2001. No loans were held for sale at
December 31, 2000. The Subsidiary Banks do not engage in highly leveraged
transactions or foreign lending activities. The loan portfolios are well
diversified and there are no significant concentrations of credit risk.
At December 31, 2001, impaired loans totaled $62.3 million, of which $14.9
million were on non-accrual status, and their related allowance for loan losses
totaled $16.8 million. The average carrying value of impaired loans was $53.9
million during 2001 and gross interest income recognized on impaired loans
totaled $4.2 million. At December 31, 2000, impaired loans totaled $12.5
million, of which $6 million were on non-accrual status, and their related
allowance for loan losses totaled $3.6 million. The average carrying value of
impaired loans was $6.3 million during 2000 and gross interest income
recognized on impaired loans totaled $351,000.
During 2001 and 2000, the Subsidiary Banks had loan and deposit
relationships with NCF's executive officers and directors and their associates.
In the opinion of management, these loans do not involve more than the normal
risk of collectibility and are made on terms comparable to other borrowers.
Following is an analysis of these borrowings for the year ended December 31,
2001 (in thousands):
BEGINNING NEW OTHER END OF
OF YEAR LOANS REPAYMENTS CHANGES YEAR
--------- ------ ---------- ------- --------
Directors, executive officers and associates $76,041 65,307 (22,399) 8,376 $127,325
- -------------------------------------------- --------- ------ ---------- ------- --------
Loans serviced for the benefit of others totaled $668.5 million and $817.1
million at December 31, 2001 and 2000, respectively. Mortgage servicing fees
totaled $2.5 million in 2001 and $1.5 million in 2000.
Certain real estate-mortgage loans with carrying values totaling $2.1
billion are pledged as collateral for advances from the FHLB.
(6) ALLOWANCE FOR LOAN LOSSES
Following is a summary of the allowance for loan losses:
In Thousands 2001 2000 1999
--------------------------------------------- -------- ------- -------
Balance at beginning of year $143,614 59,597 49,122
Provision charged to operations 29,199 16,456 16,921
Addition from acquired financial institutions 7,850 82,228 2,044
Recoveries of loans previously charged-off 7,375 5,016 3,976
Loan losses charged to allowance (31,637) (19,683) (12,466)
--------------------------------------------- -------- ------- -------
Balance at end of year $156,401 143,614 59,597
--------------------------------------------- -------- ------- -------
(7) DERIVATIVES AND HEDGING ACTIVITIES
On April 1, 1999, NCF adopted SFAS No. 133, Accounting For Derivative
Instruments and Hedging Activities. The fair value of NCF's derivative
contracts at adoption was immaterial and has been included in "Gains and losses
on interest rate swaps" on the Consolidated Statements of Income.
NCF utilizes interest rate swap agreements to provide an exchange of
interest payments computed on notional amounts that will offset any undesirable
change in cash flows or fair value resulting from market rate changes on
designated hedged transactions or items. NCF limits the credit risks of these
instruments by initiating the transactions with counterparties that meet NCF's
underwriting policies and quality standards.
44
(7) DERIVATIVES AND HEDGING ACTIVITIES -- Continued
Interest rate agreements designated as fair value hedges help manage
exposure of outstanding trust preferred securities (designated hedged item) to
changes in fair value. These agreements involve the receipt of fixed-rate
amounts in exchange for floating-rate payments over the life of the agreement
without exchange of the underlying principal amount. The differential to be
paid or received is accrued as interest rates change and is recognized as an
adjustment to interest expense related to the item specifically designated as
being hedged at the start of the agreement. The related amount payable or
receivable from counterparties is included in "other assets" or "other
liabilities" on the Consolidated Balance Sheet. At December 31, 2001, the
notional amounts of interest rate agreements designated as fair value hedges
were $200 million.
During 1999 and 2000, NCF used interest rate agreements to modify the
interest payment characteristics of its outstanding debt and large time
deposits from a floating-rate to a fixed-rate basis. These agreements involve
the receipt of floating-rate amounts in exchange for fixed-rate payments over
the life of the agreement without exchange of the underlying principal amount.
During the rising interest rate environment experienced in the beginning of
2000, NCF increased its position in these interest rate swaps that reduced its
interest rate sensitivity to its wholesale funding. The fair values of the
swaps, which did not qualify for hedge accounting treatment under SFAS No. 133,
were included in "other assets" or "other liabilities" on the Consolidated
Balance Sheet. When interest rates declined in the latter half of 2000, NCF
recognized unrealized losses on these contracts. Changes in the fair value of
these contracts have been recorded in the Consolidated Statements of Income as
"Gains / losses on interest rate swaps". The fair value of these contracts was
an unrealized loss of $77.2 million at December 31, 2000, with corresponding
notional amounts of $1.5 billion. The interest rate swaps were terminated in
early 2001.
(8) PREMISES AND EQUIPMENT
Following is a summary of premises and equipment:
Average life
In Thousands (years) 2001 2000
- ----------------------------------------------- ------------ --------- --------
Land -- $ 41,066 39,645
Buildings 17.5 147,089 134,965
Leasehold improvements 10.0 48,301 46,514
Furniture and equipment 7.5 204,215 188,617
- ----------------------------------------------- ------------ --------- --------
Gross premises and equipment 440,671 409,741
Less: accumulated depreciation and amortization (221,076) (204,838)
- ----------------------------------------------- ------------ --------- --------
Total premises and equipment $ 219,595 204,903
- ----------------------------------------------- ------------ --------- --------
(9) TIME DEPOSITS
Interest on jumbo time deposits totaled $77 million in 2001 and $112.7
million in 2000. Maturities of time deposits for each of the years ending
December 31 are as follows:
Total
In Thousands Maturities
------------------- ----------
2002 $4,750,711
2003 524,280
2004 332,668
2005 46,271
2006 and thereafter 2,788
------------------- ----------
Total $5,656,718
------------------- ----------
45
(10) BORROWINGS
At December 31, 2001, NCF (Parent Company) had available $50 million in
unsecured lines of credit with a commercial bank. No draws were outstanding as
of December 31, 2001 or during 2001.
Short-term Borrowed Funds
Following is an analysis of short-term borrowed funds at December 31, 2001
and 2000:
End of Period Daily Average Maximum
------------------ ------------------ Outstanding
Interest Interest At Any
In Thousands Balance Rate Balance Rate Month End
- --------------------------------------------------------------- ---------- -------- --------- -------- -----------
2001:
Federal funds purchased $ 567,487 1.66% 419,365 3.84 684,355
Treasury tax and loan depository note account 11,975 1.23 12,328 2.86 22,361
Securities sold under agreements to repurchase and master notes 562,155 1.54 647,377 3.39 846,974
- --------------------------------------------------------------- ---------- ---------
Total $1,141,617 1,079,070
- --------------------------------------------------------------- ---------- -------- --------- -------- -----------
2000:
Federal funds purchased $ 438,017 6.60% 341,653 6.60 438,017
Treasury tax and loan depository note account 16,532 3.91 4,754 4.53 16,532
Securities sold under agreements to repurchase and master notes 758,354 5.96 813,407 5.76 1,259,777
- --------------------------------------------------------------- ---------- ---------
Total $1,212,903 1,159,814
- --------------------------------------------------------------- ---------- -------- --------- -------- -----------
Interest on federal funds purchased totaled $16.1 million in 2001 and $22.5
million in 2000. The treasury tax and loan depository note account is payable
on demand and is collateralized by various investment securities with amortized
costs of $21.4 million and market values of $21.5 million at December 31, 2001.
Interest on borrowings under this arrangement is payable at .25 percent below
the weekly federal funds rate as quoted by the Federal Reserve. Master note
borrowings are unsecured obligations of NCF which mature daily. Securities sold
under agreements to repurchase are collateralized by U.S. Treasury and U.S.
Government agency and corporation securities with amortized costs of $448.2
million and market values of $448.8 million at December 31, 2001. Interest
expense on securities sold under agreements to repurchase totaled $13.4 million
in 2001 and $40.8 million in 2000.
FHLB Advances
FHLB advances bear interest at either a fixed rate, variable rate equal to
one-month LIBOR, or at a fixed rate for a specified period of time after the
issue date, and thereafter may be converted, at the option of the FHLB, to a
floating-rate equal to three-month LIBOR. The FHLB advances are collateralized
by mortgage-related securities and by liens on first mortgage loans. The
Subsidiary Banks have the capacity to borrow additional advances from the FHLB
of up to 50 percent of total assets, subject to available collateral and level
of FHLB stock ownership.
