-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I1OqtvNd5NpZMR5+rf9Zuto5P+IndYfvj8o0mOo0+EgVIUnTkbGTc8k7mdrRa8mo dLMd+73V7M76fs6znqZQ0w== 0000897101-00-000285.txt : 20000329 0000897101-00-000285.hdr.sgml : 20000329 ACCESSION NUMBER: 0000897101-00-000285 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL CITY BANCORPORATION CENTRAL INDEX KEY: 0000069968 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 420315731 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-09426 FILM NUMBER: 580722 BUSINESS ADDRESS: STREET 1: 651 NICOLLET MALL CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6129048500 FORMER COMPANY: FORMER CONFORMED NAME: INDEPENDENT BANCORPORATION DATE OF NAME CHANGE: 19750326 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K _X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 _____ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-9426 NATIONAL CITY BANCORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Iowa 42-0316731 - ------------------------------------ --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation of organization) 651 Nicollet Mall Minneapolis, Minnesota 55402-1611 - ------------------------------------ --------------------------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number (including area code): 612-904-8500 Securities registered pursuant to Section 12(g) of the Act: $1.25 Par Value Common Stock - -------------------------------------------------------------------------------- (Title of Class) 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 _____ As of February 21, 2000, the aggregate market value of 7,652,577 shares of voting common stock, $1.25 par value, held by non-affiliates of the registrant was approximately $125,311,000 based upon the reported closing price on the NASDAQ Stock Market SM. As of February 21, 2000, 8,721,712 shares of $1.25 par value common stock of the registrant were outstanding. 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. [ ] DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of National City Bancorporation's Annual Report to Stockholders for the year ended December 31, 1999 are incorporated by reference into Parts I, II, and IV. (2) Portions of the definitive Proxy Statement of National City Bancorporation for the Annual Meeting of Stockholders to be held on April 19, 2000 are incorporated by reference into Part III. (3) Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Certain statements under the captions "Business," "Legal Proceedings," "Market for Registrant's Common Equity and Related Stockholder Matters," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-K (and documents incorporated by reference therein) constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as "may," "will," "expect," "anticipate," "estimate," "should," or "continue" or the negative thereof or other variations thereon or comparable terminology. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or from those results currently anticipated or projected. Such factors include, among other things, the estimated fair value of financial instruments and the adequacy of the allowance for loan losses. 2 NATIONAL CITY BANCORPORATION FORM 10-K YEAR ENDED DECEMBER 31, 1999 - -------------------------------------------------------------------------------- PART I ITEM 1 - BUSINESS National City Bancorporation (NCBC) was incorporated in 1937 under the laws of the State of Iowa. NCBC is a bank holding company which owns 99.9% of the capital stock of National City Bank of Minneapolis (NCB), which is a commercial bank. NCBC owns 100% of the capital stock of Diversified Business Credit, Inc. (DBCI), a commercial finance company. NCBC also owns 100% of the capital stock of National City Development & Realty, Inc., an inactive subsidiary. NCB has its main banking office in the business district of downtown Minneapolis and also serves customers from two detached facilities. One of these facilities provides a drive-up location in downtown Minneapolis, and the other is a full service branch location in Edina, Minnesota, a suburb of Minneapolis. NCBC provides its subsidiaries advice and specialized services in various fields of financial and banking policy. The responsibility for the management of each subsidiary remains with the Board of Directors and with the officers appointed by the Boards of Directors. NCB provides usual and customary banking services, including without limitation: business, personal and real estate loans; a full range of deposit services; correspondent banking and safe deposit facilities. In addition to the services generally provided by a full-service bank, NCBC's subsidiaries offer specialized services as described below: TRUST SERVICES - NCB offers clients a wide variety of fiduciary services ranging from the management of funds for individuals to the administration of estates and trusts. For corporations, governmental bodies, and public authorities, NCB acts as fiscal and paying agent, registrar, and trustee under corporate indentures and pension and profit sharing agreements. NCB also provides record keeping and reporting for 401-K retirement savings plans. INTERNATIONAL OPERATIONS - NCB provides a wide range of services in the area of international banking including trade service products, such as letters of credit, bankers acceptances, international collections and foreign exchange. ASSET-BASED FINANCING - DBCI specializes in providing working capital loans secured by accounts receivable, inventory, and other marketable assets. All loans are made on a full recourse basis to the borrower. Personal guarantees from the owners of the borrower are normally obtained. Loans are made on a demand basis with no fixed repayment schedule. Compared to equity-based loans made by banks and others, asset-based loans usually require closer monitoring which results in higher loan servicing costs. Typically, interest rates earned on these loans are higher than rates earned on equity-based loans. OTHER SERVICES - NCBC and subsidiaries do not have more than one line of business or class of service. All income is derived from commercial banking and bank-related services. It is not dependent on a single customer or a single industry for any material part of its business. COMPETITION - Banking in Minnesota, as elsewhere, is highly competitive and NCB competes with other banks, both independent and those affiliated with other bank holding companies. Additional competitors are able to enter the Minnesota market following the June, 1997 change in banking regulations (See Supervision & Regulation). In addition, in lending funds and obtaining deposits, NCB competes with other types of institutions, such as savings and loan associations, credit unions, insurance companies, finance companies, and various institutions offering money market and mutual funds. EMPLOYEES - NCBC and its subsidiaries have approximately 282 employees, none of whom are represented by a collective bargaining organization. 