##### Table of Contents

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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Form 10-Q





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


the Securities Exchange Act of 1934





For the period ended June 30, 2002





Commission File Number:
0-6094





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NATIONAL COMMERCE FINANCIAL
CORPORATION


(Exact name of issuer as specified in charter)





Tennessee

62-0784645(State or other jurisdiction of
incorporation)

(I.R.S. Employer Identification No.)





One Commerce Square, Memphis, Tennessee 38150


(Address of principal executive offices)





Registrants telephone number, including area code (901) 523-3434





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





APPLICABLE ONLY TO CORPORATE ISSUERS:





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.





Common Stock, $2 Par value

206,216,089 shares(Class of Stock)

(Shares outstanding as of August 9, 2002)





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##### Table of Contents

National Commerce Financial Corporation and Subsidiaries





INDEX TO FORM 10-Q





Part I.

Financial InformationItem 1.

Financial StatementsConsolidated Balance Sheets June 30, 2002 and December 31, 2001

3Consolidated Statements of Income Three and Six Months Ended June 30, 2002 and 2001

4Consolidated Statements of Cash Flows Six Months Ended June 30, 2002 and 2001

5Notes to Consolidated Financial Statements As of and for the Six Months Ended June 30, 2002 and 2001

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

12Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24Item 4.

Submission of Matters to a Vote of Security Holders

24Part II.

Other InformationItem 6.

Exhibits and Reports on Form 8-K

25Signatures

26




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##### Table of Contents

PART I.    FINANCIAL INFORMATION





Item 1.    Financial Statements





National Commerce Financial Corporation
and Subsidiaries


CONSOLIDATED BALANCE SHEETS


June 30, 2002 and December 31, 2001





(Unaudited)In Thousands Except Share Data

June 30, 2002

December 31, 2001ASSETSCash and due from banks

$
481,326

561,429Time deposits in other banks


6,544

31,118Federal funds sold and other short-term investments


105,932

51,873Investment securities:Available for sale (amortized cost of $4,576,120 and $3,589,578)


4,632,713

3,611,706Held to maturity (market values of $855,853 and $913,683)


839,542

900,750Trading account securities


110,427

197,214Loans


12,470,030

11,974,765Less allowance for loan losses


161,616

156,401Net loans


12,308,414

11,818,364Bank owned life insurance


219,542

212,376Investment in First Market Bank, FSB


25,839

24,550Premises and equipment


248,567

219,595Goodwill


1,071,769

946,157Core deposit intangibles


271,318

251,464Other assets


490,235

447,117Total assets

$
20,812,168

19,273,713LIABILITIESDeposits:Demand (noninterest-bearing)

$
2,051,963

1,732,140Savings, NOW and money market accounts


5,732,415

5,230,621Jumbo and brokered certificates of deposits


1,652,279

1,366,034Time deposits


4,703,158

4,290,684Total deposits


14,139,815

12,619,479Short-term borrowed funds


1,352,416

1,141,617Federal Home Loan Bank advances


2,026,082

2,306,554Trust preferred securities and long-term debt


282,108

282,018Other liabilities


415,361

468,714Total liabilities


18,215,782

16,818,382STOCKHOLDERS EQUITYSerial preferred stock. Authorized 5,000,000 shares; none issued




Common stock, $2 par value. Authorized 400,000,000 shares;206,417,264 and 205,058,713 shares issued


412,835

410,117Additional paid-in capital


1,779,603

1,756,128Retained earnings


369,912

276,342Accumulated other comprehensive income


34,036

12,744Total stockholders equity


2,596,386

2,455,331Total liabilities and stockholders equity

$
20,812,168

19,273,713





Commitments and contingencies (note 8)





See accompanying notes to consolidated financial statements.




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National Commerce Financial Corporation and Subsidiaries


CONSOLIDATED STATEMENTS OF INCOME


Three and Six Months Ended June 30, 2002 and 2001


(Unaudited)





Three Months Ended June
30,

Six Months Ended June
30,In Thousands Except Per Share Data

2002

2001

2002

2001INTEREST INCOMEInterest and fees on loans

$
216,085

239,072

434,121

485,221Interest and dividends on investment securities:U.S. Treasury


488

796

1,322

1,437U.S. Government agencies and corporations


54,872

48,454

104,765

99,182States and political subdivisions (primarily tax-exempt)


1,809

2,350

3,814

4,909Equity and other securities


10,543

17,636

21,719

37,951Interest and dividends on trading account securities


604

761

1,034

1,659Interest on time deposits in other banks


142

317

310

711Interest on federal funds sold and other short-term investments


123

634

266

2,041Total interest income


284,666

310,020

567,351

633,111INTEREST EXPENSEDeposits


71,863

114,007

146,697

244,166Short-term borrowed funds


4,461

9,578

7,961

25,409Federal Home Loan Bank advances


22,626

23,688

45,815

47,104Trust preferred securities and long-term debt


2,474

1,270

4,955

2,822Total interest expense


101,424

148,543

205,428

319,501Net interest income


183,242

161,477

361,923

313,610Provision for loan losses


8,713

6,304

14,227

12,684Net interest income after provision for loan losses


174,529

155,173

347,696

300,926OTHER INCOMEService charges on deposit accounts


40,301

30,460

74,127

57,750Other service charges and fees


10,583

9,064

19,788

17,800Broker/dealer revenue and other commissions


17,650

16,202

33,063

31,268Trust and employee benefit plan income


13,488

13,382

26,388

27,264Equity earnings from First Market Bank, FSB


773

498

1,289

832Other


10,533

8,937

21,230

16,786Investment securities gains, net


1,694

575

4,414

1,295Total other income


95,022

79,118

180,299

152,995OTHER EXPENSEPersonnel


68,373

62,447

137,251

122,347Net occupancy


12,209

9,159

23,186

18,481Equipment


6,800

6,135

13,027

11,970Goodwill amortization




12,046



24,120Core deposit intangibles amortization


18,118

14,622

35,528

29,664Other


45,462

39,891

85,667

74,627Conversion/merger expenses






4,940

Total other expenses


150,962

144,300

299,599

281,209Income before income taxes


118,589

89,991

228,396

172,712Income taxes


37,721

34,456

72,629

64,887Net income

$
80,868

55,535

155,767

107,825EARNINGS PER COMMON SHAREBasic

$
.39

.27

.76

.52Diluted


.39

.27

.75

.52WEIGHTED AVERAGE SHARES OUTSTANDINGBasic


206,368

205,433

206,059

205,532Diluted


208,978

207,891

208,635

208,215





See accompanying notes to consolidated financial statements.