Maturities of FHLB allowances for each of the years ending December 31 are
as follows:
In Thousands Range of Rates Total Maturities
------------ -------------- ----------------
2002 1.89% to 7.65% $ 650,370
2003 4.34% to 5.92% 208,560
2004 4.87% to 5.13% 101,128
2005 5.68% to 6.42% 6,292
2006 4.44% to 4.71% 150,723
Thereafter 2.00% to 6.39% 1,189,481
---------- -------------- ----------------
Total 1.89% to 7.65% $2,306,554
------------ -------------- ----------------
Long-Term Debt
Following is a summary of long-term debt at December 31, 2001 and 2000:
In Thousands 2001 2000
------------------------------- ------- ------
6.75 percent subordinated notes $33,000 33,007
Term notes 6,374 6,372
------------------------------- ------- ------
Total long-term debt $39,374 39,379
------------------------------- ------- ------
46
(10) BORROWINGS -- Continued
NCF's 6.75 percent subordinated notes due December 1, 2003 pay interest
semi-annually and are not redeemable prior to maturity. These subordinated
notes were assumed in the CCBF merger. There is no sinking fund for the notes.
The notes are unsecured and subordinated to all present and future senior
indebtedness of NCF. Interest on the subordinated notes totaled $2.2 million in
2001 and $1.1 million in 2000.
The unsecured term notes originated in 1987, bearing interest payable at
calendar quarters with a variable rate which is repriced every three years
based on the yield on U.S. Treasury notes. The next reprice date for the notes
is 2003. At December 31, 2001, the average rate was 5.48 percent. The notes
mature in 2007. Interest on the term notes totaled $361,000 in 2001, $370,000
in 2000 and $369,000 in 1999.
Capital Trust Preferred Securities
In 2001, National Commerce Capital Trust II (the "Trust II"), a Delaware
business trust subsidiary, sold $200 million of 7.70 percent Trust Preferred
Securities. The Trust Preferred Securities may be redeemed in whole or in part
at any time on or after December 31, 2006. The Trust II used the net proceeds
from the sale of the Trust Preferred Securities to purchase a like amount of
junior subordinated debentures due 2031 (the "Junior Subordinated Debentures")
from NCF. The Junior Subordinated Debentures, which also bear interest at 7.70
percent, are the sole assets of the Trust II. The Junior Subordinated
Debentures mature and become due and payable, together with any accrued and
unpaid interest, if any, on December 15, 2031.
In 1997, National Commerce Capital Trust I (the "Trust I"), a Delaware
business trust subsidiary, sold $50 million of floating rate capital trust
pass-through securities (the "Capital Securities") bearing interest at a
variable annual rate equal to LIBOR plus .98 percent (1.75 percent and 7.80
percent at December 31, 2001 and 2000). The Trust I used the net proceeds from
the sale of the Capital Securities to purchase a like amount of floating rate
junior subordinated deferred interest debentures due 2027 (the "Subordinated
Debt Securities") from NCF. The Subordinated Debt Securities, which also bear
interest at a variable annual rate equal to LIBOR plus .98 percent, are the
sole assets of the Trust. The Subordinated Debt Securities mature and become
due and payable, together with any accrued and unpaid interest, if any, on
April 1, 2027. During 2001, $7 million of Capital Securities were repurchased
at a nominal gain and retired.
The Junior Subordinated Debentures and the Subordinated Debt Securities are
unsecured and are effectively subordinated to all existing and future
liabilities of NCF. NCF has the right, at any time, so long as no event of
default has occurred, to defer payments of interest on either issue for a
period not to exceed 20 consecutive quarters. The Junior Subordinated
Debentures and the Subordinated Debt Securities are eliminated, along with the
related income statement effects, in the consolidated financial statements. NCF
used the proceeds from the sale of the securities for general corporate
purposes. NCF has fully and unconditionally guaranteed payment of amounts due
under the Trust Preferred Securities and the Capital Securities on a
subordinated basis and only to the extent the related Trusts have funds
available for payment of those amounts.
The proceeds from the Trust Preferred Securities and Capital Securities
qualify as Tier 1 capital under the risk-based capital guidelines established
by the Federal Reserve Board.
(11) EMPLOYEE BENEFITS
Pension Plan
NCF has a noncontributory, qualified defined benefit pension plan covering
substantially all full-time employees. The pension plan makes provisions for
early and delayed retirement as well as normal retirement and provides
participants with retirement benefits based on credited years of service.
Contributions to the pension plan are funded as allowable for federal income
tax purposes. No contributions were made in 2001, 2000 or 1999 by NCF due to
funding limitations.
At December 31, 2001, pension plan assets consisted primarily of corporate
stocks, including 537,428 shares of NCF's common stock, corporate bonds, and
obligations of U.S. government agencies and corporations. The plan assets are
held and administered by trust operations of the Subsidiary Banks. The change
in benefit obligation, change in plan assets and funded status of the pension
plan and the amounts included in "other liabilities" on the Consolidated
Balance Sheets at December 31, 2001 and 2000 are shown below:
47
(11) EMPLOYEE BENEFITS -- Continued
In Thousands 2001 2000
---------------------------------------- -------- -------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at January 1 $124,558 38,797
Service cost 4,751 3,488
Interest cost 8,746 6,029
Amendments 1,673 --
Actuarial loss 1,573 2,535
Acquisition -- 80,394
Benefits paid (10,027) (6,685)
---------------------------------------- -------- -------
Benefit obligation at December 31 $131,274 124,558
---------------------------------------- -------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1 $131,279 44,665
Actual return on plan assets 14,317 3,359
Acquisition -- 89,940
Benefits paid (10,027) (6,685)
---------------------------------------- -------- -------
Fair value of plan assets at December 31 $135,569 131,279
---------------------------------------- -------- -------
RECONCILIATION OF FUNDED STATUS:
As of end of year $ 4,295 6,719
Unrecognized net loss 17,817 16,941
Unrecognized prior service costs 99 (1,947)
Unrecognized net transition asset (1) (10)
---------------------------------------- -------- -------
Prepaid benefit cost $ 22,210 21,703
---------------------------------------- -------- -------
The combined components of pension expense (benefit) for the qualified plans
for the years ended December 31, 2001, 2000 and 1999 are shown below:
In Thousands 2001 2000 1999
------------------------------- -------- ------ ------
NET PERIODIC BENEFIT COST:
Service cost $ 4,751 3,488 1,373
Interest cost 8,746 6,029 2,916
Expected return on assets (13,974) (9,157) (5,234)
Net loss recognition 354 384 475
Prior service cost amortization (373) (406) (406)
Transition asset recognition (10) (10) (10)
------------------------------- -------- ------ ------
Net pension expense (benefit) $ (506) 328 (886)
------------------------------- -------- ------ ------
NCF also has a noncontributory, nonqualified defined benefit pension plan
covering highly-compensated employees. The total benefit obligation and accrued
pension expense was $6.8 million and $5.6 million at December 31, 2001. These
amounts were $6.6 million and $4.9 million at December 31, 2000. Net pension
expense was $959,000 and $1.2 million for the years ended December 31, 2001 and
2000, respectively.
Assumptions used in computing the actuarial present value of the projected
benefit obligation for NCF in 2001 and 2000 were as follows:
2001 2000
----- -----
Discount rate 7.00% 7.75
Rate of increase in compensation level of employees 3.50% 4.00
Expected long-term rate of return on pension plan assets 10.50% 10.50
48
(11) EMPLOYEE BENEFITS -- Continued
Postretirement Health and Life Insurance Plan
NCFC sponsors a retirement medical and life insurance plan that provides
post-retirement healthcare and life insurance benefits. The plan is
contributory and contains other cost-sharing features such as deductibles and
coinsurance. NCFC's policy to fund the cost of medical benefits to employees
varies by age and service at retirement. Benefits are provided through a
self-insured plan administered by an insurance company. The following table
sets forth the change in benefit obligation, funded status and the amounts
included in "other liabilities" on the Consolidated Balance Sheets at December
31, 2001 and 2000:
In Thousands 2001 2000
-------------------------------------- -------- -------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at January 1 $ 12,074 3,449
Acquisition -- 7,894
Service cost 267 194
Interest cost 871 574
Benefit payments (795) (602)
Actuarial (gain) loss 39 (656)
Assumptions change 670 1,221
Plan change (904) --
FAS 88 charge (148) --
-------------------------------------- -------- -------
Benefit obligation at December 31 $ 12,074 12,074
-------------------------------------- -------- -------
FUNDED STATUS:
As of end of year $(12,074) (12,074)
Unrecognized net loss 223 2,146
Unrecognized prior service cost (1,295) (465)
Unrecognized net loss 2,778 243
-------------------------------------- -------- -------
Accrued postretirement benefit expense $(10,368) (10,150)
-------------------------------------- -------- -------
The accumulated postretirement benefit obligation at December 31, 2001 was
determined using a discount rate of 7.0 percent. The 2000 accumulated
postretirement benefit obligation was determining using a discount rate of 7.75
percent.