3 GOVERNMENT POLICIES - The earnings of NCBC's various operating units, as lenders of money, are affected by state and federal legislative changes and by policies of various regulatory authorities, including those of the State of Minnesota and the United States and, to a lesser extent, by those of foreign governments, and international agencies. These policies include, for example, statutory maximum legal interest rates, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, and capital adequacy and liquidity constraints imposed by bank regulatory agencies. SUPERVISION AND REGULATION - NCBC is a registered bank holding company under the Bank Holding Company Act of 1956 (the Act) and is subject to the supervision of and regulation by the Board of Governors of the Federal Reserve System (the Board). Under the Act, a bank holding company may engage in banking, managing or controlling banks, furnishing and performing services for banks which it controls, and activities which the Board has determined to be closely related to banking. NCBC must obtain approval of the Board before acquiring control of a bank or acquiring more than 5% of the outstanding voting shares of a company engaged in a bank-related business. In general, effective June 1, 1997, federal law permits the merger of insured banks within different home states. Under state law, a bank subsidiary of an out-of state bank holding company may establish branch offices in Minnesota if the bank subsidiary's principal place of business is within the state. An acquiring out-of-state bank may maintain and operate branches within Minnesota provided the in-state acquired bank has been in continuous operation for at least five years. NCBC's subsidiary bank is a national bank and is, accordingly, subject to the supervision of and examination by the Comptroller of the Currency and the Federal Reserve System. The subsidiary bank is a member of the Federal Deposit Insurance Corporation and, accordingly, is subject to examination thereby. Areas subject to regulation by federal and state authorities include deposit reserves, investments, loans, mergers, issuance of securities, payment of dividends, establishment of branches, and other aspects of operations. STATISTICAL DATA - Statistical data is presented on pages 29 through 35 of the Annual Report to Stockholders for the year ended December 31, 1999, and such statistical data is incorporated herein by reference. ITEM 2 - PROPERTIES NCB currently leases 95,200 square feet of space for its downtown main office under a lease which expires in 2006. Management believes this facility is adequate for NCB's needs. NCB leases 3,380 square feet of record storage space at a downtown location under a lease that expires in the year 2000. NCB maintains a drive-up detached banking facility in downtown Minneapolis on leased land. The lease expires in the year 2000. NCB does not intend to renew the lease and will make alternate arrangements to serve customers affected by the closure. NCB also owns an 8,500 square foot banking facility and land in Edina, Minnesota. DBCI leases 14,067 square feet of space in downtown Minneapolis. This lease expires in the year 2002. Management believes this facility is adequate for DBCI's needs. The aggregate net rentals for all of the above described facilities were approximately $2,534,000 in 1999. 4 ITEM 3 - LEGAL PROCEEDINGS NCBC is party to various legal proceedings incidental to its business. Certain claims, suits, and complaints arising in the ordinary course of business have been filed or are pending against NCBC. In the opinion of management, the resulting liability, if any, arising from all such actions will not have a material impact on NCBC's consolidated financial position, liquidity or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The market for National City Bancorporation's common stock and related stockholder matters is presented on pages 1 and 35 of the Annual Report to Stockholders for the year ended December 31, 1999, and is incorporated herein by reference. PART II ITEM 6 - SELECTED FINANCIAL DATA Selected financial data is presented on page 34 of the Annual Report to Stockholders for the year ended December 31, 1999 and is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is presented on pages 20 through 28 of the Annual Report to Stockholders for the year ended December 31, 1999 and is incorporated herein by reference. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are presented in pages 23 through 25 of the Annual Report to Stockholders for the year ended December 31, 1999 and is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary financial information of National City Bancorporation and subsidiaries are presented on pages 3 through 19 and 29 through 35 of the Annual Report to Stockholders for the year ended December 31, 1999 and are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 5 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of National City Bancorporation are presented on pages 3 through 4 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 19, 2000, and said presentation is incorporated herein by reference. The executive officers referred to in this Item 10 are as follows: Mr. David L. Andreas has been a director since 1980 and was elected Chief Executive Officer effective November 1, 1987. Mr. Andreas served as Chairman of the Board from 1987 to 1998. Mr. Andreas had been a Vice President and Senior Vice President of NCBC during the five years prior to being elected Chairman. Mr. Andreas was elected President and Chief Executive Officer of NCB in 1994. Mr. Thomas J. Freed was elected Secretary and Controller of NCBC effective January 1, 1982 and Secretary and Chief Financial Officer effective July 16, 1997. Mr. Freed was elected Senior Vice President and Chief Financial Officer of NCB in 1986. Previous to 1986, Mr. Freed served as an officer of NCB for seventeen years. Mr. Robert L. Olson has been President, Chief Executive Officer and director of Diversified Business Credit, Inc. since 1985. ITEM 11 - EXECUTIVE COMPENSATION Executive compensation is set forth on pages 5 through 8 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 19, 2000 and is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The security ownership of certain beneficial owners and management is presented on page 2 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 19, 2000 and is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain relationships and related transactions are presented on pages 2 through 4 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 19, 2000 and is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements, Scheduled Exhibits: The consolidated financial statements and related notes, the independent auditor's report thereon and supplementary data that appear on pages 3 through 19 and 29 through 35 of our Annual Report to Stockholders for the year ended December 31, 1999 are incorporated herein by reference. (2) Financial Statement Schedules: All schedules are omitted, because the conditions requiring that filing do not exist. (3) Exhibits: 3(a) - Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.01 of the Registrant's Registration Statement on Form S-1, Registration No. 269057). 6 3(b) - Restated By-laws [incorporated herein by reference to Exhibit 3(ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985]. 10(c) - Salary Continuation Agreement between NCB and Walter E. Meadley, Jr. (incorporated herein by reference to Exhibit 10(c) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). 10(d) - Salary Continuation Agreement, as amended, between NCB and Thomas J. Freed (incorporated herein by reference to Exhibit 10(d) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10(f) - Fourth Amendment to Executive Salary Continuation Agreement by and between NCB and Thomas J. Freed dated November 31, 1995. [Incorporated herein by reference to Exhibit 10(f) to the 1995 Form 10-K.] 10(g) - Fourth Amendment to Executive Salary Continuation Agreement by and between NCB and Walter E. Meadley, Jr. dated November 31, 1995. [Incorporated herein by reference to Exhibit 10(g) to the 1995 Form 10-K.] 10(h) - Fourth Amendment to Executive Salary Continuation Agreement by and between NCB and David L. Andreas dated December 31, 1995. [Incorporated herein by reference to Exhibit 10(h) to the 1995 Form 10-K.] 10(i) - Change in Control Agreement by and between NCBC, NCB, and Thomas J. Freed dated as of November 19, 1996. [Incorporated herein by reference to Exhibit 10(i) to the 1996 Form 10-K.] 10(j) - Employment Agreement, dated December 4, 1997, by and between DBCI and Robert L. Olson. [Incorporated herein by reference to Exhibit 10(j) to the 1997 Form 10-K.] 10(k) - Seventh Amendment to Executive Salary Continuation Agreement by and between NCB and Thomas J. Freed dated as of March 9, 2000. 10(k) - Seventh Amendment to Executive Salary Continuation Agreement by and between NCB and David L. Andreas dated as of March 9, 2000. 11 - Computation of Basic Earnings Per Share. 