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National Commerce Financial Corporation and Subsidiaries


CONSOLIDATED STATEMENTS OF CASH FLOWS


Six Months Ended June 30, 2002 and 2001


(Unaudited)





In Thousands

2002


2001OPERATING ACTIVITIESNet income

$
155,767


107,825Adjustments to reconcile net income to net cash provided by operating activities:Depreciation, amortization and accretion, net


47,373


55,399Provision for loan losses


14,227


12,684Net gain on sales of investment securities


(4,414
)

(1,295
)Deferred income taxes


(4,233
)

5,370Origination of loans held for sale


(212,267
)

(70,673
)Sales of loans held for sale


258,988


Changes in:Trading account securities


86,787


14,671Other assets


(25,064
)

(164,093
)Other liabilities


(62,320
)

(15,215
)Other operating activities, net


3,681


1,046Net cash provided (used) by operating activities


258,525


(54,281
)INVESTING ACTIVITIESProceeds from:Maturities and issuer calls of investment securities held to maturity


246,344


463,423Sales of investment securities available for sale


1,348,747


64,875Maturities and issuer calls of investment securities available for sale


771,392


646,200Purchases of:Investment securities held to maturity


(184,580
)

(90,967
)Investment securities available for sale


(2,058,503
)

(810,079
)Premises and equipment


(16,988
)

(8,155
)Net originations of loans


(116,001
)

(158,872
)Net cash paid in business combination


(324,132
)

Net cash provided (used) by investing activities


(333,721
)

106,425FINANCING ACTIVITIESNet increase in deposit accounts


172,387


2,545Net increase (decrease) in short-term borrowed funds


179,240


(96,421
)Net increase (decrease) in Federal Home Loan Bank advances


(281,247
)

299,014Increase in long-term debt


89


Repurchase and retirement of capital trust pass-through securities





(7,303
)Issuances of common stock from exercise of stock options, net


18,843


10,731Purchase and retirement of common stock


(2,537
)

(51,585
)Cash dividends paid


(62,197
)

(53,480
)Net cash provided by financing activities


24,578


103,501Net increase (decrease) in cash and cash equivalents


(50,618
)

155,645Cash and cash equivalents at beginning of period


644,420


531,467Cash and cash equivalents at end of period

$
593,802


687,112SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONInterest paid during the period

$
212,739


329,254Income taxes paid during the period

$
86,784


35,164





See accompanying notes to consolidated financial statements.




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##### Table of Contents

National Commerce Financial Corporation and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


As of and for the Six Months Ended June 30, 2002 and 2001


(Unaudited)





(1)    CONSOLIDATION AND
PRESENTATION





The accompanying unaudited consolidated financial statements of National Commerce Financial Corporation
(NCF) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the opinion of management, the statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of NCF on a
consolidated basis, and all such adjustments are of a normal recurring nature. These financial statements and the notes thereto should be read in conjunction with NCFs Annual Report on Form 10-K for the year ended December 31, 2001. Operating
results for the three- and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.





CONSOLIDATION    NCF is a bank holding company that provides diverse financial services through a regional network of banking affiliates and a national network of nonbanking
affiliates. NCFs wholly-owned banking subsidiaries include National Bank of Commerce (NBC) and NBC Bank, FSB. The consolidated financial statements also include the accounts and results of operations of the wholly-owned non-bank
subsidiaries of NCF: TransPlatinum Service Corp., Commerce Capital Management, Inc., First Mercantile Trust, First Mercantile Capital Management, Inc., USI Alliance, National Commerce Capital Trust I, National Commerce Capital Trust II, Senior
Housing Crime Prevention Foundation Investment Corporation and Monroe Properties. Also included in the consolidated financial statements are the subsidiaries of NBC and TransPlatinum. All significant intercompany transactions and accounts are
eliminated in consolidation.





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





Certain prior period amounts have been reclassified to conform to the 2002 presentation.





BUSINESS
COMBINATIONS    NCF acquired 37 divested Wachovia branches and corresponding ATMs in North Carolina, South Carolina, Georgia and Virginia on February 18, 2002. Results of operations from this acquisition are included in
NCFs operating results only from the date of acquisition. This acquisition added to NCFs balance sheet $1.4 billion in deposits, $450 million in loans, $24.8 million in fixed assets and $1 billion in available for sale investment
securities that were subsequently sold to restructure the balance sheet. Net cash paid in this business combination totaled $324 million. Core deposit intangible and goodwill recorded from the branches acquired amounted to $55.4 million and $125.4
million, respectively. Under the terms of the acquisition, NCF is required to make a contingent purchase price payment in February 2003 based on the retention of specifically identified deposit accounts. At June 30, 2002, based on the then
outstanding retained balances of the specific deposit accounts, the contingent payment would have been approximately $13 million. The ultimate payment under this contingency, if any, is likely to change as some of the currently outstanding specific
deposit accounts may be closed before final settlement of the contingency. The ultimate contingent payment, if any, will be an adjustment to goodwill. The acquisition continues NCFs strategic expansion into high growth areas of the Southeast.
The proforma results of operations, in any of the periods reported, are not materially different from those reported.





NCF also acquired
SouthBanc Shares, Inc. in November 2001 and First Vantage-Tennessee in August 2001 in transactions accounted for as purchases. Accordingly, the results of operations from these acquisitions are included in NCFs operating results only from the
dates of acquisition.




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##### Table of Contents




National Commerce Financial Corporation and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(1)    CONSOLIDATION AND PRESENTATION (Continued)





EARNINGS PER
SHARE    Basic earnings per share (EPS) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted
EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding plus dilutive stock options (as computed under the treasury stock method) assumed to have been exercised during the period.





COMPREHENSIVE INCOME    Comprehensive income is the change in equity during the period from transactions and other events and circumstances from non-owner sources. Total
comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income for the six months ended June 30, 2002 and 2001 and accumulated other comprehensive income as of June 30, 2002, December 31, 2001 and June 30,
2001 are comprised of unrealized gains and losses on investment securities available for sale and certain hedging instruments and adjustments of minimum pension liability.





(2)    LOANS





Management internally classifies the loan
portfolio by the purpose of the borrowing. Such classification is presented below as of June 30, 2002 and December 31, 2001. This classification basis places the emphasis on the source of repayment rather than the collateral source, which is the
classification basis for regulatory reporting purposes.





In Thousands

2002

2001Commercial

$
3,114,754

2,900,346Construction and commercial real estate


3,582,421

3,361,232Mortgage


1,658,905

1,912,345Consumer


3,910,081

3,602,013Revolving credit


69,388

61,731Lease financing


134,481

137,098Total loans

$
12,470,030

11,974,765





(3)    ALLOWANCE FOR LOAN LOSSES





Following is the activity in the allowance for loan losses during the six months ended June 30, 2002 and 2001:





In Thousands

2002


2001Balance at beginning of period

$
156,401


143,614Provision charged to operations


14,227


12,684Addition from business combination


6,107


Recoveries of loans previously charged-off


3,346


3,723Loan losses charged to allowance


(18,465
)

(14,362
)Balance at end of period

$
161,616


145,659




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##### Table of Contents




National Commerce Financial Corporation and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(4)    RISK ASSETS





Following is a summary of risk assets:





In Thousands

June 30, 2002

December 31, 2001

June 30, 2001Nonaccrual loans

$
30,465

22,800

11,780Other real estate acquired through loan foreclosures


24,634

10,687

7,787Accruing loans 90 days or more past due


52,351

48,553

29,397Total risk assets

$
107,450

82,040

48,964





(5)    GOODWILL AND OTHER INTANGIBLE ASSETS





The changes in the carrying amount of goodwill for the six months ended June 30, 2002 and year ended December 31, 2001 are as follows:





In Thousands

Traditional Banking


Financial Enterprises


TotalBalance as of January 1, 2001

$
897,779


36,688


934,467Amortization of goodwill


(46,450
)

(1,790
)

(48,240
)Goodwill acquired during year


59,856


74


59,930Balance as of December 31, 2001


911,185


34,972


946,157Other goodwill adjustments


248





248Goodwill acquired during period


125,364





125,364Balance as of June 30, 2002

$
1,036,797


34,972


1,071,769





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





Six months ended June 30,
2002


Year ended December 31,
2001In Thousands

Gross Carrying Amount

Accumulated Amortization


Gross Carrying Amount

Accumulated AmortizationCore deposit intangibles

$
405,127

(133,809
)