Combined net periodic postretirement benefit expense charged to operations
for the years ended December 31, 2001, 2000 and 1999 included the following
components:
In Thousands 2001 2000 1999
--------------------------------------------------- ------ ---- ----
Service cost $ 267 194 23
Interest cost 871 574 161
Net amortization and deferral of unrecognized items 22 52 (1)
FAS 88 curtailment gain (148) -- --
--------------------------------------------------- ------ ---- ----
Net postretirement benefit expense $1,012 820 183
--------------------------------------------------- ------ ---- ----
The health care trend rate was projected to be 8.5 percent for 2002 and 7.0
percent for the two years thereafter. A 1 percent change in the assumed health
care trend rates would have the following effects:
1 percent 1 percent
In Thousands Increase Decrease
- ------------------------------------------------------------------------------------------------------ --------- ---------
Effect on total of service and interest cost components of net periodic postretirement benefit expense $ 85 (69)
Effect on the accumulated postretirement benefit obligation 969 (811)
Savings and Profit Sharing Plans
NCF and CCB have defined contribution employee benefit plans covering
substantially all employees with one year's service. Under these plan, employee
contributions are partially matched.
Stock Options and Restricted Stock
Under NCF's 1994 Stock Plan, 12.2 million shares of common stock were
reserved for award to key employees as stock options and restricted stock.
Options vest ratably over varying periods of up to five years from the date of
grant. Under the 1994 Stock Plan, NCF instituted a program to encourage stock
ownership by its employees. Under ShareNCF, eligible employees who purchase NCF
shares from Capital Markets are awarded two options for each share purchased.
The options' exercise price equals the purchase price of the qualifying shares.
The options are cancelled in the employee does not remain in NCF's
49
(11) EMPLOYEE BENEFITS -- Continued
employ over the vesting period. For ShareNCF options issued prior to August 1,
2001, the options vest after two years if the employee has held the purchased
shares for the two-year period after purchase. For ShareNCF options issued
after August 1, 2001, the options vest after two years if the employee has held
the purchased shares for the two-year period after purchase or vest after six
years if the purchased shares were not held for the two-year period after
purchase. As of December 31, 2001, approximately 253 employees were
participating in the ShareNCF program. NCF accounts for ShareNCF options issued
prior to August 1, 2001 as variable options, and, accordingly, recognizes
compensation expense ratably over the two-year vesting period based on
differences in the options' exercise price and the market price of NCF stock on
the reporting date. For the years ended December 31, 2001, 2000 and 1999, NCF
recorded compensation expense (benefit) of $348,000, ($500,000)and $1.4
million, respectively.
During 2000, the terms of approximately 600,000 stock options were modified;
as a result, NCF accounts for these option grants as variable options. During
2001 and 2000, $1.2 million and $2.1 million, respectively, was recorded as
compensation expense related to these options.
NCF continued in effect nonstatutory and incentive stock option plans
existing at the date of merger with acquired financial institutions. The stock
options under these plans were granted to directors and certain officers of the
respective financial institutions and entitled them to purchase shares of
common stock at an exercise price equal to the fair market value of the stock
on the date of grant. The options granted under these plans were exercisable
for periods of up to ten years with varying vesting provisions. All options
outstanding at the time of the respective mergers were converted into options
to acquire NCF common stock.
NCF has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options as permitted under SFAS No. 123. In
accordance with APB No. 25, no compensation expense is recognized when stock
options are granted and the exercise price of the stock options equals the
market price of the underlying stock on the date of grant. Had compensation
expense for the stock option plans been determined consistent with SFAS No.
123, NCF's net income and net income per share for the years ended December 31,
2001, 2000 and 1999 would have been reduced to the pro forma amounts indicated
below. These pro forma amounts may not be representative of the effect on
reported net income in future years.
In Thousands Except Per Share Data 2001 2000 1999
---------------------------------- -------- ------- ------
Net income As reported $225,296 $45,310 92,632
Pro forma 219,626 37,914 88,697
Basic EPS As reported 1.10 .29 .88
Pro forma 1.07 .24 .85
Diluted EPS As reported 1.09 .28 .87
Pro forma 1.06 .24 .83
The weighted average fair value of options granted approximated $5.83 in
2001, $3.24 in 2000 and $6.36 in 1999. The fair values of the options granted
in 2001, 2000 and 1999 are estimated on the date of the grants using the
Black-Scholes option-pricing model. Option pricing models require the use of
highly subjective assumptions, including expected stock volatility, which when
changed can materially affect fair value estimates. The fair values were
estimated using the following weighted-average assumptions:
2001 2000 1999
------- ------- -------
Dividend yield 2.00% 2.00 2.00
Expected volatility 30.00 35.00 35.00
Risk-free interest rate 2.50 6.00 6.00
Expected average life 5 YEARS 5 years 5 years
50
(11) EMPLOYEE BENEFITS -- Continued
A summary of stock option activity and related information for the years
ended December 31, 2001, 2000 and 1999 follows:
Outstanding Exercisable
---------------------------- --------------------------
Option Weighted Average Option Weighted Average
Shares Exercise Price Shares Exercise Price
---------- ---------------- --------- ----------------
At December 31, 1998 5,225,985 $ 8.74
Granted 1,101,100 16.49
Assumed under acquisition of financial institution 175,404 4.90
Exercised (1,208,848) 7.02
Forfeited (140,100) 14.08
- -------------------------------------------------- ---------- ----------------
At December 31, 1999 5,153,541 10.53 3,232,541 $ 7.69
- -------------------------------------------------- --------- ----------------
Granted 2,447,335 16.76
Assumed under acquisition of financial institution 4,602,911 16.09
Exercised (1,245,805) 7.89
Forfeited (287,775) 18.33
- -------------------------------------------------- ---------- ----------------
At December 31, 2000 10,670,207 14.45 7,508,818 $13.57
- -------------------------------------------------- --------- ----------------
Granted 2,322,079 24.64
Assumed under acquisition of financial institution 625,637 15.38
Exercised (1,773,155) 10.39
Forfeited (179,716) 21.07
- -------------------------------------------------- ---------- ----------------
At December 31, 2001 11,665,052 $17.26 7,676,218 $15.38
- -------------------------------------------------- ---------- ---------------- --------- ----------------
Exercise prices for options outstanding as of December 31, 2001 ranged from
$3.15 to $27.44. The following table summarizes information about stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted Weighted Weighted
Range of Number Average Years Average Number Average
Exercise Prices of Options Remaining Exercise Price of Options Exercise Price
- ---------------- ---------- ------------- -------------- ---------- --------------
$3.15 to $10.22 2,057,007 3.89 $ 7.48 2,057,007 $ 7.48
$10.69 to $15.94 2,524,364 7.07 14.91 1,641,753 14.43
$16.00 to $17.98 2,305,404 7.83 16.94 1,496,736 17.13
$18.00 to $22.84 2,452,388 7.25 21.19 2,240,645 21.23
$22.86 to $27.44 2,325,889 9.05 24.65 240,077 24.15
- ---------------- ---------- ------------- -------------- ---------- --------------
$3.15 to $27.44 11,665,052 7.09 $17.26 7,676,218 $15.38
- ---------------- ---------- ------------- -------------- ---------- --------------
Restricted stock awarded totaled 26,159 shares during 2001 and 434,415
shares during 2000. The grants in 2001 and 2000 were recorded at their fair
values of $702,000 and $6.2 million, respectively, on the dates of grant and
had weighted average fair values of $25.74 and $16.08 per share. Additionally,
shares of restricted stock had been awarded under stock option and other
incentive plans of acquired financial institutions. During 2001, 2000 and 1999,
$2.4 million, $1 million and $373,000, respectively, of compensation expense
was recognized for restricted stock awards.
(12) STOCKHOLDERS' EQUITY
Earnings Per Share
The following schedule reconciles the numerators and denominators of the
basic and diluted EPS computations for the years ended December 31, 2001, 2000
and 1999. Dilutive common shares arise from the potentially dilutive effect of
NCF's stock options outstanding.
In Thousands Except Per Share Data 2001 2000 1999
---------------------------------- -------- ------- -------
BASIC EPS
Average common shares 204,972 157,387 104,947
Net income $225,296 45,310 92,632
Earnings per share 1.10 .29 .88
---------------------------------- -------- ------- -------
DILUTED EPS
Average common shares outstanding 204,972 157,387 104,947
Average dilutive common shares 2,512 1,867 1,860
--------------------------------- -------- ------- -------
Adjusted average common shares 207,484 159,254 106,807
Net income $225,296 45,310 92,632
Earnings per share 1.09 .28 .87
---------------------------------- -------- ------- -------
51
(12) STOCKHOLDERS' EQUITY -- CONTINUED
Regulatory Matters
NCF and the Subsidiary Banks are subject to risk-based capital guidelines
requiring minimum capital levels based on the perceived risk of assets and
off-balance sheet instruments. As required by the Federal Deposit Insurance
Corporation Improvement Act, the federal bank regulatory agencies have jointly
issued rules which implement a system of prompt corrective action for financial
institutions. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, there are minimum ratios of capital to
risk-weighted assets. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk-weightings
and other factors. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly discretionary actions by regulators that, if
undertaken, could have a material effect on NCF's consolidated financial
statements.