13 - Annual Report to Stockholders (only those portions incorporated herein by reference shall be deemed filed with the Commission). 22 - Subsidiaries of Registrant are listed and described in PART I, Item 1. 23 - Consent of Ernst & Young, LLP. 27 - Financial Data Schedule Copies of the exhibits will be furnished upon request and payment of registrant's reasonable expenses in furnishing the exhibits. (b) Reports on Form 8-K A report on Form 8-K was filed during the quarter ended December 31, 1999. 7 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 CITY BANCORPORATION Date: March 17, 2000 /s/ David L. Andreas ----------------------------------------- David L. Andreas, Chief Executive Officer 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. Date: March 17, 2000 /s/ David L. Andreas ----------------------------------------- David L. Andreas, Chief Executive Officer (Principal Executive Officer) Date: March 17, 2000 /s/ Thomas J. Freed ----------------------------------------- Thomas J. Freed, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 17, 2000 /s/ David C. Malmberg ----------------------------------------- David C. Malmberg, Chairman of the Board Date: March 17, 2000 /s/ Wendell R. Anderson ----------------------------------------- Wendell R. Anderson, Director Date: March 17, 2000 /s/ Terry L. Andreas ----------------------------------------- Terry L. Andreas, Director Date: March 17, 2000 ----------------------------------------- Michael J. Boris, Director Date: March 17, 2000 /s/ Marvin Borman ----------------------------------------- Marvin Borman, Director Date: March 17, 2000 ----------------------------------------- Sharon N. Bredeson, Director Date: March 17, 2000 /s/ Kenneth H. Dahlberg ----------------------------------------- Kenneth H. Dahlberg, Director Date: March 17, 2000 ----------------------------------------- John H. Daniels, Jr., Director Date: March 17, 2000 /s/ James B. Goetz, Sr. ----------------------------------------- James B. Goetz, Sr., Director Date: March 17, 2000 /s/ Esperanza Guerrero-Anderson ----------------------------------------- Esperanza Guerrero-Anderson, Director Date: March 17, 2000 /s/ Thomas E. Holloran ----------------------------------------- Thomas E. Holloran, Director 8 Date: March 17, 2000 ----------------------------------------- C. Bernard Jacobs, Director Date: March 17, 2000 /s/ Walter E. Meadley, Jr. ----------------------------------------- Walter E. Meadley, Jr., Director Date: March 17, 2000 /s/ Robert L. Olson ----------------------------------------- Robert L. Olson, Director Date: March 17, 2000 /s/ Roger H. Scherer ----------------------------------------- Roger H. Scherer, Director 9 NATIONAL CITY BANCORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS - -------------------------------------------------------------------------------- SUBSEQUENTLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE 11 Computation of Basic Earnings Per Share. 13 Annual Report to Stockholders (only those portions incorporated herein by reference shall be deemed filed with the Commission). 22 Subsidiaries of Registrant are listed and described in PART I, Item 1. 23 Consent of Ernst & Young, LLP. 27 Financial Data Schedule 10 EX-10.(K) 2 AMENDMENT TO SALARY CONTINUATION AGREEMENT EXHIBIT 10(k) SEVENTH AMENDMENT TO EXECUTIVE SALARY CONTINUATION AGREEMENT THIS AMENDMENT is made and entered into as of the 9th day of March, 2000, as an amendment to the Executive Salary Continuation Agreement dated June 5, 1986, (hereinafter called the "Agreement"), by and between NATIONAL CITY BANK OF MINNEAPOLIS (hereinafter called the "Bank"), and Thomas J. Freed (hereinafter called the "Executive"); and this Amendment supersedes the Sixth Amendment to such Agreement, dated August 2, 1999. WHEREAS, the Executive remains in the employ of the Bank; and both the Bank and the Executive desire to amend the Agreement; and WHEREAS, the Bank wishes (1) to remove the limitation on payment of benefits under the Agreement so that the benefit under the Agreement will no longer take into account the benefit provided under the Bank's cash balance pension plan; and (2) to provide that the benefit under the Agreement will be determined under a formula rather than stated as a fixed dollar amount; NOW, THEREFORE, in consideration of the services to be performed by the Executive in the future, as well as the mutual promises herein contained, the parties hereto agree to amend the Agreement as follows: 1. Paragraph 1.1 of Article I (entitled "NORMAL RETIREMENT OR DISABILITY") is hereby amended to read as follows: 1.1) Amount and Terms of Payment. For purposes of this Paragraph 1.1, the term "normal retirement date" shall mean the date on which the Executive attains sixty-five (65); the term "disability retirement date" shall mean the date on which the Executive terminates employment with the Bank due to his disability (as defined in Paragraph 1.4); and "base salary" shall include any base salary paid by the Bank, any of its subsidiaries and its parent company. In consideration of the Executive's remaining employed by the Bank until his normal retirement date or, if earlier, his disability retirement date (the "applicable date"), the Bank agrees that from and after the Executive's normal retirement date, subject to the following sentence of this Paragraph 1.1, the Bank shall thereafter pay to the Executive an annual amount equal to 50% (fifty percent) of the Executive's base salary as of the December 31st coinciding with or immediately preceding the applicable date, for a period of fifteen (15) years from and after the Executive's normal retirement date, payable in equal monthly installments commencing with the first day of the first month following the Executive's normal retirement date. However, if the Executive remains employed by the Bank after his normal retirement date, payment of the annual dollar amount that would have been payable upon his retirement at his normal retirement date shall be deferred, shall commence with the first day of the first month following the date of his actual retirement from the active service of the Bank (without any adjustment for that delay or any change in his base salary after the December 31st coinciding with or immediately preceding his normal retirement date) and shall be payable in the same manner and for the same period of time as provided in the preceding sentence. 2. Paragraph 1.2 (entitled "Continuation of Payment to Beneficiary") of Article I is hereby amended by deleting the phrase "the sum of sixty-three thousand seven hundred twenty-five dollars ($63,725) per annum" and inserting in its place the phrase "the annual payment amount described in Paragraph 1.1." 3. Paragraph 1.3 of Article I is hereby amended to read as follows: 1.3) Limitation on Payment. Effective July 1, 1999, there is no limitation on the annual payment amount specified in Paragraph 1.1. 4. Paragraph 2.4 of Article II (entitled "EARLY RETIREMENT") is hereby amended to read as follows: 2.4) Limitation on Payment. Effective July 1, 1999, there is no limitation on the annual accrued benefit payment amount (whether determined from Column I or Column II of Schedule A or as it might otherwise be adjusted pursuant to Paragraph 2.2). 5. Paragraph 3.1 (entitled "Amount and Terms of Payment") of Article III (entitled "DEATH BENEFIT") is hereby amended by deleting the phrase "the sum of sixty-three thousand seven hundred twenty-five dollars ($63,725) per annum" and inserting in its place the phrase "an annual amount equal to 50% (fifty percent) of the Executive's base salary (as described in Paragraph 1.1) as of the December 31 immediately preceding the earlier of (a) the date of death of the Executive while in the employ of the Bank or (b) the date of the termination of service with the Bank by the Executive due to disability (as hereinafter defined),". 6. Schedule A of the Agreement is hereby deleted in its entirety and replaced by the attached Amended Schedule A, dated as of the date hereof. 