349,745

(98,281
)Aggregate amortization expense for the period


35,528




58,775Estimated annual amortization expense:For year ended 12/31/02

$
69,930For year ended 12/31/03


61,469For year ended 12/31/04


51,691For year ended 12/31/05


41,954For year ended 12/31/06


32,526




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National Commerce Financial Corporation and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(5)    GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)





The following is a reconciliation of
the reported net income for the three- and six-month periods ended June 30, 2002 compared to the adjusted net income for June 30, 2001:





Three months ended June 30,

Six months ended June 30,In Thousands Except Per Share Data

2002

2001

2002

2001Reported net income

$
80,868

55,535

155,767

107,825Add back: goodwill amortization




12,046



24,120Adjusted net income

$
80,868

67,581

155,767

131,945Basic EPSReported net income

$
.39

.27

.76

.52Goodwill amortization




.06



.12Adjusted net income

$
.39

.33

.76

.64Diluted EPSReported net income

$
.39

.27

.75

.52Goodwill amortization




.06



.12Adjusted net income

$
.39

.33

.75

.64





(6)    COMPREHENSIVE INCOME





The following table presents the components of other comprehensive income and the related tax effects allocated for the six months ended June 30, 2002 and 2001:





2002


2001In Thousands

Before tax amount


Tax (expense) benefit


Net of tax amount


Before tax amount


Tax (expense) benefit


Net of tax amountUnrealized gains on securities:Unrealized gains arising during holding period

$
39,134


(15,270
)


23,864


5,248


(2,073
)

3,175Reclassification adjustment for gains realized in net income


(4,414
)

1,744



(2,670
)

(1,295
)

512


(783
)Minimum pension liability:Adjustment to minimum pension liability


161


(63
)


98








Other comprehensive income

$
34,881


(13,589
)


21,292


3,953


(1,561
)

2,392Net income









155,767








107,825Comprehensive income








$
177,059








110,217




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National Commerce Financial Corporation and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(7)    PER SHARE DATA





The following schedule reconciles the numerators and denominators of
the basic and diluted EPS computations for the three and six months ended June 30, 2002 and 2001. Dilutive common shares arise from the potentially dilutive effect of NCFs stock options outstanding.





Three Months Ended June 30,

Six Months Ended June 30,In Thousands Except Per Share Data

2002

2001

2002

2001Basic EPSAverage common shares


206,368

205,433

206,059

205,532Net income

$
80,868

55,535

155,767

107,825Earnings per share


.39

.27

.76

.52Diluted EPSAverage common shares


206,368

205,433

206,059

205,532Average dilutive common shares


2,610

2,458

2,576

2,683Adjusted average common shares


208,978

207,891

208,635

208,215Net income

$
80,868

55,535

155,767

107,825Earnings per share


.39

.27

.75

.52





(8)    CONTINGENCIES





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





(9)    SEGMENT INFORMATION





Management monitors NCF performance as two business segments, traditional banking and financial enterprises.





The traditional banking segment includes sales and distribution of financial products and services to individuals. These products and services include loan
products such as residential mortgage, home equity lending, automobile and other personal financing needs. Traditional banking also offers various deposit products that are designed for customers saving and transaction needs. This segment also
includes lending and related financial services provided to small- to medium-sized companies. Included among these services are several specialty services such as real estate finance, asset-based lending and residential construction lending.
Traditional banking also includes management of the investment portfolio and non-deposit based funding.





The financial enterprises
segment is comprised of trust services and investment management, transaction processing, retail banking consulting/in-store licensing and broker/dealer activities.





The accounting policies of the individual segments are the same as those of NCF. Transactions between business segments are conducted at arms length. Interest income for tax-exempt loans and
securities is adjusted to a taxable-equivalent basis. Expenses for centrally provided services such as data processing, human resources and other support functions are allocated to each segment.




10




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National Commerce Financial Corporation and Subsidiaries


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





(9)    SEGMENT INFORMATION (Continued)





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





In Thousands

Traditional Banking


Financial Enterprises


Intersegment Eliminations


TotalQuarter ended June 30, 2002:Net interest income (TE)

$
186,041


4,829





190,870Provision for loan losses


(8,713
)







(8,713
)Noninterest income


53,665


43,766


(2,409
)

95,022Intangibles amortization


(18,118
)







(18,118
)Noninterest expense


(102,175
)

(33,078
)

2,409


(132,844
)Income before income taxes (TE)


110,700


15,517





126,217Income taxes


(39,298
)

(6,051
)




(45,349
)Net income

$
71,402


9,466





80,868Quarter ended June 30, 2001:Net interest income (TE)

$
163,629


4,722





168,351Provision for loan losses


(6,304
)







(6,304
)Noninterest income


38,973


40,781


(636
)

79,118Intangibles amortization


(26,221
)

(447
)




(26,668
)Noninterest expense


(89,009
)

(29,259
)

636


(117,632
)Income before income taxes (TE)


81,068


15,797





96,865Income taxes


(34,757
)

(6,573
)




(41,330
)Net income

$
46,311


9,224





55,535





In Thousands

Traditional Banking


Financial Enterprises


Intersegment Eliminations


TotalSix months ended June 30, 2002:Net interest income (TE)

$
367,677


9,270





376,947Provision for loan losses


(14,227
)







(14,227
)Noninterest income


100,474


83,386


(3,561
)

180,299Intangibles amortization


(35,528
)







(35,528
)Noninterest expense


(203,577
)

(64,055
)

3,561


(264,071
)Income before income taxes (TE)


214,819


28,601





243,420Income taxes


(76,499
)

(11,154
)




(87,653
)Net income

$
138,320


17,447





155,767Six months ended June 30, 2001:Net interest income (TE)

$
318,630


9,024





327,654Provision for loan losses


(12,684
)







(12,684
)Noninterest income


75,194


79,114


(1,313
)

152,995Intangibles amortization


(52,889
)

(895
)




(53,784
)Noninterest expense


(171,629
)

(57,109
)

1,313


(227,425
)Income before income taxes (TE)


156,622


30,134





186,756Income taxes


(66,026
)

(12,905
)




(78,931
)Net income

$
90,596


17,229





107,825




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##### Table of Contents




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





The following sets forth managements discussion and analysis of financial condition and results of operations of National Commerce Financial Corporation (NCF) and its wholly-owned subsidiaries on a consolidated
basis for the six months ended June 30, 2002 and 2001. NCF is a registered bank holding company which provides diverse financial services through a regional network of banking subsidiaries and a national network of nonbank subsidiaries. This
Quarterly Report on Form 10-Q should be read in conjunction with NCFs 2001 Annual Report on Form 10-K and serves to update previously reported information for current interim period results.