Disclosure about the Subsidiary Banks' capital adequacy are set forth in the
table below. Tier I capital consists of common equity and trust preferred
securities less goodwill and certain other intangible assets. Tier I excludes
the equity impact of adjusting available for sale securities to market value.
Total capital is comprised of Tier I and Tier II capital. Tier II capital
includes subordinated notes and loan loss allowance, as defined and limited
according to regulatory guidelines. Balance sheet assets and the credit
equivalent amount of off-balance sheet items per regulatory guidelines are
assigned to broad risk categories and a category risk-weight is then applied.
Management believes that as of December 31, 2001, NCF and the Subsidiary Banks
met all capital adequacy requirements to which they were subject.
The risk-based capital and leverage ratios for NCF and NBC as of December
31, 2001 and for NCF, NBC and CCB as of December 31, 2000 are presented below.
2001 2000
----------------------- ------------------------------
In Thousands NCF NBC NCF NBC CCB
- ------------------------------------------------------------- ----------- ---------- ---------- --------- ---------
Tier I capital $ 1,492,718 1,331,124 1,169,780 430,131 673,227
Total capital 1,655,795 1,475,275 1,326,588 478,556 760,173
Risk-weighted assets 13,516,622 13,285,709 12,292,660 4,732,927 7,415,044
Adjusted quarterly average assets 17,261,097 16,946,406 16,365,141 6,833,251 9,251,932
Risk-based capital ratios:
Tier I capital to risk-weighted assets:
Actual 11.04 % 10.02 9.52 9.09 9.08
Regulatory minimum 4.00 4.00 4.00 4.00 4.00
Well-capitalized under prompt corrective action provisions -- 6.00 -- 6.00 6.00
Total capital to risk-weighted assets:
Actual 12.25 11.10 10.79 10.11 10.25
Regulatory minimum 8.00 8.00 8.00 8.00 8.00
Well-capitalized under prompt corrective action provisions -- 10.00 -- 10.00 10.00
Leverage ratio:
Actual 8.65 7.85 7.15 6.29 7.28
Regulatory minimum 3.00 4.00 3.00 4.00 4.00
Well-capitalized under prompt corrective action provisions -- 5.00 -- 5.00 5.00
- ------------------------------------------------------------- ----------- ---------- ---------- --------- ---------
No conditions or events have occurred since December 31, 2001 that would
change the capital categorizations presented as of December 31, 2001.
Certain restrictions exist regarding the ability of the Subsidiary Banks to
transfer funds to NCF in the form of cash dividends. Regulatory capital
requirements must be met by the Subsidiary Banks as well as other requirements
under applicable federal and state laws. Under these requirements, the
Subsidiary Banks have approximately $13.4 million in retained earnings at
December 31, 2001 that can be transferred to NCF in the form of cash dividends
without prior regulatory approval. Management believes that it will be able to
receive regulatory approval to transfer dividends in excess of that amount, if
needed. Total dividends declared by the Subsidiary Banks to NCF in 2001 were
$233.7 million.
As a result of the above requirements, consolidated net assets of the
Subsidiary Banks amounting to approximately $2.5 billion at December 31, 2001
were restricted from transfer to NCF without prior approval from regulatory
agencies.
Under Federal Reserve regulations, the Subsidiary Banks are also limited as
to the amount they may loan to affiliates, including the Parent Company, unless
such loans are collateralized by specified obligations. At December 31, 2001,
the Subsidiary Banks had loans to the Parent Company totaling $37 million.
52
(13) SUPPLEMENTARY INCOME STATEMENT INFORMATION
Following is a breakdown of the components of "other operating" expenses on
the Consolidated Statements of Income for the years ended December 31, 2001,
2000 and 1999:
In Thousands 2001 2000 1999
------------------------------ -------- ------ ------
Legal and professional fees $ 37,176 21,828 5,556
Marketing 14,915 7,748 2,314
Telecommunications 14,365 9,055 3,928
All other 91,578 61,208 35,574
------------------------------ -------- ------ ------
Total other operating expenses $158,034 99,839 47,372
------------------------------ -------- ------ ------
(14) INCOME TAXES
The components of income tax expense for the years ended December 31, 2001,
2000 and 1999 were as follows:
In Thousands 2001 2000 1999
--------------------------------------- -------- ------ ------
Current income taxes:
Federal $108,487 7,108 50,338
State 4,494 441 1,648
--------------------------------------- -------- ------ ------
Total current tax expense 112,981 7,549 51,986
--------------------------------------- -------- ------ ------
Deferred income tax expense (benefit):
Federal 21,016 27,995 (4,205)
State (609) (944) (573)
--------------------------------------- -------- ------ ------
Total deferred tax expense (benefit) 20,407 27,051 (4,778)
--------------------------------------- -------- ------ ------
Total income tax expense $133,388 34,600 47,208
--------------------------------------- -------- ------ ------
During 2001, 2000 and 1999, a total of $8.7 million, $5.1 million and $7
million, respectively, of income tax benefit was credited to additional paid-in
capital as a result of the exercise of certain stock options.
A reconciliation of income tax expense to the amount computed by multiplying
income before income taxes by the statutory federal income tax rate of 35%
follows:
Amount % of Pretax Income
------------------------ --------------------
In Thousands 2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------- -------- ------ ------ ------ ----- -----
Tax expense at statutory rate on income before income taxes $125,539 27,969 48,944 35.00 % 35.00 35.00
State taxes, net of federal benefit 2,525 (327) 698 .70 (.41) .50
Increase (reduction) in taxes resulting from:
Tax-exempt interest on investment securities and loans (3,462) (2,678) (2,279) (.97) (3.35) (1.63)
Non-deductible goodwill amortization 16,766 9,125 1,130 4.67 11.42 .81
Non-taxable life insurance income (3,395) (885) -- (.95) (1.11) --
Other, net (4,585) 1,396 (1,285) (1.26) 1.75 (.92)
- ----------------------------------------------------------- -------- ------ ------ ------ ----- -----
Income tax expense $133,388 34,600 47,208 37.19% 43.30 33.76
- ----------------------------------------------------------- -------- ------ ------ ------ ----- -----
53
(14) INCOME TAXES -- CONTINUED
At December 31, 2001 and 2000, NCF had recorded net deferred tax liabilities
of $135.2 million and $117.4 million, respectively, which are included in
"other assets" or "other liabilities" on the Consolidated Balance Sheets. A
valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. In management's
opinion, it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the deferred tax assets.
Consequently, management has determined that a valuation allowance for deferred
tax assets was not required at December 31, 2001 and 2000. The sources and tax
effects of cumulative temporary differences that give rise to significant
deferred tax assets (liabilities) at December 31, 2001 and 2000 are shown below:
In Thousands 2001 2000
- -------------------------------------------------------------- --------- --------
Deferred tax assets:
Allowance for loan losses $ 59,808 54,648
Deferred compensation 5,470 4,453
Net operating loss and credit carryovers 7,196 7,191
Other 20,738 28,328
- -------------------------------------------------------------- --------- --------
Total gross deferred tax assets 93,212 94,620
- -------------------------------------------------------------- --------- --------
Deferred tax liabilities:
Intangible assets 88,285 100,713
Deferred loan fees and costs 20,675 13,576
Premises and equipment 11,964 11,898
Investments 11,645 11,757
Pension costs 6,633 6,571
Unrealized gains on investment securities available for sale 8,453 13,670
Deferred income 73,507 46,423
Other 7,298 7,381
- -------------------------------------------------------------- --------- --------
Total gross deferred tax liabilities 228,460 211,989
- -------------------------------------------------------------- --------- --------
Net deferred tax liability $(135,248) (117,369)
- -------------------------------------------------------------- --------- --------
(15) COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
Commitments and Contingencies
Leases
The Subsidiary Banks lease certain real property and equipment under
long-term operating leases expiring at various dates to 2021. Total rental
expense amounted to $20.2 million in 2001, $14.5 million in 2000 and $7.9
million in 1999. A summary of the commitments under noncancellable, long-term
leases in effect at December 31, 2001 for each of the years ending December 31
follows:
Type of Property
----------------------- Total
In Thousands Real Property Equipment Commitments
----------------------- ------------- --------- -----------
2002 $ 9,538 3,762 13,300
2003 8,400 2,170 10,570
2004 6,816 1,334 8,150
2005 5,541 229 5,770
2006 4,620 157 4,777
Thereafter 38,544 -- 38,544
----------------------- ------------- --------- -----------
Total lease commitments $73,459 7,652 81,111
----------------------- ------------- --------- -----------
Generally, real estate taxes, insurance, and maintenance expenses are
obligations of the Subsidiary Banks. It is expected that in the normal course
of business, leases that expire will be renewed or replaced by leases on other
properties; thus, it is anticipated that future minimum lease commitments will
not be less than the amounts shown for 2002.