7. All of terms and conditions of the Agreement remain unchanged and are hereby affirmed by the Bank and the Executive. [SIGNATURE PAGE FOLLOWS] 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Agreement as of the date first above written. NATIONAL CITY BANK OF MINNEAPOLIS By /s/ David L. Andreas ------------------------------------------------ As its President and Chief Executive Officer ATTEST: /s/ Thomas J. Freed "BANK" - ------------------------------------ Secretary /s/ Thomas J. Freed -------------------------------------------------- Printed Name: Thomas J. Freed "EXECUTIVE" 3 SCHEDULE A TO SALARY CONTRIBUTION AGREEMENT - -------------------------------------------------------------------------------- Column I - -------------------------------------------------------------------------------- Annual Accrued Benefit Payment Amount Payable at Age Sixty-five (or Death) After Early Retirement - -------------------------------------------------------------------------------- Such annual amount shall be determined by accumulating the existing Theoretical Reserve (as defined below), as of the date of termination of the Executive's employment, until the date the Executive attains age 65 at ten percent (10%) annual interest (compounded monthly). The resulting accumulated balance is then annuitized for a period of fifteen (15) years at the same annual interest rate (compounded monthly). The resulting annual accrued benefit payment amount is paid monthly for a period of fifteen (15) years, commencing at age 65. - -------------------------------------------------------------------------------- Column II - -------------------------------------------------------------------------------- Reduced Annual Accrued Benefit Payment Amount Payable Immediately Upon Early Retirement - -------------------------------------------------------------------------------- Such annual amount shall be equal to the existing Theoretical Reserve (as defined below), as of the date early payments are approved to begin to the Executive, annuitized for a period of fifteen (15) years at ten percent (10%) annual interest (compounded monthly). The resulting reduced annual accrued benefit payment is paid monthly for a period of fifteen (15) years, commencing as of the date early payments are approved to begin. - -------------------------------------------------------------------------------- DEFINITIONS "Theoretical Reserve" means the dollar amount that would be available in a reserve fund if, for each year from the original effective date of this Salary Continuation Agreement (the "Agreement"), the Bank made a Theoretical Contribution (as defined below) to the reserve fund on the Executive's behalf. "Theoretical Contribution" means, for any year during which the Agreement is in effect, is a contribution assumed to be made by the Bank and determined by using the individual level premium funding method, from the age at which the Executive was first covered by the Agreement until the Executive attains age sixty-five (65), to fund the Executive's entire anticipated benefit under the Agreement, assuming the Executive remains employed by the Bank during that period. The calculation of the Theoretical Contribution as of any date applies from the effective date of the Agreement until the Executive attains age sixty-five (65) years, based on the benefit due under Paragraph 1.1 of the Agreement, determined using the Executive's base salary as of that date. 4 EX-10.(L) 3 AMENDMENT TO SALARY CONTINUATION AGREEMENT EXHIBIT 10(l) SEVENTH AMENDMENT TO EXECUTIVE SALARY CONTINUATION AGREEMENT THIS AMENDMENT is made and entered into as of the 9th day of March, 2000, as an amendment to the Executive Salary Continuation Agreement dated June 5, 1986, (hereinafter called the "Agreement"), by and between NATIONAL CITY BANK OF MINNEAPOLIS (hereinafter called the "Bank"), and David L. Andreas (hereinafter called the "Executive"); and this Amendment supersedes the Sixth Amendment to such Agreement, dated August 2, 1999. WHEREAS, the Executive remains in the employ of the Bank; and both the Bank and the Executive desire to amend the Agreement; and WHEREAS, the Bank wishes (1) to remove the limitation on payment of benefits under the Agreement so that the benefit under the Agreement will no longer take into account the benefit provided under the Bank's cash balance pension plan; and (2) to provide that the benefit under the Agreement will be determined under a formula rather than stated as a fixed dollar amount; NOW, THEREFORE, in consideration of the services to be performed by the Executive in the future, as well as the mutual promises herein contained, the parties hereto agree to amend the Agreement as follows: 1. Paragraph 1.1 of Article I (entitled "NORMAL RETIREMENT OR DISABILITY") is hereby amended to read as follows: 1.1) Amount and Terms of Payment. For purposes of this Paragraph 1.1, the term "normal retirement date" shall mean the date on which the Executive attains sixty-five (65); the term "disability retirement date" shall mean the date on which the Executive terminates employment with the Bank due to his disability (as defined in Paragraph 1.4); and "base salary" shall include any base salary paid by the Bank, any of its subsidiaries and its parent company. In consideration of the Executive's remaining employed by the Bank until his normal retirement date or, if earlier, his disability retirement date (the "applicable date"), the Bank agrees that from and after the Executive's normal retirement date, subject to the following sentence of this Paragraph 1.1, the Bank shall thereafter pay to the Executive an annual amount equal to 50% (fifty percent) of the Executive's base salary as of the December 31st coinciding with or immediately preceding the applicable date, for a period of fifteen (15) years from and after the Executive's normal retirement date, payable in equal monthly installments commencing with the first day of the first month following the Executive's normal retirement date. However, if the Executive remains employed by the Bank after his normal retirement date, payment of the annual dollar amount that would have been payable upon his retirement at his normal retirement date shall be deferred, shall commence with the first day of the first month following the date of his actual retirement from the active service of the Bank (without any adjustment for that delay or any change in his base salary after the December 31st coinciding with or immediately preceding his normal retirement date) and shall be payable in the same manner and for the same period of time as provided in the preceding sentence. 2. Paragraph 1.2 (entitled "Continuation of Payment to Beneficiary") of Article I is hereby amended by deleting the phrase "the sum of one-hundred thirty-five thousand eight hundred twenty-eight dollars ($135,828) per annum" and inserting in its place the phrase "the annual payment amount described in Paragraph 1.1." 3. Paragraph 1.3 of Article I is hereby amended to read as follows: 1.3) Limitation on Payment. Effective July 1, 1999, there is no limitation on the annual payment amount specified in Paragraph 1.1. 4. Paragraph 2.4 of Article II (entitled "EARLY RETIREMENT") is hereby amended to read as follows: 2.4) Limitation on Payment. Effective July 1, 1999, there is no limitation on the annual accrued benefit payment amount (whether determined from Column I or Column II of Schedule A or as it might otherwise be adjusted pursuant to Paragraph 2.2). 5. Paragraph 3.1 (entitled "Amount and Terms of Payment") of Article III (entitled "DEATH BENEFIT") is hereby amended by deleting the phrase "the sum of one-hundred thirty-five thousand eight hundred twenty-eight dollars ($135,828) per annum" and inserting in its place the phrase "an annual amount equal to 50% (fifty percent) of the Executive's base salary (as described in Paragraph 1.1) as of the December 31 immediately preceding the earlier of (a) the date of death of the Executive while in the employ of the Bank or (b) the date of the termination of service with the Bank by the Executive due to disability (as hereinafter defined),". 