The following discussion contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking
statements relate to anticipated future operating and financial performance measures, including net interest margin, credit quality, business initiatives, growth opportunities and growth rates, among other things. Words such as expects,
plans, estimates, projects, objectives and goals and similar expressions are intended to identify these forward-looking statements. We caution readers that such forward-looking statements
are necessarily estimates based on managements judgment, and obtaining the estimated results is subject to a number of risks and uncertainties. Such risks include:





| |  | Rapid 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.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | The events of September 11, 2001, 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. These factors have occurred during an economic downturn in the United States, recovery from which has been relatively slow. If the recovery of the domestic economy continues to lag, we could experience a decline in
credit quality which could have a material adverse effect on our earnings.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | In February 2002, we completed the acquisition of 37 branch offices and related ATMs from Wachovia. We may lose deposits or be unable to attract new
deposits to these branches. Moreover, we may lose key employees in these branches who influence 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 banking agencies and authorities and the Securities and Exchange Commission. Changes in or new regulations could make
it more costly for us to do business or could force changes to the way we do business, which could have a material adverse effect on earnings. The NCF Parent Company relies on dividends from its subsidiaries as a primary source of funds to pay
dividends to shareholders and cover debt service. Federal banking law restricts the ability of our banking subsidiaries to pay dividends to the Parent Company. Although we expect to continue receiving dividends from our banking subsidiaries
sufficient to meet our current and anticipated cash needs, a decline in their profitability could result in restrictions on the payment of future dividends to the Parent Company.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12




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##### Table of Contents




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. In accordance with these policies, we make estimates and
assumptions that affect the amounts reported in those financial statements. As discussed more fully in the 2001 Annual Report on Form 10-K, we believe that our determination of the allowance for loan losses and the fair value of assets, including
the impairment of intangibles, involve a higher degree of judgment and complexity than our other significant accounting policies.





We
adopted Statement No. 142, Goodwill and Other Intangible Assets,on January 1, 2002. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed
for impairment. In accordance with Statement 142, we tested our recorded goodwill for impairment and found no impairment losses. See additional discussion under Recently Issued Accounting Standards.





As of June 30, 2002, we have unamortized goodwill totaling $1.1 billion and core deposit intangibles totaling $271.3 million (see Note 5 to the Consolidated
Financial Statements). Intangible assets subject to amortization will be reviewed for impairment in accordance with Statement 144. Goodwill and intangible assets not subject to amortization will be reviewed for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset might be impaired.





Operating Cash Earnings





Non-recurring items and the amortization of intangibles that arose from prior acquisitions significantly impact our earnings. 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. Table 1 provides a summary of the non-recurring items and
intangibles amortization over the three- and six-month periods ended June 30 and their effect on earnings and diluted earnings per share.





Table 1    Operating Cash Earnings


Three months ended June 30,

Six months ended June 30,2002

2001

2002

2001Before Tax

After Tax

Before Tax

After Tax

Before Tax

After Tax

Before Tax

After TaxNet income




$
80,868



55,535



155,767



107,825Non-recurring items:Merger-related expense

$









4,940

3,211



Intangibles amortization:Goodwill







12,046

12,046





24,120

24,120Core deposit intangibles


18,118


11,052

14,622

8,919

35,528

21,672

29,664

18,095Operating cash earnings




$
91,920



76,500



180,650



150,040Effect on diluted earnings per share:Net income




$
.39



.27



.75



.52Non-recurring items:Merger-related expense

$









.02

.02



Intangibles amortization:Goodwill







.06

.06





.12

.12Core deposit intangibles


.09


.05

.07

.04

.17

.10

.14

.08Operating cash earnings




$
.44



.37



.87



.72








Results of OperationsThree Months Ended
June 30, 2002 and 2001





Our second quarters results showed an overall improvement over results for the comparable period in
2001, despite the effects of the lingering recession, due to our focus on revenue growth, asset quality and expense control. We experienced increased loan demand, deposit growth and higher levels of fee income.





Net income for the three months ended June 30, 2002 totaled $80.9 million compared to 2001s $55.5 million. Basic and diluted income per share were $.39 in
second quarter 2002 and $.27 in the second quarter of 2001. Annualized returns on average assets and stockholders equity were 1.60% and 12.82%, respectively, in 2002 compared to 1.27% and 9.19% respectively, for the three months ended June 30,
2001.





Operating cash earnings for the three months ended June 30, 2002 totaled $91.9 million compared to 2001s $76.5 million.
Basic and diluted operating cash earnings per share totaled $.45 and $.44, respectively, for the second quarter of 2002 and $.37 in the second quarter of 2001. Annualized operating cash returns on average tangible assets and average tangible equity
were 1.95% and 31.28%, respectively, in 2002 compared to 1.87% and 24.80%, respectively, for the same period in 2001.





NCF acquired 37
divested Wachovia branches in February 2002, SouthBanc Shares, Inc. in November 2001 and First Vantage-Tennessee in August 2001, in independent transactions accounted for as purchases. Amortization of the core deposit intangibles recorded in these
transactions and adoption of Statement 142 had a significant impact on the results of operations in 2002 compared to 2001, as discussed below.





During the quarter, we expanded to the Atlanta market by opening 11 de novo in-store branches, spokes in our hub-and-spoke branch network. A hub location in the Atlanta market is expected to open
in the second half of 2002. Over the next two years, we plan to open 30 in-store branches in the Atlanta market, including the branches already opened, by partnering with Kroger, the leading grocer in the Atlanta marketplace. The expansion to
Atlanta solidifies our geographic footprint, linking Tennessee and the north Georgia regions with the westernmost edge of our North and South Carolina operations. Having built our branch network in the fastest growing MSAs in the Southeast, we will
now focus on increasing market share in each region.




13




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##### Table of Contents

Table 2





National Commerce Financial Corporation and Subsidiaries


AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS


Three Months Ended June 30, 2002 and 2001


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





2002


2001Average Balance

Interest Income/Expense

Average Yield/ Rate


Average Balance

Interest Income/Expense

Average Yield/RateEarning assets:Loans (2)

$
12,335,537


218,856

7.11
%

11,142,888

242,174

8.71U.S. Treasury and agency obligations (3)


4,324,893


59,003

5.46


2,893,493

52,086

7.21States and political subdivision obligations (3)


132,583


2,718

8.20


168,315

2,801

6.66Other securities (3)


739,967


10,834

5.86


1,028,326

18,060

7.03Trading securities


89,229


613

2.75


60,125

799

5.31Time deposits in other banks


22,411


142

2.54


25,166

317

5.04Federal funds sold and other short-term investments


21,187


128

2.43


52,800

657

4.99Total earning assets


17,665,807


292,294

6.63


15,371,113

316,894

8.26Non-earning assets:Cash and due from banks


436,473







401,156Bank owned life insurance


217,458







138,796Investment in First Market Bank


25,317







22,834Premises and equipment


247,739







202,822Goodwill


1,070,724







918,208Core deposit intangibles


280,701







267,613All other assets, net


289,085







282,383Total assets

$
20,233,304







17,604,925Interest-bearing liabilities:Savings, NOW and money market accounts

$
5,800,664


18,527

1.28
%

4,525,169

29,164

2.59Jumbo and brokered certificates of deposit


1,533,119


8,290

2.17


1,696,004

21,994

5.20Time deposits


4,681,751


45,046

3.86


4,196,083

62,849

6.01Total interest-bearing deposits


12,015,534


71,863

2.40


10,417,256

114,007

4.39Short-term borrowed funds


1,124,318


4,461

1.26


984,703

9,578

3.90FHLB advances


1,949,166


22,626

4.66


1,878,033

23,688

5.06Trust preferred securities and long-term debt


282,053


2,474

3.51


82,016

1,270

6.19Total interest-bearing liabilities


15,371,071


101,424

2.65


13,362,008

148,543

4.46Other liabilities and stockholders equity:Demand deposits


1,923,408







1,417,129Other liabilities


408,906







402,538Stockholders equity


2,529,919







2,423,250Total liabilities and stockholders equity

$
20,233,304







17,604,925Net interest income and net interestNet interest income and net interest margin (4)




$
190,870

4.33
%



168,351

4.38Interest rate spread (5)







3.98
%





3.80


---

|(1) |  | The taxable equivalent basis is computed using 35% federal and applicable state tax rates in 2002 and 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(2) |  | The average loan balances include non-accruing loans. Loan fees of $4,839,000 and $5,604,000 for 2002 and 2001, respectively, are included in interest income.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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



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NET INTEREST INCOME    Average Balances and Net Interest Income Analyses on a
taxable equivalent basis for each of the periods are included in Table 2. Taxable equivalent net interest income was $190.9 million in the second quarter of 2002, compared to $168.4 million for the second quarter of 2001, a 13.4% increase.