Litigation
Certain legal claims have arisen in the normal course of business in which
NCF and certain of its Subsidiary Banks have been named as defendants. Although
the amount of any ultimate liability with respect to such matters cannot be
determined, in the opinion of management and counsel, any such liability will
have no material effect on NCF's financial position or results of operations.
54
(15) Commitments, Contingencies and Off-Balance Sheet Risk -- Continued
Lending
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract. These
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of these commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Each customer's credit
worthiness is evaluated on a case-by-case basis and collateral, primarily real
estate or business assets, is generally obtained. At December 31, 2001 and
2000, the Subsidiary Banks had commitments to extend credit of approximately
$2.9 billion and $2.5 billion. These amounts include unused revolving credit
lines and home mortgage equity lines of $11.9 million and $1.1 billion,
respectively, at December 31, 2001 and $71 million and $816 million,
respectively, at December 31, 2000.
Standby letters of credit are commitments issued by the Subsidiary Banks to
guarantee the performance of a customer to a third party. The standby letters
of credit are generally secured by non-depreciable assets. The Subsidiary Banks
had approximately $161.8 million and $128 million in outstanding standby
letters of credit at December 31, 2001 and 2000.
Off-Balance Sheet Risk
Capital Markets, for trading purposes, enters into transactions involving
financial instruments with off-balance sheet risk in order to meet the
financing and hedging needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include forward
contracts, when issued contracts and options written. All such contracts are
for United States Treasury, federal agency or municipal securities. These
financial instruments involve varying degrees of credit and market risk. The
contract amounts of those instruments reflect the extent of involvement in
particular classes of financial instruments. Risks arise from the possible
inability of counterparties to meet the terms of their contracts and from
movements in securities' market values and interest rates. The extent of the
Capital Market's involvement in financial instruments with off-balance sheet
risk as of December 31 was as follows:
In Thousands 2001 2000
------------------------- -------- ------
Forward contracts:
Commitments to purchase $190,205 52,635
Commitments to sell 198,720 69,435
When issued contracts:
Commitments to purchase 4,068 5,714
Commitments to sell 17,196 7,325
55
(16) NATIONAL COMMERCE FINANCIAL CORPORATION (PARENT COMPANY)
The Parent Company's principal asset is its investment in the Subsidiary
Banks and dividends from the Subsidiary Banks are its primary source of income.
Condensed Balance Sheets as of December 31, 2001 and 2000 and the related
Condensed Statements of Income and Cash Flows for the years ended December 31,
2001, 2000 and 1999 follow:
CONDENSED BALANCE SHEETS
As of December 31, 2001 and 2000
In Thousands 2001 2000
--------------------------------------------- ---------- ---------
Cash and short-term investments $ 405,713 234,191
Investment securities 25,893 25,823
Loans 53,291 71,587
Less allowance for loan losses 721 792
--------------------------------------------- ---------- ---------
Net loans 52,570 70,795
Investment in subsidiaries 2,619,718 2,387,801
Other assets 22,521 11,621
--------------------------------------------- ---------- ---------
Total assets $3,126,415 2,730,231
--------------------------------------------- ---------- ---------
Master notes $ 325,721 195,070
Note payable to subsidiary 38,547 50,547
Subordinated notes and debentures 281,830 82,928
Other liabilities 24,986 36,848
--------------------------------------------- ---------- ---------
Total liabilities 671,084 365,393
Stockholders' equity 2,455,331 2,364,838
--------------------------------------------- ---------- ---------
Total liabilities and stockholders' equity $3,126,415 2,730,231
--------------------------------------------- ---------- ---------
CONDENSED INCOME STATEMENTS
Years Ended December 31, 2001, 2000 and 1999
In Thousands 2001 2000 1999
- ---------------------------------------------------------------- -------- ------- ------
Dividends from subsidiaries $236,700 82,215 60,844
Interest income 15,324 12,092 1,338
Other income 1,154 1,190 3,153
- ---------------------------------------------------------------- -------- ------- ------
Total operating income 253,178 95,497 65,335
- ---------------------------------------------------------------- -------- ------- ------
Interest expense 15,252 12,633 3,236
Other operating expenses 4,153 5,023 2,879
- ---------------------------------------------------------------- -------- ------- ------
Total operating expenses 19,405 17,656 6,115
- ---------------------------------------------------------------- -------- ------- ------
Income before income taxes 233,773 77,841 59,220
Income tax benefit (559) (1,497) (648)
- ---------------------------------------------------------------- -------- ------- ------
Income before equity in undistributed net income of subsidiaries 234,332 79,338 59,868
Net income of subsidiaries, net of dividends paid (9,036) (34,028) 32,764
- ---------------------------------------------------------------- -------- ------- ------
Net income $225,296 45,310 92,632
- ---------------------------------------------------------------- -------- ------- ------
56
(16) NATIONAL COMMERCE FINANCIAL CORPORATION (PARENT COMPANY) -- CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
In Thousands 2001 2000 1999
- ---------------------------------------------------- --------- ------- -------
Net cash provided by operating activities $ 225,582 144,225 43,036
- ---------------------------------------------------- --------- ------- -------
Investment in subsidiaries (160,188) (24,914) (48,331)
Net decrease in loans to subsidiaries -- -- 25,626
Net (increase) decrease in loans 18,296 (2,179) --
Other, net (28,266) 189,094 (25,570)
- ---------------------------------------------------- --------- ------- -------
Net cash provided (used) by investing activities (170,158) 162,001 (48,275)
- ---------------------------------------------------- --------- ------- -------
Increase in master notes 130,651 9,911 --
Net decrease in notes payable to subsidiaries (12,000) (4,453) --
Net increase in subordinated notes and debentures 198,902 -- --
Proceeds from stock issuance in acquisition -- -- 80,248
Purchase and retirement of common stock (102,212) (32,008) (22,925)
Cash dividends paid (114,838) (76,236) (39,697)
Other, net 15,595 8,240 5,999
- ---------------------------------------------------- --------- ------- -------
Net cash provided (used) by financing activities 116,098 (94,546) 23,625
- ---------------------------------------------------- --------- ------- -------
Net increase in cash and short-term investments 171,522 211,680 18,386
Cash and short-term investments at beginning of year 234,191 22,511 4,125
- ---------------------------------------------------- --------- ------- -------
Cash and short-term investments at end of year $ 405,713 234,191 22,511
- ---------------------------------------------------- --------- ------- -------
(17) SEGMENT INFORMATION
Management monitors NCF performance as two business segments, traditional
banking and financial enterprises. During 2001, management redefined the
financial enterprise segment to include retail brokerage/insurance commissions.
Data for prior years has been restated to conform to the 2001 presentation.
The traditional banking segment includes sales and distribution of financial
products and services to individuals. These products and services include loan
products such as residential mortgage, home equity lending, automobile and
other personal financing needs. Traditional banking also offers various deposit
products that are designed for customers' saving and transaction needs. This
segment also includes lending and related financial services provided to small-
and medium-sized corporations. Included among these services are several
specialty services such as real estate finance, asset-based lending and
residential construction lending. Traditional banking also includes management
of the investment portfolio and non-deposit based funding.
The financial enterprises segment is comprised of trust services and
investment management, transaction processing, retail banking
consulting/in-store licensing and broker/dealer activities.
The accounting policies of the individual segments are the same as those of
NCF as described in Note 1. Transactions between business segments are
conducted at fair value and are eliminated for reporting consolidated financial
position and results of operations. Interest income for tax-exempt loans and
securities is adjusted to a taxable-equivalent basis. Expenses for centrally
provided services such as data processing, human resources, and other support
functions are allocated to each segment. The following tables present condensed
income statements and average assets for each reportable segment.