6. Schedule A of the Agreement is hereby deleted in its entirety and replaced by the attached Amended Schedule A, dated as of the date hereof. 7. All of terms and conditions of the Agreement remain unchanged and are hereby affirmed by the Bank and the Executive. [SIGNATURE PAGE FOLLOWS] 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Agreement as of the date first above written. NATIONAL CITY BANK OF MINNEAPOLIS By /s/ David C. Malmberg ------------------------------------------------ As its: Chairman of the Board ATTEST: /s/ Thomas J. Freed "BANK" - -------------------------------- Secretary /s/ David L. Andreas -------------------------------------------------- Printed Name: David L. Andreas "EXECUTIVE" 3 SCHEDULE A TO SALARY CONTRIBUTION AGREEMENT - -------------------------------------------------------------------------------- Column I - -------------------------------------------------------------------------------- Annual Accrued Benefit Payment Amount Payable at Age Sixty-five (or Death) After Early Retirement - -------------------------------------------------------------------------------- Such annual amount shall be determined by accumulating the existing Theoretical Reserve (as defined below), as of the date of termination of the Executive's employment, until the date the Executive attains age 65 at ten percent (10%) annual interest (compounded monthly). The resulting accumulated balance is then annuitized for a period of fifteen (15) years at the same annual interest rate (compounded monthly). The resulting annual accrued benefit payment amount is paid monthly for a period of fifteen (15) years, commencing at age 65. - -------------------------------------------------------------------------------- Column II - -------------------------------------------------------------------------------- Reduced Annual Accrued Benefit Payment Amount Payable Immediately Upon Early Retirement - -------------------------------------------------------------------------------- Such annual amount shall be equal to the existing Theoretical Reserve (as defined below), as of the date early payments are approved to begin to the Executive, annuitized for a period of fifteen (15) years at ten percent (10%) annual interest (compounded monthly). The resulting reduced annual accrued benefit payment is paid monthly for a period of fifteen (15) years, commencing as of the date early payments are approved to begin. - -------------------------------------------------------------------------------- DEFINITIONS "Theoretical Reserve" means the dollar amount that would be available in a reserve fund if, for each year from the original effective date of this Salary Continuation Agreement (the "Agreement"), the Bank made a Theoretical Contribution (as defined below) to the reserve fund on the Executive's behalf. "Theoretical Contribution" means, for any year during which the Agreement is in effect, is a contribution assumed to be made by the Bank and determined by using the individual level premium funding method, from the age at which the Executive was first covered by the Agreement until the Executive attains age sixty-five (65), to fund the Executive's entire anticipated benefit under the Agreement, assuming the Executive remains employed by the Bank during that period. The calculation of the Theoretical Contribution as of any date applies from the effective date of the Agreement until the Executive attains age sixty-five (65) years, based on the benefit due under Paragraph 1.1 of the Agreement, determined using the Executive's base salary as of that date. 4 EX-11 4 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS NATIONAL CITY BANCORPORATION AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF BASIC EARNINGS PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - -------------------------------------------------------------------------------- 1999 1998 1997 Net earnings applicable to common stock $16,627 $15,664 $13,722 Weighted average common shares outstanding* 8,766,727 8,855,348 8,901,415 Basic earnings per share $1.90 $1.77 $1.54 *Adjusted for stock dividends EX-13 5 1999 ANNUAL REPORT EXHIBIT 13 NATIONAL CITY BANCORPORATION 1999 ANNUAL REPORT [GRAPHICS OMITTED] This year's annual report cover was designed by Minneapolis College of Art and Design (MCAD) senior graphic design student, Rosie Gatto. She divides her academic program time between design and professinal practice at the college's in-house design studio, MCAD DesignWorks. Rosie will gain a BFA in Graphic Design from MCAD in the spring of 2000. After graduation, Rosie hopes to secure a junior design position at a Twin Cities studio. Regarding her objectives for the concept and design of this annual report cover, says Gatto, "I worked with forms and colors established in National City Bancorporation's identity system. Colors and shapes call attention to the photograph which illustrates the importance of personalized, business to business relationships at National City Bancorporation." A program of the college's design division, MCAD DesignWorks is committed to providing professional opportunities to outstanding students of graphic design, illustration, advertising and interactive multimedia. The studio offers professional practice opportunities to students and provides creative solutions to Minnesota's non-profit and business communities. National City Bancorporation's work with DesignWorks is one of the many ways we support MCAD, an internationally recognized non-profit, accredited college of art and design. Our community benefits when businesses and community leaders support arts and education. We are all richer for these relationships. For more information about MCAD DesignWorks call Pamela Arnold, Coordinator, at (612) 874-3767, or e-mail: pamela_arnold@mn.mcad.edu. - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 - ---------------------------------------------------------------------- For the Year Net interest income $ 49,377 $ 47,552 Net earnings 16,627 15,664 Basic earnings per share 1.90 1.77 At Year End Total assets $1,140,180 $1,025,682 Loans 838,585 766,109 Deposits 614,308 517,494 Stockholders' equity 151,949 147,288 Book value per share 17.39 16.71 - -------------------------------------------------------------------------------- TABLE OF CONTENTS Report to Stockholders 2 Consolidated Financial Statements 3 Notes to Consolidated Financial Statements 7 Report of Independent Auditors 19 Management's Discussion and Analysis of Financial Condition and Results of Operation 20 Statistical Data 29 Selected Financial Data 34 Selected Ratios and Consolidated Quarterly Financial Data 35 Directors and Officers 36 NATIONAL CITY BANCORPORATION National City Bancorporation (NCBC) (the Company) is a bank holding company headquartered in Minneapolis, Minnesota. NCBC owns National City Bank of Minneapolis (the "Bank") which has three offices in metropolitan Minneapolis. NCBC also owns Diversified Business Credit, Inc. (DBCI), a commercial finance company. FORM 10-K The consolidated financial statements and related footnotes and certain other information included in this Annual Report will be incorporated by reference in the Company's Annual Report on Form 10-K to the Securities and Exchange Commission. A copy of the Form 10-K report is available free of charge upon written request to the Company, attention: David L. Andreas, President and Chief Executive Officer, National City Bancorporation, 651 Nicollet Mall, Minneapolis, Minnesota 55402-1611. STOCK TRANSFER AGENT AND REGISTRAR National City Bank of Minneapolis, Gaviidae Common, 651 Nicollet Mall, Minneapolis, Minnesota 55402-1611. ANNUAL MEETING The annual meeting of Stockholders will be held in the Company's offices on the fifth floor of Gaviidae Common, 651 Nicollet Mall, Minneapolis, Minnesota, on Wednesday, April 19, 2000, at 