During 2001, the Federal Reserve decreased the target federal funds rate eleven times by a total of 475 basis points, of which 275 basis
points occurred by the end of the second quarter of 2001. There have been no changes in this rate during 2002. Upon each action by the Federal Reserve, our banking subsidiaries lowered their prime lending rate to keep pace with the changes in
funding costs. Our banking subsidiaries prime rates have fallen from 9.50% at December 31, 2000 to 6.75% at June 30, 2001 and to 4.75% by December 31, 2001, the current rate. With the liability sensitive nature of our balance sheet, in times
of falling interest rates, the decrease in interest expense from the lower cost of interest-bearing liabilities exceeds the decrease in interest income from the lower yield on earning assets. Consequently, our interest rate spread widened to 3.98%
in 2002 compared to second quarter 2001s 3.80%.





NCFs net interest margin declined to 4.33% for the second quarter of 2002
compared to second quarter 2001s 4.38%. The contribution of net free liabilities to the net interest margin (computed as net interest margin less the interest rate spread) fell to 35 basis points in 2002 from 2001s 58 basis
points. Despite the increase in net free liabilities of approximately $286 million, their benefit to our net interest margin declined as a result of the significant decline in the average cost on our interest-bearing liabilities. The
decline in our cost of funds is due to the general decline in interest rates discussed previously. Our Asset/Liability Management Committee (ALCO), which monitors our interest sensitivity and liquidity, has restructured our balance sheet
to be less liability sensitive in recognition that interest rates will eventually rise again.





We do not anticipate that the Federal
Reserve will raise interest rates during the third quarter of 2002. Historically, the Federal Reserve has not increased interest rates until the national unemployment rate is on a sustained downward trend. We anticipate a very slow-paced recovery of
the U.S. economy with a gradual increase in interest rates beginning in 2003.





Adjusting for acquisitions accounted for under the
purchase method of accounting, average loans and average core deposits increased 2.4% and 4.6%, respectively, over the quarter ended June 30, 2001. Average loans for the quarter were adversely affected by an increase in the amount of payoffs from
refinanced mortgage loans compared to our experience in 2001 and the continuing managed decline in our State Farm indirect auto portfolio. Excluding these two categories, and loans acquired in purchase acquisitions, average loans increased 8.7% over
second quarter 2001. Average noninterest-bearing deposits, excluding deposits acquired in previous acquisitions, increased $296.1 million over second quarter 2001, in part due to our Free Checking product. This allowed us to decrease our
reliance on interest-bearing sources of funding, such as FHLB advances.





PROVISION FOR LOAN LOSSES    The provision
for loan losses during the second quarter of 2002 was $8.7 million compared to $6.3 million in the second quarter of 2001. Net loan charge-offs totaled $7.3 million in the second quarter of 2002 and $4.7 million in the second quarter of 2001 which
represent .24% and .17% net charge-offs to average loans (annualized) for the respective periods. The allowance for loan losses as a percent of total loans and leases was 1.30% at June 30, 2002 and 2001.





Management performs an analysis of the loan portfolio quarterly to determine the adequacy of the allowance for loan losses. The overall allowance analysis
considers the results of detailed loan reviews, quantitative and qualitative indicators of the current quality of the loan portfolio and the inherent risk not captured in the reviews and assessments of individual loans or pools of loans.





We also track a number of key performance indicators in establishing the allowance for loan losses. As discussed previously, the U.S.
economy continues to show signs of weakness and while general economic conditions have deteriorated, our portfolio quality indicators have not dramatically deteriorated. Management believes that our strong collateral positions will prevent
significant charge-offs from assets that are currently not performing. The following table summarizes indicators of portfolio quality and the allowance for loan losses as of and for the five quarters ended June 30, 2002 (dollars in thousands):




15




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##### Table of Contents




2002

2001Second Quarter


First Quarter

Fourth Quarter

Third Quarter

Second QuarterLoans outstanding

$
12,470,030


12,264,784

11,974,765

11,516,651

11,236,246Ratio of allowance for loan losses to loans outstanding


1.30
%

1.31

1.31

1.31

1.30Average loans outstanding for the period

$
12,335,537


12,108,855

11,773,105

11,370,853

11,142,888Ratio of annualized net charge-offs to average loans for the period


.24
%

.26

.25

.21

.17Ratio of recoveries to charge-offs for the period


18.06
%

18.18

21.18

21.09

29.57Ratio of non-performing assets to:Loans outstanding and other real estate acquired through loan foreclosures


.44
%

.36

.28

.21

.17Total assets


.26
%

.22

.17

.13

.11Ratio of total risk assets to:Loans outstanding and other real estate acquired through loan foreclosures


.86
%

.81

.68

.49

.44Total assets


.52
%

.50

.43

.30

.27Allowance for loan losses to total risk assets


1.50
x

1.61

1.91

2.68

2.97





The ratio of non-performing assets (consisting of nonaccrual loans and foreclosed real
estate) to loans outstanding and other real estate acquired through foreclosure has increased to .44% at June 30, 2002 from .36% at March 31, 2002 and .17% at June 30, 2001. The increase from March 31, 2002 to June 30, 2002 is due to an increase in
nonaccrual loans and foreclosed real estate primarily attributable to three secured commercial relationships. Based on our evaluation of the collateral position of these three relationships, we do not expect significant charge-offs.





At June 30, 2002, total risk assets (consisting of non-performing assets, restructured loans and accruing loans 90 days or more past due) amounted to
$107.5 million or .86% of outstanding loans plus other real estate acquired through foreclosure. This compares to $99.6 million or .81% at March 31, 2002 and $49 million or .44% at June 30, 2001. Approximately $4 million of the increase in total
risk assets from March 31, 2002 to June 30, 2002 is attributable to loans from our aircraft lending division. The aircraft loan portfolio, which totals approximately $135 million at June 30, 2002, has been reviewed in detail during 2002 following
the departure of the banker in charge of the division. The allowance for loan losses to risk assets was 1.50x at June 30, 2002 compared to 1.61x at March 31, 2002 and 2.97x at June 30, 2001. Management believes nonperforming and risk assets have
reached a peak. Despite the increase in total risk assets, management anticipates that net charge-offs for the remainder of 2002 will be between 25 and 30 basis points, including any further losses attributable to the aircraft loan portfolio.





Based on its review, management believes that the allowance for loan losses at June 30, 2002 is adequate to absorb estimated probable
losses inherent in the loan portfolio. The allocation of components of the allowance at June 30, 2002 are consistent with the amounts at December 31, 2001. The most recent regulatory agency examinations have not revealed any material problem credits
that had not been previously identified; however, future regulatory examinations may result in the regulatory agencies requiring additions to the allowance for loan losses based on information available at the date of examination.





NONINTEREST INCOME AND EXPENSE    Non-interest income, excluding investment securities transactions, increased from $78.5
million in second quarter 2001 to $93.3 million in second quarter 2002. Service charges on deposit accounts increased $9.8 million from $30.5 million in second quarter of 2001 to $40.3 million in second quarter 2002 due to higher volume of
commercial accounts and increases in overdraft fees, due in part to our Free Checking product. Other income increased $1.6 million from $8.9 million in the second quarter of 2001 to $10.5 million in the second quarter of 2002 due
primarily to increased earnings on bank owned life insurance. Annualized noninterest income as a percentage of average tangible assets improved to 2.02% for second quarter 2002 compared to 1.93% in the same period of 2001.