Traditional Financial Intersegment
In Thousands Banking Enterprises Eliminations Total
- --------------------------------------------- ----------- ----------- ------------ ----------
Year ended December 31, 2001:
Net interest income, taxable equivalent basis $ 663,936 18,518 -- 682,454
Provision for loan loss 29,199 -- -- 29,199
- --------------------------------------------- ----------- ----------- ------------ ----------
Net interest income after provision 634,737 18,518 -- 653,255
Other income 162,430 166,758 (4,300) 324,888
Intangibles amortization (105,225) (1,790) -- (107,015)
Other expense (365,627) (119,776) 4,300 (481,103)
- --------------------------------------------- ----------- ----------- ------------ ----------
Income before income taxes 326,315 63,710 -- 390,025
Income taxes 139,835 24,894 -- 164,729
- --------------------------------------------- ----------- ----------- ------------ ----------
Net income $ 186,480 38,816 -- 225,296
- --------------------------------------------- ----------- ----------- ------------ ----------
Average assets $17,319,317 587,695 -- 17,907,012
- --------------------------------------------- ----------- ----------- ------------ ----------
57
(17) SEGMENT INFORMATION -- CONTINUED
Traditional Financial Intersegment
In Thousands Banking Enterprises Eliminations Total
- --------------------------------------------- ----------- ----------- ------------ ----------
Year ended December 31, 2000:
Net interest income, taxable equivalent basis $ 431,971 12,114 -- 444,085
Provision for loan loss 16,456 -- -- 16,456
- --------------------------------------------- ----------- ----------- ------------ ----------
Net interest income after provision 415,515 12,114 -- 427,629
Other income 98,124 93,485 (2,118) 189,491
Intangibles amortization (60,472) (948) -- (61,420)
Other expense (388,916) (65,679) 2,118 (452,477)
- --------------------------------------------- ----------- ----------- ------------ ----------
Income before income taxes 64,251 38,972 -- 103,223
Income taxes 42,691 15,222 -- 57,913
- --------------------------------------------- ----------- ----------- ------------ ----------
Net income $ 21,560 23,750 -- 45,310
- --------------------------------------------- ----------- ----------- ------------ ----------
Average assets $11,912,442 489,541 -- 12,401,983
Year ended December 31, 1999:
Net interest income, taxable equivalent basis $ 228,984 11,272 -- 240,256
Provision for loan loss 16,921 -- -- 16,921
- --------------------------------------------- ----------- ----------- ------------ ----------
Net interest income after provision 212,063 11,272 -- 223,335
Other income 36,564 52,070 (1,407) 87,227
Intangibles amortization (7,456) -- -- (7,456)
Other expense (117,168) (33,889) 1,407 (149,650)
- --------------------------------------------- ----------- ----------- ------------ ----------
Income before income taxes 124,003 29,453 -- 153,456
Income taxes 49,147 11,677 -- 60,824
- --------------------------------------------- ----------- ----------- ------------ ----------
Net income $ 74,856 17,776 -- 92,632
- --------------------------------------------- ----------- ----------- ------------ ----------
Average assets $ 6,029,284 329,544 -- 6,358,828
- --------------------------------------------- ----------- ----------- ------------ ----------
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
2001 2000
--------------------------------------- ----------------------------
In Thousands Except Per Share Data 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr.
- --------------------------------------------------- --------- -------- -------- -------- -------- -------- --------
Interest income $ 287,262 302,492 310,020 323,091 334,073 329,090 142,392
Interest expense 114,826 137,425 148,543 170,958 183,231 181,248 80,819
- --------------------------------------------------- --------- -------- -------- -------- -------- -------- --------
Net interest income 172,436 165,067 161,477 152,133 150,842 147,842 61,573
Provision for loan losses 6,892 9,623 6,304 6,380 5,317 5,098 3,865
- --------------------------------------------------- --------- -------- -------- -------- -------- -------- --------
Net interest income after provision for loan losses 165,544 155,444 155,173 145,753 145,525 142,744 57,708
Securities gains (losses) 2,752 2,588 575 720 (141) 4,522 127
Other income 89,909 76,644 78,543 73,157 69,387 67,213 24,439
Intangibles amortization (26,782) (26,449) (26,668) (27,116) (27,521) (27,822) (3,249)
Other expenses (137,456) (116,222) (117,632) (109,793) (198,331) (166,093) (43,890)
- --------------------------------------------------- --------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes 93,967 92,005 89,991 82,721 (11,081) 20,564 35,135
Income tax expense (benefit) 34,107 34,394 34,456 30,431 (2,669) 14,775 11,194
- --------------------------------------------------- --------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 59,860 57,611 55,535 52,290 (8,412) 5,789 23,941
- --------------------------------------------------- --------- -------- -------- -------- -------- -------- --------
Net income (loss) per share:
Basic (1) $ .29 .28 .27 .25 (.04) .03 .22
Diluted (1) .29 .28 .27 .25 (.04) .03 .22
- --------------------------------------------------- --------- -------- -------- -------- -------- -------- --------
In Thousands Except Per Share Data 1st Qtr.
- --------------------------------------------------- --------
Interest income 132,421
Interest expense 71,906
- --------------------------------------------------- --------
Net interest income 60,515
Provision for loan losses 2,176
- --------------------------------------------------- --------
Net interest income after provision for loan losses 58,339
Securities gains (losses) 1
Other income 23,943
Intangibles amortization (2,828)
Other expenses (44,163)
- --------------------------------------------------- --------
Income (loss) before income taxes 35,292
Income tax expense (benefit) 11,300
- --------------------------------------------------- --------
Net income (loss) 23,992
- --------------------------------------------------- --------
Net income (loss) per share:
Basic (1) .22
Diluted (1) .22
- --------------------------------------------------- --------
(1) For 2000, the sum of the quarterly per share net income amounts do not
equal the annual per share net income presented elsewhere herein due to
significant changes in net income and weighted average shares outstanding
impacting the third and fourth quarter.
58
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
2001 2000
---------------------- -----------------------
Carrying Carrying
In Thousands Amount Fair Value Amount Fair Value
- --------------------------------------------- ----------- ---------- ---------- ----------
FINANCIAL ASSETS:
Cash and cash equivalents $ 644,420 644,420 531,467 531,467
Investment securities 4,512,456 4,525,389 4,418,321 4,386,226
Trading account securities 197,214 197,214 74,417 74,417
Net loans 11,818,364 12,213,405 10,864,805 10,953,779
FINANCIAL LIABILITIES:
Deposits 12,619,479 12,728,535 11,979,631 12,134,567
Short-term borrowings 1,141,617 1,141,617 1,212,903 1,212,903
Federal Home Loan Bank advances 2,306,554 2,288,161 1,649,055 1,648,979
Trust preferred securities and long-term debt 282,018 281,820 89,301 99,010
DERIVATIVE FINANCIAL INSTRUMENTS:
Interest rate swaps -- -- (74,140) (74,140)
- --------------------------------------------- ----------- ---------- ---------- ----------
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values.
Investment and Trading Account Securities
Fair values for investment and trading account securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Net Loans
For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair
values for certain mortgage loans (e.g., one-to-four family residential) and
certain consumer loans are based on quoted market prices of similar loans sold
in conjunction with securitization transactions, adjusted for differences in
loan characteristics. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently offered for loans
with similar terms to borrowers of similar credit quality. The carrying amount
of accrued interest approximates its fair value.
Deposits
The fair values disclosed for demand deposits (e.g., interest and
non-interest checking, passbook savings and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Borrowings
The carrying amounts of short-term borrowings and trust preferred securities
approximate their fair values. The fair values of FHLB advances and long-term
debt are estimated using discounted cash flow analyses, based on NCF's
incremental borrowing rates for similar types of borrowing arrangements.
Interest Rate Swaps
Fair values for interest rate swaps are based on discounted cash flow
projections under the swap agreements based on assumptions about future
interest rate movements.
Off-Balance Sheet Financial Instruments
The Subsidiary Banks have commitments to extend credit and standby letters
of credit. These types of credit are made at market rates; therefore, there
would be no market risk associated with these credits which would create a
significant fair value liability.
59
REPORT OF MANAGEMENT REGARDING RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the content of the financial information
included in this annual report. The financial statements from which the
financial information has been drawn are prepared in accordance with accounting
principles generally accepted in the United States of America. Other
information in this report is consistent with the financial statements.
In meeting its responsibility, management relies on the system on internal
accounting control and related control systems. Elements of these systems
include selection and training of qualified personnel, establishment and
communication of accounting and administrative policies and procedures,
appropriate segregation of responsibilities and programs of internal audit.
These systems are designed to provide reasonable assurance that financial
records are reliable for preparing financial statements and maintaining
accountability for assets and that assets are safeguarded against unauthorized
use or disposition. Such assurance cannot be absolute because of inherent
limitations in any system of internal control. The concept of reasonable
assurance recognizes that the cost of a system of internal control should not
exceed the benefit derived and that the evaluation of such cost and benefit
necessarily requires estimates and judgments.
KPMG LLP, independent auditors, audited NCF's consolidated financial
statements in accordance with auditing standards generally accepted in the
United States of America. These standards include a study and evaluation of
internal control for the purpose of establishing a basis for reliance thereon
relative to the determination of the scope of their audits.
The voting members of the Audit Committee of the Board of Directors consist
solely of outside Directors. The Audit Committee meets periodically with
management, NCF's internal auditors and the independent auditors to discuss
audit, financial reporting and related matters. KPMG LLP and the internal
auditors have direct access to the Audit Committee.