11:00 a.m. MARKET FOR COMMON STOCK NCBC's common stock is traded on The NASDAQ Stock Market- under the symbol NCBM. There are currently approximately 2300 registered stockholders. [PRINTED WITH SOY INK] [RECYCLED PAPER] ---------------------------------------- This annual report is printed with soy ink on recycled paper. All papers meet or exceed the current E.P.A. guidelines for recycled paper. To help our environment, please recycle this publication. ---------------------------------------- 1 - -------------------------------------------------------------------------------- REPORT TO STOCKHOLDERS To Our Stockholders: In 1999, National City Bancorporation achieved very good results, keeping with our commitment to deliver continuing, consistent and improved performance. We earned $16,627,000 for the year, six percent above the prior year's record earnings of $15,664,000. Earnings per share were $1.90, compared with $1.77 for 1998. As in 1997, earnings included a state income tax refund related to taxes paid in prior years. The refund was $1,233,000 with an after-tax effect of approximately $769,000. Without the tax refund, net earnings for 1999 would have been $15,858,000, or $1.81 per share, for the 12-month period. On a consolidated basis, net interest income growth occurred through increases in average earning assets, despite greater funding costs. Our 1999 rate spread was 3.84 percent, down from 3.92 percent in 1998. Last year, a larger percentage of bank asset funding came from brokered deposits, which will continue to be an important funding option for the bank's growth. Typically, we fund the growth of Diversified Business Credit Inc. (DBCI), our commercial finance company, through the sale of commercial paper. However during 1999, we restructured DBCI's funding by raising additional long-term debt to a total of $176 million, thereby reducing our reliance on the sale of commercial paper. For the three years leading up to the end of 1999, we dedicated substantial time and resources to preparing for the Y2K computer issue or "years digits" problem. In addition to solving the narrow issue of compliance, we addressed our greater need for system design and update to make progress on our Information Strategy Plan (ISP). As soon as the security of our operation was assured following year-end, we turned to accelerating our progress on completion of the ISP. This bank project uses many of the company resources developed during the Y2K project to design and install an integrated operating system for the company. It will allow us to operate at an even more effective level with our customers anytime, anywhere and in many ways, consistent with the fast-moving world of the Internet and browser-based delivery of services and information. The bank has experienced excellent results and customer reception with our first secured, web-delivered treasury management tool, OptiLINK, which was introduced in early 1999. This capability sets the standard for expanding our ability to serve our customers without increasing our operating expense ratios. During the fourth quarter, we addressed an issue related to restatement of prior years' accounting for the allowance for loan losses associated with DBCI. We amended our 1998 financial reports and incorporated appropriate changes in operating controls, personnel responsibilities, accounting and audit procedures, and oversight by the DBCI credit committee. Aggregate changes in the financial statements were not required, but any change in financial reporting is material, and we worked closely with our independent auditors and our examining regulators to bring about a resolution. As we enter this new millennium, we renew our focus on serving mid-sized businesses and their owners and employees. Our continuing goals are to: provide high-quality service at a reasonable cost, maintain a strong commitment to the communities in which we operate, and make a difference in the well-being of others. Through the development of innovative solutions, we will continue to be an informed and capable source for financial services. Looking ahead, we will consistently improve our operating results through effective use of technology, balanced with a high level of personal service, to solve our customers' challenges. Sincerely, /s/ David C. Malmberg /s/ David L. Andreas David C. Malmberg David L. Andreas Chairman of the Board President and Chief Executive Officer 2 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------- (IN THOUSANDS EXCEPT NUMBER OF SHARES) 1999 1998 - ------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 36,997 $ 52,271 Federal funds sold and resale agreements 55,655 6,100 Available-for-sale securities 135,340 133,897 Held-to-maturity securities (market value: 1999 - $45,297 and 1998 - $41,569) 46,572 41,255 Loans 838,585 766,109 Less allowance for loan losses (13,883) (13,785) ---------- ---------- 824,702 752,324 Bank premises and equipment 8,921 10,399 Accrued interest receivable 7,600 7,499 Customer acceptance liability 1,424 824 Other assets 22,969 21,113 ---------- ---------- $1,140,180 $1,025,682 ========== ========== - ------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 166,039 $ 165,598 Interest bearing 448,269 351,896 ---------- ---------- 614,308 517,494 Federal funds purchased and repurchase agreements 89,950 98,702 Commercial paper 38,777 99,396 Other short-term borrowed funds 45,053 12,663 Acceptances outstanding 1,424 824 Other liabilities 22,719 10,315 Long-term debt 176,000 139,000 ---------- ---------- Total liabilities 988,231 878,394 Stockholders' equity: Common stock, par value $1.25, authorized 40,000,000 shares Issued: 1999 - 8,861,944 shares; 1998 - 8,861,944 shares 11,077 11,077 Additional paid-in capital 121,982 121,982 Unrealized gains (losses) net of tax effect (1,883) 913 Retained earnings 23,735 14,470 ---------- ---------- 154,911 148,442 Less common stock in treasury at cost: 1999 - 125,222 shares; 1998 - 45,030 shares (2,962) (1,154) ---------- ---------- Total stockholders' equity 151,949 147,288 ---------- ---------- $1,140,180 $1,025,682 ========== ==========
See Notes To Consolidated Financial Statements 3 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, -------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 1997 - ------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 76,779 $ 73,040 $ 66,910 Interest on federal funds sold and resale agreements 691 1,092 1,450 Interest and dividends on securities: Taxable 10,664 11,443 11,440 Exempt from federal income taxes 262 ---------- ---------- ---------- 10,926 11,443 11,440 ---------- ---------- ---------- Total interest income 88,396 85,575 79,800 - ------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 17,043 16,393 16,281 Interest on short-term borrowed funds 12,325 15,275 15,069 Interest on long-term debt 9,651 6,355 3,941 ---------- ---------- ---------- Total interest expense 39,019 38,023 35,291 ---------- ---------- ---------- Net interest income 49,377 47,552 44,509 Provision for loan losses 3,480 2,890 4,819 ---------- ---------- ---------- Net interest income after provision for loan losses 45,897 44,662 39,690 - ------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Service charges on deposit accounts 2,433 2,145 2,195 Fees for other customer services 1,775 1,635 1,698 Trust fees 4,512 4,641 4,801 State income tax refund 1,233 1,369 Other income 744 821 1,327 ---------- ---------- ---------- 10,697 9,242 11,390 - ------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits 16,379 15,238 15,110 Net occupancy expense of bank premises 3,308 3,062 3,194 Equipment rentals, depreciation and maintenance 3,531 3,512 3,648 Other expense 5,873 6,237 6,313 ---------- ---------- ---------- 29,091 28,049 28,265 ---------- ---------- ---------- Earnings before income taxes 27,503 25,855 22,815 Income taxes 10,876 10,191 9,093 ---------- ---------- ---------- Net earnings $ 16,627 $ 15,664 $ 13,722 ========== ========== ========== - ------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE $ 1.90 $ 1.77 $ 1.54 ========== ========== ========== Average common and common equivalent shares outstanding 8,766,727 8,855,348 8,901,415