Due to the significant impact non-recurring expenses and amortization of intangibles has on our financial results, management monitors our financial information
on a cash operating basis. Noninterest cash operating expense is




16




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##### Table of Contents




computed as total noninterest expense less non-recurring expense and amortization of intangibles.
Noninterest cash operating expense increased $15.2 million to $132.8 million in second quarter 2002 from $117.6 million in second quarter 2001, due primarily to the business combinations discussed in Footnote 1 to the financial statements. Personnel
expenses increased $5.9 million in the second quarter of 2002 over the second quarter of 2001 primarily due to higher headcount in revenue-related areas. We had 5,469 full-time equivalent employees at June 30, 2002 compared to 4,766 at June 30,
2001. Occupancy and equipment expense increased $3.7 million in the second quarter of 2002 over the second quarter of 2001 due in large part to our expanded branch network. Other expenses increased $5.6 million in the second quarter of 2002 due
primarily to increased printing and office supplies, telecommunications, miscellaneous losses, cardholder/merchant processing expense and the expanded branch network.





As a result of the aforementioned changes, net overhead (noninterest cash operating expense less noninterest income) as a percentage of average tangible assets decreased to .80% for the three months
ended June 30, 2002 from .91% for the three months ended March 31, 2002 and .94% for the three months ended June 30, 2001. Our cash efficiency ratio (noninterest cash operating expense as a percentage of taxable equivalent net interest income
and noninterest income) was 46.47% and 46.54% for the three months ended June 30, and March 31, 2002, and 47.53% for the three months ended June 30, 2001, respectively. The following schedule presents noninterest income and noninterest cash
operating expense (annualized) as a percentage of average tangible assets for the five quarters ended June 30, 2002.





2002

2001Second Quarter


First Quarter

Fourth Quarter

Third Quarter

Second QuarterNoninterest income

2.02
%

1.89

2.12

1.88

1.93Personnel expense

1.45


1.53

1.58

1.38

1.53Occupancy and equipment expense

.40


.38

.34

.38

.37Other operating expense, cash basis

.97


.89

1.03

.93

.97Noninterest expense, cash basis

2.82


2.80

2.95

2.69

2.87Net overhead, cash basis

.80
%

.91

.83

.81

.94





In the second quarter of 2002, core deposit intangibles amortization totaled $18.1 million
compared to $14.6 million for the quarter ended June 30, 2001. Due to the change in accounting standards relating to intangibles discussed earlier, we recorded no goodwill amortization in 2002. This compares to $12.1 million and $12 million of
goodwill amortization recognized in the first and second quarters of 2001, respectively.





Results of OperationsSix Months Ended
June 30, 2002 and 2001





Net income for the six months ended June 30, 2002 totaled $155.8 million compared to $107.8 million for the
six months ended June 30, 2001. Basic and diluted net income per share totaled $.76 and $.75, respectively, for the first six months of 2002. For the same period in 2001, basic and diluted net income per share totaled $.52. Annualized returns on
average assets and stockholders equity were 1.58% and 12.52%, respectively, for the six months ended June 30, 2002 compared to 1.24% and 9.03%, respectively, for the six months ended June 30, 2001.





Operating cash earnings for the six months ended June 30, 2002 totaled $180.7 million compared to $150 million for the same period in 2001. Basic and diluted
operating cash earnings per share totaled $.88 and $.87, respectively, for the first six months of 2002 and $.73 and $.72, respectively, for the same period of 2001. Annualized operating cash returns on average tangible assets and average tangible
equity were 1.96% and 30.55%, respectively, in 2002 compared to 1.85% and 25.04%, respectively, for the same period in 2001.





NET
INTEREST INCOME    Average Balances and Net Interest Income Analyses on a taxable equivalent basis for each of the periods are included in Table 3. Taxable equivalent net interest income was $376.9 million for the first six
months of 2002, compared to $327.7 million for the same period in 2001, a 15% increase. Our net interest margin improved 10 basis points and our interest rate spread improved 35 basis points during the six-month period ended June 30, 2002 compared
to the same six-month period in 2001 largely due to the decreased rate paid on interest-bearing liabilities more than offsetting the lower rate earned on interest-earning assets. During the six months ended June 30, 2002, our average net free
liabilities grew approximately $245 million compared to the same period in 2001. Their contribution to the net interest margin fell from 61 basis points for the six months ended June 30, 2001 to 36 basis points for the same period in 2002 due
to the decline in our average cost of interest-bearing liabilities, as previously discussed.




17




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##### Table of Contents




Table 3





National Commerce Financial Corporation and Subsidiaries


AVERAGE BALANCES AND NET INTEREST INCOME
ANALYSIS


Six Months Ended June 30, 2002 and 2001


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





2002


2001Average Balance


Interest Income/ Expense

Average Yield/ Rate


Average Balance

Interest Income/ Expense

Average Yield/
RateEarning assets:Loans (2)

$
12,222,822


439,677

7.24
%

11,088,400

491,529

8.93U.S. Treasury and agency obligations (3)


4,109,724


113,019

5.50


2,891,993

106,387

7.36States and political subdivision obligations (3)


139,130


5,708

8.21


175,682

5,812

6.62Other securities (3)


765,773


22,329

5.83


1,079,308

38,878

7.20Trading securities


82,513


1,055

2.56


62,147

1,720

5.53Time deposits in other banks


25,256


310

2.47


26,676

711

5.37Federal funds sold and other short-term investments


25,021


277

2.23


76,562

2,118

5.58Total earning assets


17,370,239


582,375

6.74


15,400,768

647,155

8.45Non-earning assets:Cash and due from banks


454,467







373,937Bank owned life insurance


215,737







111,211Investment in First Market Bank


25,021







22,608Premises and equipment


239,188







204,180Goodwill


1,040,625







924,156Core deposit intangibles


275,911







275,020All other assets, net


271,297







281,421Total assets

$
19,892,485







17,593,301Interest-bearing liabilities:Savings, NOW and money market accounts

$
5,643,359


35,929

1.28
%

4,490,705

64,955

2.92Jumbo and brokered certificates of deposit


1,552,380


17,108

2.22


1,862,695

51,679

5.60Time deposits


4,592,683


93,660

4.11


4,183,125

127,532

6.15Total interest-bearing deposits


11,788,422


146,697

2.51


10,536,525

244,166

4.67Short-term borrowed funds


1,048,208


7,961

1.53


1,081,694

25,409

3.96FHLB advances


2,021,161


45,815

4.57


1,712,002

47,104

5.55Trust preferred securities and long-term debt


282,052


4,955

3.52


85,599

2,822

6.59Total interest-bearing liabilities


15,139,843


205,428

2.74


13,415,820

319,501

4.80Other liabilities and stockholders equity:Demand deposits


1,835,344







1,350,954Other liabilities


408,431







418,933Stockholders equity


2,508,867







2,407,594Total liabilities and stockholders equity

$
19,892,485







17,593,301Net interest income and net interest margin (4)




$
376,947

4.36
%



327,654

4.26Interest rate spread (5)







4.00
%





3.65


---

|(1) |  | The taxable equivalent basis is computed using 35% federal and applicable state tax rates in 2002 and 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(2) |  | The average loan balances include non-accruing loans. Loan fees of $10,353,000 and $10,790,000 for 2002 and 2001, respectively, are included in interest income.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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



18




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##### Table of Contents




PROVISION FOR LOAN LOSS    The provision for loan losses for the first six months of
2002 was $14.2 million compared to $12.7 million in the first six months of 2001. Net loan charge-offs totaled $15.1 million and $10.6 million for the six months ended June 30, 2002 and 2001, respectively, and as a percentage of average loans
(annualized) were .25% for the six months ended June 30, 2002 and .19% for the same period in 2001. The allowance for loan losses as a percent of total loans and leases was 1.30% at June 30, 2002 and 2001.