/s/ ERNEST C. ROESSLER
ERNEST C. ROESSLER
President and Chief Executive Officer
/s/ SHELDON M. FOX
SHELDON M. FOX
Chief Financial Officer
60
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
National Commerce Financial Corporation:
We have audited the accompanying consolidated balance sheet of National
Commerce Financial Corporation and subsidiaries as of December 31, 2001 and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the 2001 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Commerce Financial Corporation and subsidiaries as of December 31, 2001, and
the results of their operations and their cash flows for the year/then ended in
conformity with accounting principles generally accepted in the United States
of America. /
/s/ KPMG LLP
Memphis, Tennessee
January 16, 2002
61
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
National Commerce Financial Corporation
We have audited the accompanying consolidated balance sheet of National
Commerce Financial Corporation and Subsidiaries ("the Company") as of December
31, 2000, and the related consolidated statements of income, stockholders'
equity and comprehensive income, and cash flows for each of the two years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2000 and the consolidated results of their operations and their
cash flows for each of the two years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Memphis, Tennessee
June 22, 2001
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL AND
ACCOUNTING
DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to
National Commerce Financial Corporation's definitive Proxy Statement dated
March 26, 2002 (the "Proxy Statement") under the heading "Proposal 1. Election
of Directors" or appears under the heading "Executive Officers of the
Registrant" in Part I. of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the Proxy Statement under the headings "Report of the Compensation Committee",
"Compensation of Management and Other Information", "Pension Plans" and
"Employment Agreements".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the Proxy Statement under the heading "Stock Ownership of Management and
Principal Shareholders".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the Proxy Statement under the heading "Certain Transactions with Directors and
Management".
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2.
The financial statements and supplementary data listed in the index set
forth in Item 8 of this Annual Report are filed as part of this Annual Report.
All schedules are omitted because of the absence of the condition under
which they are required or because the required information is included in the
financial statements or related notes.
(a) 3.
Exhibits are listed in the Exhibit Index beginning on page 64 of this Annual
Report.
(b) Reports on Form 8-K:
None.
63
DESCRIPTION OF EXHIBITS
Agreement and Plan of Reorganization between Registrant and SouthBanc Shares,
Inc.
Articles of Amendment to amended and restated Charter of Registrant
Charter of Registrant as amended and restated
Bylaws of Registrant as amended and restated
Specimen Stock Certificate of Registrant
Form of Indenture dated as of November 1, 1993, between CCB Financial
Corporation and Bank of New York as successor to Wachovia Bank of North
Carolina, N.A., Trustee, pursuant to which Registrant's Subordinated Notes are
issued and held
Certificate of Trust of National Commerce Capital Trust II
Form of Promissory Notes of NBC payable to The Mallory Partners
Amended and Restated Employment Agreement entered into as of November 1, 2001
by and between Registrant and Thomas M. Garrott and further amended on February
18, 2002
Employment Agreement entered into as of November 1, 2001 by and between
Registrant and Ernest C. Roessler
Employment Agreement entered into as of March 17, 2000, effective as of July 5,
2000, by and among Registrant and William R. Reed, Jr.
Employment Agreement entered into as of March 17, 2000, effective as of July 5,
2000, by and among Registrant and Richard L. Furr
Employment Agreement entered into as of March 17, 2000, effective as of July 5,
2000, by and among Registrant and J. Scott Edwards
Employment Agreement entered into as of March 17, 2000, effective as of July 5,
2000, by and among Registrant and Sheldon M. Fox
Employment Agreement entered into as of March 17, 2000, effective as of July 5,
2000, by and among Registrant and David T. Popwell
Employment Agreement entered into as of March 17, 2000, effective as of July 5,
2000, by and among Registrant and Tom W. Scott
Change of Control Agreement dated as of July 5, 2000 by and between Registrant
and Ernest C. Roessler
Change of Control Agreement dated as of July 5, 2000 by and between Registrant
and William R. Reed
Change of Control Agreement dated as of July 5, 2000 by and between Registrant
and Richard L. Furr
Change of Control Agreement dated as of July 5, 2000 by and between Registrant
and J. Scott Edwards
Change of Control Agreement dated as of July 5, 2000 by and between Registrant
and Sheldon M. Fox
Change of Control Agreement dated as of July 5, 2000 by and between Registrant
and David T. Popwell
Change of Control Agreement dated as of July 5, 2000 by and between Registrant
and Tom W. Scott
Retirement Plan of Registrant as amended and restated
Hillsborough Savings Bank, Inc., SSB Management Recognition Plan
Piedmont Bancorp, Inc. Stock Option Plan
1993 Incentive Stock Option Plan
Salem Trust Bank 1986 Incentive Stock Option Plan
1995 Directors Performance Plan of American Federal Bank, FSB
1993 Nonstatutory Stock Option Plan for CCB Savings Bank of Lenoir, Inc., SSB
64
1993 Nonstatutory Stock Option Plan for Graham Savings Bank, Inc., SSB
Security Capital Bancorp Omnibus Stock Ownership and Long-Term Incentive Plan
Long-Term Incentive Plan of CCB Financial Corporation
American Federal Bank, FSB Amended and Restated 1998 Stock Option and Incentive
Plan
Stone Street Bancorp, Inc. Stock Option Plan
Deferred Compensation Agreement as of December 1, 1983 for Thomas M. Garrott
Supplemental Executive Retirement Plan of Registrant
1990 Stock Plan of the Registrant
1994 Stock Plan of the Registrant, as amended and restated effective as of
November 1, 1996
Amendment Number One to the 1994 Stock Plan of the Registrant
Amendment Number Two to the 1994 Stock Plan of the Registrant
Resolution authorizing Pension Restoration Plan
National Commerce Financial Corporation Deferred Compensation Plan effective
January 1, 1999
CCB Financial Corporation Retirement Savings Plan
SouthBanc Shares, Inc. 1998 Stock Option Plan and SouthBanc Shares, Inc. 2001
Stock Option Plan
Subsidiaries of Registrant
Consent of KPMG LLP
Consent of Ernst & Young LLP
Registrant's Proxy Statement to Shareholders for the 2002 Annual Meeting of
Shareholders
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO
SHELDON M. FOX, CHIEF FINANCIAL OFFICER
OF NATIONAL COMMERCE FINANCIAL CORPORATION
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NATIONAL COMMERCE FINANCIAL CORPORATION
By: /s/ Thomas M. Garrott
-----------------------------------
Thomas M. Garrott
Chairman of the Board
Date: March 22, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas M. Garrott Chairman of the Board March 22, 2002
- -----------------------------
Thomas M. Garrott
/s/ Ernest C. Roessler President and Chief Executive March 22, 2002
- ----------------------------- Officer (Principal Executive
Ernest C. Roessler Officer)
/s/ James B. Brame, Jr. Director March 22, 2002
- -----------------------------
James B. Brame, Jr.
/s/ R. Grattan Brown, Jr. Director March 22, 2002
- -----------------------------
R. Grattan Brown, Jr.
- ----------------------------- Director March , 2002
Bruce E. Campbell, Jr.
- ----------------------------- Director March , 2002
John D. Canale III
/s/ James H. Daughdrill, Jr. Director March 22, 2002
- -----------------------------
James H. Daughdrill, Jr.
- ----------------------------- Director March , 2002
Thomas C. Farnsworth, Jr.
/s/ Blake P. Garrett, Jr. Director March 22, 2002
- -----------------------------
Blake P. Garrett, Jr.
/s/ C. Dan Joyner Director March 22, 2002
- -----------------------------
C. Dan Joyner
/s/ W. Neely Mallory, Jr. Director March 22, 2002
- -----------------------------
W. Neely Mallory, Jr.
/s/ Eugene J. McDonald Director March 22, 2002
- -----------------------------
Eugene J. McDonald
66
Signature Title Date
--------- ----- ----
/s/ Phillip H. McNeill Sr. Director March 22, 2002
- -----------------------------
Phillip H. McNeill Sr.
/s/ Eric B. Munson Director March 22, 2002
- -----------------------------
Eric B. Munson
- ----------------------------- Director March , 2002
J. Bradbury Reed
/s/ Dr. David E. Shi Director March 22, 2002
- -----------------------------
Dr. David E. Shi
/s/ H. Allen Tate, Jr. Director March 22, 2002
- -----------------------------
H. Allen Tate, Jr.
/s/ Dr. Phail Wynn, Jr. Director March 22, 2002
- -----------------------------
Dr. Phail Wynn, Jr.
/s/ Sheldon M. Fox Chief Financial Officer March 22, 2002
- ----------------------------- (Principal
Sheldon M. Fox Financial Officer)
67
EXHIBIT INDEX
Exhibit No.
- -----------
(2) Plan of acquisition, reorganization, arrangement, liquidation or secession.