See Notes To Consolidated Financial Statements 4 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TREASURY STOCK ---------------------- ADDITIONAL UNREALIZED ------------------ NUMBER PAID-IN RETAINED GAINS NUMBER (IN THOUSANDS EXCEPT NUMBER OF SHARES) OF SHARES AMOUNT CAPITAL EARNINGS (LOSSES) OF SHARES AMOUNT TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1997 7,374,520 $ 9,218 $79,199 $ 31,243 $ (405) 16 $119,255 Net earnings for the year 13,722 13,722 Ten percent stock dividend 736,374 921 15,558 (16,500) (21) Unrealized securities gains net of tax effect 829 829 Cancellation of treasury stock (58) (1) (1) (58) $ 1 (1) Purchase of treasury stock 33,595 (857) (857) --------- ------- -------- --------- --------- ------- -------- -------- Balance at December 31, 1997 8,110,836 10,139 94,756 28,464 424 33,553 (856) 132,927 Net earnings for the year 15,664 15,664 Ten percent stock dividend 804,574 1,005 27,961 (29,006) (40) Unrealized securities gains net of tax effect 489 489 Cancellation of treasury stock (53,466) (67) (735) (652) (53,466) 1,454 Purchase of treasury stock 64,943 (1,752) (1,752) --------- ------- -------- --------- --------- ------- -------- -------- Balance at December 31, 1998 8,861,944 11,077 121,982 14,470 913 45,030 (1,154) 147,288 Net earnings for the year 16,627 16,627 Cash dividend (7,362) (7,362) Unrealized securities (losses) net of tax effect (2,796) (2,796) Purchase of treasury stock 80,192 (1,808) (1,808) --------- ------- -------- --------- --------- ------- -------- -------- Balance at December 31, 1999 8,861,944 $11,077 $121,982 $ 23,735 $ (1,883) 125,222 $ (2,962) $151,949 ========= ======= ======== ========= ========= ======= ======== ========
- ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, ------------------------------------ (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------- Total interest income $88,396 $85,575 $79,800 Total interest expense 39,019 38,023 35,291 ------- ------- ------- Net interest income 49,377 47,552 44,509 Provision for loan losses 3,480 2,890 4,819 ------- ------- ------- Net interest income after provision for loan losses 45,897 44,662 39,690 ------- ------- ------- Total non-interest income 10,697 9,242 11,390 Total non-interest expense 29,091 28,049 28,265 ------- ------- ------- Earnings from operations before taxes 27,503 25,855 22,815 Applicable income taxes 10,876 10,191 9,093 ------- ------- ------- Net earnings 16,627 15,664 13,722 Other comprehensive income, before tax: Unrealized gain (loss) on investments in securities (4,697) 821 1,393 Applicable income tax (1,901) 332 564 ------- ------- ------- Other comprehensive income, net of tax (2,796) 489 829 ------- ------- ------- Comprehensive income $13,831 $16,153 $14,551 ======= ======= =======
See Notes to Consolidated Financial Statements 5 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------------- (IN THOUSANDS) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 16,627 $ 15,664 $ 13,722 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 2,757 2,927 3,245 Amortization of securities premiums and discounts 283 579 469 Provision for loan losses 3,480 2,890 4,819 (Increase) in accrued interest receivable (101) (239) (954) (Increase) decrease in other assets (1,856) 3,268 (4,936) Increase in other liabilities 12,404 1,229 1,421 Other decrease (increase) 1,842 (651) (194) ---------- --------- --------- Total operating adjustments 18,809 10,003 3,870 ---------- --------- --------- Net cash provided by operating activities 35,436 25,667 17,592 Cash flows from investing activities: Net (increase) in loans (75,858) (98,903) (71,321) Net (increase) decrease in federal funds sold (49,555) (2,360) 56,380 Available-for-sale securities: Proceeds from maturities and principal repayments 37,619 64,810 27,274 Purchases of securities (44,006) (57,114) (34,476) Held-to-maturity securities: Proceeds from maturities and principal repayments 12,102 17,865 9,233 Purchases of securities (17,396) (21,743) (15,139) Purchase of premises and equipment (1,279) (1,913) (2,436) ---------- --------- --------- Net cash (used in) investing activities (138,373) (99,358) (30,485) ---------- --------- --------- Cash flows from financing activities: Net (decrease) increase in non-interest bearing and savings deposits (4,352) 31,333 2,151 Net increase (decrease) in time deposits 101,166 7,511 (43,132) Net (decrease) increase in federal funds purchased and repurchase agreements (8,752) (5,697) 7,759 Net (decrease) increase in commercial paper (60,619) (19,685) 20,974 Net increase (decrease) in other short-term borrowed funds 32,390 (10,555) 11,852 Net increase in long-term debt 37,000 72,000 19,080 Purchase of treasury stock (1,808) (1,752) (856) Payment for fractional shares on stock dividends (40) (22) Cash dividends paid (7,362) ---------- --------- --------- Net cash provided by financing activities 87,663 73,115 17,806 ---------- --------- --------- Net increase (decrease) in cash and due from banks (15,274) (576) 4,913 Cash and due from banks at beginning of year 52,271 52,847 47,934 ---------- --------- --------- Cash and due from banks at end of year $ 36,997 $ 52,271 $ 52,847 ========== ========= ========= Supplemental disclosures Cash paid during the year for: Interest $ 37,210 $ 36,306 $ 35,194 Income taxes 10,655 10,618 10,076
See Notes to Consolidated Financial Statements 6 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS -- The Company's principal business is a bank holding company for National City Bank of Minneapolis which is a full service national bank offering a variety of loans, deposit programs, trust and related banking services. The Company's principal non-bank subsidiary is Diversified Business Credit, Inc., a commercial finance company. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of the Company and its subsidiaries, after elimination of all material intercompany transactions and balances. RISKS AND UNCERTAINTIES -- The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual experience could differ from those estimates. SECURITIES -- Securities which the Company has the positive intent and ability to hold to maturity are reported as held-to-maturity securities. Securities in this category are stated at cost, adjusted for amortization of premiums and accretion of discounts over their remaining lives. Securities not classified as held-to-maturity securities are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity and comprehensive income. Realized gains and losses on disposition of securities and declines in value judged to be other than temporary are computed on a specific identification method, and included in earnings. LOANS -- Most of the Company's loans are to customers within Minnesota. Interest income on loans is accrued on the basis of unpaid principal. Loan and commitment fees are generally deferred and recognized over the loan and commitment period as a yield adjustment. Loans are generally placed on non-accrual status when the collection of interest or principal has become 90 days past due or collection is otherwise considered doubtful. When a loan is placed on non-accrual status, interest previously accrued and unpaid in the current year is reversed against current period interest income. Interest payments received on non-accrual loans are generally applied against principal unless the loan is well secured or in the process of collection. ALLOWANCE FOR LOAN LOSSES -- The provision for loan losses is based on management's continuing evaluation of the loan portfolio, including estimates and appraisals of collateral values, and current economic conditions. Changes in the estimates, appraisals and evaluations might be required quickly in the event of changing economic conditions and the economic prospects of borrowers. The Company allocates the allowance