NONINTEREST INCOME AND EXPENSE    Non-interest income, excluding investment securities transactions, increased from $151.7 million in the
first six months of 2001 to $175.9 million for the same period in 2002. Of this increase, $16.4 million is due to increased service charges on deposit accounts and $4.4 million resulted from an increase in other income attributable to increased
earnings on bank owned life insurance and net mortgage banking income. Annualized noninterest income as a percentage of average tangible assets improved to 1.96% for the first six months of 2002 compared to 1.88% for the same period in 2001.





Noninterest cash operating expense increased to $259.1 million for the first six months of 2002 from $227.4 million for the same period
in 2001, primarily from the business combinations discussed previously. Personnel expenses increased $14.9 million in the first six months of 2002 over the same period in 2001 primarily due to higher headcount as well as higher incentives and
commissions, a result of our increased sales emphasis in 2002. Occupancy and equipment expense increased $5.8 million in the first six months of 2002 over the same period in 2001 due in part to our expanded branch network. Other expenses increased
$11 million in the first six months of 2002 over the same period in 2001 due to increased general operating expenses and our expanded branch network.





Our cash efficiency ratio was 46.50% and 47.32% for the six months ended June 30, 2002 and 2001, respectively. The following schedule presents noninterest income and noninterest cash operating expense (annualized) as a percentage of
average tangible assets for the six months ended June 30, 2002 and 2001.





2002


2001Noninterest income

1.96
%

1.88Personnel expense

1.49


1.50Occupancy and equipment expense

.39


.37Other operating expense, cash basis

.93


.92Noninterest expense, cash basis

2.81


2.79Net overhead, cash basis

.85
%

.91





Financial Condition and Capital Resources





Total assets have increased to $20.8 billion at June 30, 2002 from $18 billion at June 30, 2001. Quarterly average assets increased to $20.2 billion for the
second quarter of 2002 from $17.6 billion for the same quarter in 2001. The increase was largely attributable to the acquisitions.





Federal Home Loan Bank advances have decreased $280.5 million since December 31, 2001, primarily due to increases in noninterest-bearing deposits and other sources of borrowed funds. This source of liquidity had an average rate of
4.66% for the three months ended June 30, 2002.





Our capital position has historically been strong as evidenced by the ratio of tangible
equity to tangible assets of 6.44% and 7.26% as of June 30, 2002 and 2001, respectively. The purchase acquisitions mentioned previously, particularly the Wachovia branch purchase, have caused the decline in the tangible assets ratio. Management has
targeted a 7.00% tangible equity to tangible assets ratio, which it expects to achieve by late 2002 or early 2003. Our book value at June 30, 2002 was $12.58 compared to June 30, 2001s $11.68. The effect of unrealized gains on investment
securities available for sale, net of applicable tax expense, increased stockholders equity by $21.2 million from December 31, 2001. As of June 30, 2002, unrealized gains on investment securities available for sale, net of applicable tax
expense, totaled $33.9 million and contributed $.16 per share to period-end book value.





On July 16, 2002, NCFs Board of Directors
approved an increase in the companys annual dividend by declaring a quarterly cash dividend of $.17 per common share payable October 1, 2002 to shareholders of record September 13, 2002. This compares to the $.15 per common share dividend paid
in the second quarter.




19




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##### Table of Contents




Under a stock repurchase plan adopted by the Board of Directors on June 19, 2001, NCF repurchased and
retired 100,000 shares of its common stock during the first six months of 2002. There are approximately 2.9 million shares remaining to be repurchased under the current authorization which expires on December 31, 2002.





Bank holding companies are required to comply with the Federal Reserves risk-based capital guidelines requiring a minimum leverage ratio relative to
average total assets and minimum capital ratios relative to risk-adjusted assets. The minimum leverage ratio is 3% if the holding company has the highest regulatory rating and meets other requirements but the leverage ratio required may be raised
from 100 to 200 basis points if the holding company does not meet these requirements. The minimum risk-adjusted capital ratios are 4% for Tier I capital and 8% for total capital. Additionally, the Federal Reserve may set capital requirements higher
than the minimums we have described for holding companies whose circumstances warrant it.





Each of our banking subsidiaries is subject to
similar risk-based and leverage capital requirements adopted by its applicable federal banking agency. NCF and our banking subsidiaries continue to maintain higher capital ratios than required under regulatory guidelines and all of our banking
subsidiaries were considered to be well-capitalized at June 30, 2002. The following table discloses NCF and NBCs components of capital, risk-adjusted asset information and capital ratios at June 30, 2002 (dollars in thousands):





NCF


NBCTier I capital


$1,467,926


1,353,230Tier II capital:Allowable loan loss reserve


161,616


160,924Subordinated debt


6,599


Other


65


65Total capital

$
1,636,206


1,514,219Risk-adjusted assets

$
13,992,933


13,898,591Average regulatory assets


18,909,305


18,771,680Tier I capital ratio


10.49
%

9.74Total capital ratio


11.69


10.89Leverage ratio


7.76


7.21





Liquidity and Interest Sensitivity





NCF manages 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 ALCO. ALCO reviews interest rate and liquidity exposures and, based on its view of existing and expected market conditions, adopts balance sheet strategies that are intended to optimize net interest income to the extent possible while
minimizing the risk associated with changes in interest rates.





Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds, on which rates change daily, and loans which are tied to the prime rate are much more interest rate sensitive than fixed-rate securities and loans. Similarly, time deposits of
$100,000 and over and money market accounts are much more interest rate sensitive than savings accounts. The shorter-term interest rate sensitivities are the key to measurement of the interest sensitivity gap, or difference between
interest-sensitive earning assets and interest-sensitive liabilities. Trying to minimize this gap is a continual challenge in a changing interest rate environment and one of the objectives of the ALCO. ALCO uses Gap Analysis as one method to
determine and monitor the appropriate balance between interest-sensitive assets and interest-sensitive liabilities.




20




---

##### Table of Contents




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 total earning assets) between interest-sensitive assets and liabilities is necessary in order to protect against wide fluctuations in
interest rates. An analysis of our interest sensitivity position at June 30, 2002 is presented in Table 4. At June 30, 2002, we had a cumulative negative gap (interest-sensitive liabilities and interest rate swaps exceed
interest-sensitive assets) of $1 billion or 5.21 percent of total tangible assets over a twelve-month horizon. This compares to a cumulative negative gap of $1.7 billion or 9.22 percent of total tangible assets over a twelve-month horizon at
December 31, 2001. In light of expected future interest rate increases, management has restructured the balance sheet during 2002 to be less liability sensitive. The ratio of tangible assets to liabilities, tangible equity and interest rate swaps
was .89x at June 30, 2002 compared to .83x at December 31, 2001.