1. Agreement and Plan of Reorganization entered into as of, July 15, 2001 by and between the
Registrant and SouthBanc Shares, Inc. is incorporated by reference from Exhibit 2.1 to the
Registrant's Registration Statement on Form S-4 filed on September 13, 2001 (File No. 333-
69338). *
(3) Articles of Incorporation and Bylaws.
1. Articles of Amendment to Registrant's Amended and Restated Charter is incorporated by reference
from Exhibit 3.1 to the Registrant's Form S-3/A dated July 9, 2001.
2. Amended and Restated Charter of Registrant is incorporated by reference from Exhibit 3.1 to the
Registrant's Form 8-K dated July 11, 2000. *
3. Bylaws of Registrant as amended is incorporated by reference from Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. *
(4) Instruments defining the rights of security holders, including indentures.
1. Specimen Stock Certificate of Registrant is incorporated herein by reference from Exhibit 4.1 of
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. *
2. Form of indenture dated November 1, 1993 between CCB Financial Corporation and Bank of New York
as successor to Wachovia Bank of North Carolina, N.A., Trustee, pursuant to which Registrant's
Subordinated Notes are issued and held is incorporated herein by reference from Exhibit 4.2 of
the CCB Registration Statement No. 33-50793 on Form S-3 (File No. 001- 11989). *
3. Certificate of Trust of National Commerce Capital Trust II is incorporated by reference from
Exhibit 4.2 to the Registrant's Form S-1/1 filed on December 5, 2001.
(10) Material contracts.
1. Form of Promissory Notes of NBC payable to The Mallory Partners is incorporated herein by
reference from Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987 (File No. 0-6094). *
2. Amended and Restated Employment Agreement entered into as of November 1, 2001 by and between
Registrant and Thomas M. Garrott is incorporated by reference from Exhibit 10.2 to the
Registrant's Form S-1/1 filed on December 5, 2001. *
3. First Amendment to Amended and Restated Employment Agreement dated as of February 18, 2002 by
and between Registrant and Thomas M. Garrot. 10.1
4. Employment Agreement entered into as of November 1, 2001 by and between Registrant and Ernest C.
Roessler is incorporated by reference from Exhibit 10. 3 to the Registrant's Form S- 1/1 filed
on December 5, 2001. *
5. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and
among Registrant and William R. Reed, Jr. is incorporated by reference from Exhibit 10.24 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
6. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and
among Registrant and Richard L. Furr is incorporated by reference from Exhibit 10.25 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
7. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and
among Registrant and J. Scott Edwards is incorporated by reference from Exhibit 10.27 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
68
Exhibit No.
- -----------
8. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and
among Registrant and Sheldon M. Fox is incorporated by reference from Exhibit 10.28 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
9. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and
among Registrant and David T. Popwell is incorporated by reference from Exhibit 10.29 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
10. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and
among Registrant and Tom W. Scott is incorporated by reference from Exhibit 10.30 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
11. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial
Corporation and Ernest C. Roessler is incorporated by reference from Exhibit 10.31 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 *
12. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial
Corporation and William R. Reed is incorporated by reference from Exhibit 10.32 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
13. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial
Corporation and Richard L. Furr is incorporated by reference from Exhibit 10.33 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
14. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial
Corporation and J. Scott Edwards is incorporated by reference from Exhibit 10.35 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
15. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial
Corporation and Sheldon M. Fox is incorporated by reference from Exhibit 10.36 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
16. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial
Corporation and David T. Popwell is incorporated by reference from Exhibit 10.37 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
17. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial
Corporation and Tom W. Scott is incorporated by reference from Exhibit 10.38 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
18. National Commerce Financial Corporation Retirement Plan as amended and restated effective
August 1, 2001. 10.2
19. Hillsborough Savings Bank, Inc., SSB Management Recognition Plan is incorporated by reference
to Exhibit 10.II.B of the Form 10-K of Piedmont Bancorp, Inc. ("PBI") for the fiscal year ended
June 30, 1996 (File No. 001-14070). *
20. Piedmont Bancorp, Inc. Stock Option Plan is incorporated by reference to Exhibit 10.II.A to
PBI's Form 10-K for the fiscal year ended June 30, 1996 (File No. 001-14070). *
21. 1993 Incentive Stock Option Plan is incorporated by reference to Exhibit 28 to the Registration
Statement No. 33-61270 on Form S-8 of CCB Financial Corporation ("CCB")(File No. 001- 11989). *
22. Salem Trust Bank 1986 Incentive Stock Option Plan is incorporated by reference to Exhibit 99 of
CCB's Registration Statement No. 333-22031 on Form S-8 (File No. 001-11989). *
23. 1995 Directors Performance Plan of American Federal Bank, FSB is incorporated by reference to
Exhibit 99 to CCB's Registration Statement No. 333-34231 on Form S-8 (File No. 001- 11989). *
69
Exhibit No.
- -----------
24. 1993 Nonstatutory Stock Option Plan for CCB Savings Bank of Lenoir, Inc., SSB is incorporated
by reference to Exhibit 99 of CCB's Registration Statement No. 33-53599 on Form S-8, as amended
by Amendment No. 1 to the 1993 Nonstatutory Stock Option Plan for CCB Savings Bank of Lenoir,
Inc., SSB (incorporated by reference to Exhibit 10(G) of CCB's Annual Report on Form 10-K for
the year ended December 31, 1993)(File No. 001-11989). *
25. 1993 Nonstatutory Stock Option Plan for Graham Savings Bank, Inc., SSB is incorporated by
reference to Exhibit 99 to CCB's Registration Statement No. 33-53595 on Form S-8 (File No.
001-11989). *
26. Security Capital Bancorp Omnibus Stock Ownership and Long Term Incentive Plan is incorporated
by reference to Exhibit 99 to CCB's Registration Statement No. 33-61791 on Form S-8 (File No.
001-11989). *
27. Long-Term Incentive Plan is incorporated by reference to Exhibit 99 to CCB's Registration
Statement No. 33-54645 on Form S-8 (File No. 001-11989). *
28. American Federal Bank, FSB Amended and Restated 1988 Stock Option and Incentive Plan is
incorporated by reference to Exhibit 99 of CCB's Registration Statement No. 33-34207 on Form
S-8 (File No. 001-11989). *
29. Stone Street Bancorp, Inc. Stock Option Plan is incorporated by reference to Exhibit 99 of
CCB's Registration Statement No. 33-9158 on Form S-8 (File No. 001-11989). *
30. Deferred Compensation Agreement as of December 1, 1983 for Thomas M. Garrott is incorporated by
reference to Exhibit 10c(2) to the Registrant's Form 10-K for the year ended December 31, 1984
(File No. 0-6094). *
31. 1990 Stock Plan of the Registrant is incorporated by reference from Exhibit A to the
Registrant's Proxy Statement for the 1990 Annual Meeting of Shareholders (File No. 0-6094). *
32. 1994 Stock Plan of the Registrant, as amended and restated effective as of November 1, 1996, is
incorporated by reference from Exhibit A to the Registrant's Proxy Statement for the 1997
Annual Meeting of Shareholders. *
33. Amendment Number One to the 1994 Stock Plan of the Registrant, as amended and restated
effective as of November 1, 1996, is incorporated by reference from Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. *
34. Amendment Number Two to the 1994 Stock Plan of the Registrant, as amended and restated
effective as of November 1, 1996, is incorporated by reference from Exhibit 10.21 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
35. Resolution authorizing Pension Restoration Plan is incorporated by reference from Exhibit
10(c)(7) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1986
(File No. 0-6094). *
36. National Commerce Financial Corporation Deferred Compensation Plan effective January 1, 1999,
is incorporated by reference from Exhibit 10.19 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998. *
37. National Commerce Financial Corporation Supplemental Executive Retirement Plan. 10.3
38. CCB Financial Corporation Retirement Savings Plan is incorporated by reference to Exhibit 99 of
Registrant's Registration Statement No. 333-66110 on Form S-8 (File No. 0-6094). *
39. Long-Term Incentive Plan is incorporated by reference to Exhibit 99 of Registrant's
Registration Statement No. 333-66116 on Form S-8 (File No. 0-6094). *
70
Exhibit No.
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40. SouthBanc Shares, Inc. 1998 Stock Option Plan and SouthBanc Shares, Inc. 2001 Stock Option Plan
is incorporated by reference to Exhibit 99 of Registrant's Registration Statement No. 333-
69338 on Form S-8/A (File No. 0-6094). *
(21) Subsidiaries of Registrant.
A listing of the direct and indirect subsidiaries of Registrant. 21
(23) Consents of experts and counsel.
Consent of KPMG LLP. 23.1
Consent of Ernst & Young LLP. 23.2
(99) Additional exhibits.
Proxy Statement for 2002 Annual Meeting of Shareholders to be held on April 24, 2002. Not Required
to be re-filed
* Previously filed
71