Table 4





Interest Sensitivity Analysis





As of June 30, 2002 (1)In Thousands

30 Days Sensitive


6 Months Sensitive


6 Months to 1 Year Sensitive


Total Sensitive


Beyond 1 Year Sensitive


TotalAssets:Short term investments

$
222,903








222,903





222,903Investment securities (2)


666,240


477,150


362,417


1,505,807


3,966,447


5,472,254Loans


4,754,009


885,702


951,142


6,590,853


5,879,177


12,470,030Other assets














1,303,894


1,303,894Total tangible assets


5,643,152


1,362,852


1,313,559


8,319,563


11,149,518


19,469,081Liabilities:Noninterest DDA


171,919


343,838





515,757


1,536,206


2,051,963Savings deposits


1,128,032


698,161


698,161


2,524,354


3,208,061


5,732,415Time deposits


1,627,344


1,831,053


1,072,518


4,530,915


1,824,522


6,355,437Short-term borrowed funds


1,142,416








1,142,416


210,000


1,352,416Long-term debt


148,576


114,743


157,241


420,560


1,887,630


2,308,190Other liabilities














415,361


415,361Total liabilities


4,218,287


2,987,795


1,927,920


9,134,002


9,081,780


18,215,782Tangible equity














1,253,299


1,253,299Total liabilities and tangible equity


4,218,287


2,987,795


1,927,920


9,134,002


10,335,079


19,469,081Interest 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

$
1,424,865


(1,824,943
)

(614,361
)

(1,014,439
)Cumulative gap

$
1,424,865


(400,078
)

(1,014,439
)Cumulative ratio of tangible assets to liabilities, tangible equity and interest rate swaps


1.34
x

.95


.89Cumulative gap to total tangible assets


7.32
%

(2.05
)

(5.21
)


---

|(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 $56.6 million for available for sale securities is not included.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------




---




Gap Analysis is a limited
measurement tool, however, because it does not incorporate the interrelationships between interest rates charged or paid, balance sheet trends and reaction to interest rate changes. In addition, a gap analysis model does not consider that changes in
interest rates do not affect all categories of assets and liabilities equally or simultaneously. Therefore, ALCO uses Gap Analysis as a tool to monitor changes in the




21




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##### Table of Contents

balance sheet structure. To estimate the impact that changes in interest rates would have on our earnings, ALCO uses Simulation Analysis. ALCO prepares and reviews the Simulation Analysis
quarterly. The most recent Simulation Analysis was as of May 31, 2002 and those results do not vary significantly from those that would have been obtained for an analysis as of June 30, 2002.





Simulation Analysis is performed using a computer-based asset/liability model incorporating current portfolio balances and rates, contractual maturities, repricing opportunities, and
assumptions about prepayments, future interest rates, and future volumes. Using this information, the model calculates earnings estimates under multiple interest rate scenarios. To measure the sensitivity of our earnings, the results of multiple
simulations, which assume changes in interest rates, are compared to the base case simulation, which assumes no changes in interest rates. The sensitivity of earnings is expressed as a percentage change in comparison to the base
case simulation. The model assumes an immediate parallel shift in the interest rate environment. At May 31, 2002, a 100 basis point increase is projected to decrease net income 1.3% and a 100 basis point decrease is projected to decrease net
income 1.7%. As mentioned earlier, we have restructured our balance sheet to lessen our exposure to interest rate increases. At December 31, 2001, Simulation Analysis projected a 2.3% decrease in net income with a 100 basis point increase and a 1.2%
decrease with a 100 basis point decrease. The models projection of decreased net income, whether interest rates rise or fall, is due to asymmetrical pricing assumptions and call risk. The model uses asymmetrical pricing assumptions with
certain borrowings whereby interest rates are assumed not to be able to fall as much as they are able to rise (a floor is established but no ceiling). With call risk, in a falling interest rate environment, issuer calls of higher yielding securities
produce excess cash that would be re-invested at the lower rates available in the market. In a rising rate environment, maturities of lower-yielding callable securities are extended and less cash is generated for re-investment at the higher market
rates available.





As of June 30, 2002, management believes that NCF is positioned to avoid material negative changes in net income
resulting from possible future changes in interest rates. Management continues to target a neutral position relative to future interest rate increases as it believes interest rate increases will begin in 2003.If simulation results show that
earnings sensitivity exceeds the targeted limit, ALCO will adopt on-balance sheet and/or off-balance sheet strategies to bring earnings sensitivity within target guidelines.





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 quarterly 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.




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##### Table of Contents




Impact of Recently Issued Accounting Standards





In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 142, Goodwill and Other Intangible Assets. Statement 142
requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible
assets with definite useful lives be amortized over their respective estimated useful lives to the estimated residual values, and reviewed for impairment in accordance with Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Statement requires goodwill acquired in purchase business combination be tested for impairment annually and between annual tests under certain circumstances. Impairment exists if the carrying amount of the goodwill exceeds
its implied fair value.





NCF adopted Statement 142 on January 1, 2002. Upon adoption of Statement 142, NCF reassessed the useful lives
and residual values of intangible assets acquired in purchase business combinations. No amortization period adjustments or reclassification entries were considered necessary. NCF has not recorded any intangible assets identified as having indefinite
useful lives. In accordance with Statement 142, we tested our recorded goodwill for impairment and found no impairment losses.





In August
2001, the FASB issued Statement No. 144, Accounting for the Impairment of Long-Lived Assets. Statement 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 supersedes FASB
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). This Statement also amends ARB No.
51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. Statement 144 is effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The provisions of this Statement generally are to be applied prospectively. Adoption of this pronouncement January 1, 2002 had no impact on NCFs financial statements.





In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement 146
requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Statement 146 replaces Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring). Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.




23




---

##### Table of Contents




Item 3.    
Quantitative and Qualitative Disclosures About Market Risk





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





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





Management believes that there have been no other significant changes in market risk as
disclosed in NCFs Annual Report on Form 10-K for the year ended December 31, 2001.





Item 4.    
Submission of Matters to a Vote of Security Holders





The Annual Meeting of Shareholders of National Commerce
Financial Corporation was held April 24, 2002 at 10:00 a.m. (CDT), One Commerce Square, Memphis, Tennessee.





The following are the voting
results on each matter submitted to the shareholders:





|1.    To |  | elect six directors
|-------- |  | -------------------




For

Withheld/AgainstR. Grattan Brown, Jr.

175,310,089

2,540,120Thomas C. Farnsworth, Jr.

175,929,198

1,921,011Eugene J. McDonald

175,838,277

2,011,932Phillip H. McNeill, Sr.

175,310,562

2,539,647Ernest C. Roessler

175,761,284

2,088,925Phail Wynn, Jr.

175,833,078

2,017,131





|2. |  | To ratify the Board of Directors appointment of KPMG LLP, independent certified accountants, as auditors of NCF for the year ending December 31, 2002
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




For

Withheld/Against

Exceptions/Abstentions173,802,168

3,774,557

273,484




24




---

##### Table of Contents




PART II.    
OTHER INFORMATION





Item 6.    
Exhibits and Reports on Form 8-K





(a).    Exhibits





99.1

2002 National Commerce Financial Corporation Plan for Severance Compensation After a Change in Control





(b).    Reports on Form 8-K





During the quarter ended June 30, 2002, the registrant filed no current reports on Form 8-K.




25




---

##### Table of Contents




SIGNATURES





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





NATIONAL COMMERCE FINANCIAL CORPORATION Registrant/s/    ERNEST C. ROESSLERErnest C. Roessler President and Chief Executive Officer


Date: August 13, 2002





/s/    SHELDON M. FOXSheldon M. Fox Chief
Financial Officer


Date: August 13, 2002




26