for loan losses by identifying specific loans that have a possibility of loss or are impaired, and by applying a historical loss experience. The entire balance of the allowance is available to absorb losses on loans that become uncollectible. BANK PREMISES AND EQUIPMENT -- Bank premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line or double declining balance basis over the estimated useful life of the asset or lease term. TREASURY STOCK -- The Company's board of directors has authorized the repurchase of shares from stockholders who have 99 or fewer shares. The board also authorized the repurchase of larger blocks of stock, from time to time. INCOME TAXES -- Deferred income taxes are provided on all significant temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements at currently enacted tax rates. INTEREST RATE SWAPS -- The Company enters into interest rate swap transactions as a tool to manage its interest rate risk. Income or expense on swaps designated as hedges of assets or liabilities is recorded as an adjustment to interest income or expense. If the hedged instrument is terminated prior to maturity, the swap agreement is marked to market with any resulting gain or loss included in the gain or loss from the disposition. If the interest rate swap is terminated, the gain or loss is deferred and amortized over the remaining life of the specific asset or liability it was designated to hedge. 7 - -------------------------------------------------------------------------------- NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PER SHARE CALCULATION -- Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Average common shares outstanding are retroactively adjusted to reflect the impact of stock dividends. NEW ACCOUNTING PRONOUNCEMENT -- The Financial Accounting Standards Board issued in June, 1998 SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". As amended by SFAS No. 137, SFAS No. 133 is effective for years beginning after June 15, 2000. SFAS No. 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The Company expects to adopt SFAS 133 for the year ending December 31, 2001 and is in the process of assessing its impact on the financial statements. - -------------------------------------------------------------------------------- NOTE B. ESTIMATED FAIR VALUE The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" DECEMBER 31, 1999 ------------------------ CARRYING ESTIMATED (IN THOUSANDS) AMOUNT FAIR VALUE - ------------------------------------------------------------- ASSETS: Cash and due from banks $36,997 $36,997 Federal funds sold and resale agreements 55,655 55,655 Available-for-sale securities 135,340 135,340 Held-to-maturity securities 46,572 45,297 Loans-net of allowance for loan losses 824,702 823,175 LIABILITIES: Deposits 614,308 613,415 Federal funds purchased and repurchase agreements 89,950 89,935 Commercial paper and other short-term funds 83,830 83,770 Long-term debt 176,000 173,564 OFF-BALANCE SHEET UNREALIZED GAINS: Interest rate swap agreements (2,873) DECEMBER 31, 1998 ------------------------ CARRYING ESTIMATED (IN THOUSANDS) AMOUNT FAIR VALUE - ------------------------------------ ---------- ----------- ASSETS: Cash and due from banks $52,271 $52,271 Federal funds sold and resale agreements 6,100 6,100 Available-for-sale securities 133,897 133,897 Held-to-maturity securities 41,255 41,569 Loans-net of allowance for loan losses 752,324 756,573 LIABILITIES: Deposits 517,494 518,331 Federal funds purchased and repurchase agreements 98,702 98,702 Commercial paper and other short-term funds 112,059 112,495 Long-term debt 139,000 144,581 OFF-BALANCE SHEET UNREALIZED GAINS: Interest rate swap agreements 5,071 The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgement is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. CASH AND DUE FROM BANKS -- The carrying value of cash and due from banks approximates estimated fair value. FEDERAL FUNDS SOLD, RESALE AGREEMENTS, FEDERAL FUNDS PURCHASED, AND REPURCHASE AGREEMENTS -- The carrying value of these instruments approximates estimated fair value. SECURITIES -- Estimated fair values of securities are based primarily on quoted market prices or dealer quotes. If quoted market price is not available, fair value is estimated using quoted market prices for securities with similar characteristics. LOANS -- Approximately 80% of the loans outstanding have variable rate pricing. Management segregates all loans into appropriate risk categories. For that portion of the portfolio for which there are no known credit concerns, management believes that the risk factor embedded in the pricing of loans results in a fair valuation of such loans at their carrying value. For that portion of the portfolio with an element of credit concern, the level of credit adjustment required in the marketplace approximates the valuation allowance for loan losses. 8 - -------------------------------------------------------------------------------- NOTE B. ESTIMATED FAIR VALUE (CONTINUED) DEPOSITS -- The fair value of non-interest bearing deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered in the marketplace for deposits of similar remaining maturities. COMMERCIAL PAPER AND OTHER BORROWED FUNDS -- These short term borrowings generally mature in less than 90 days and carrying value is a reasonable estimate of fair value. LONG-TERM DEBT -- The fair value of long-term debt is estimated using the rates currently available on debt with similar terms and similar remaining maturities. INTEREST RATE SWAP AGREEMENTS -- The fair value is the estimated amount that the Company would receive or pay to execute a new agreement with terms identical to those remaining on the current agreement, considering current interest rates. - -------------------------------------------------------------------------------- NOTE C. LOANS The following loans were outstanding: DECEMBER 31, ------------------------- (IN THOUSANDS) 1999 1998 - --------------------------------------------------------- Commercial & Industrial $570,879 $520,672 Real estate: Construction 31,967 24,196 Residential mortgage 42,096 40,074 Non-residential mortgage 111,794 92,769 Loans to individuals for personal expenditures 42,704 46,800 Other 39,145 41,598 -------- -------- $838,585 $766,109 ======== ======== At December 31, 1999 and 1998, receivables from and standby letters of credit issued on behalf of commercial real estate developers and investors were approximately $131 million and $95 million, respectively. The credit risk associated with these loans is subject to changes in real estate market values. The properties held as collateral are primarily in the state of Minnesota. The Company's non-bank subsidiary engages in asset-based lending and originates loans which are dependent on the value of the borrower's underlying collateral. Collateral typically includes accounts receivable, inventory and equipment. The total receivables from collaterally dependent loans was $298 million and $305 million at December 31, 1999 and 1998, respectively, secured by collateral against which the non-bank subsidiary has made advances pursuant to its loan agreements with an estimated fair value of $366 million and $369 million, respectively. An analysis of the allowance for loan losses is presented below: YEAR ENDED DECEMBER 31, ------------------------------------ (IN THOUSANDS) 1999 1998 1997 - ----------------------------------------------------------------- Balance at beginning of period $13,785 $14,283 $10,111 Provision charged to operating expense 3,480 2,890 4,819 Charge-offs (3,560) (3,444) (1,179) Recoveries 178 56 532 ------- ------- ------- Balance at end of period $13,883 $13,785 $14,283 ======= ======= ======= In the opinion of management, the allowance for loan losses is adequate to provide for known and estimated exposures in the loan portfolio at each of the respective balance sheet dates. At December 31, 1999, the Company had five impaired commercial loans under SFAS No. 114 totaling $15,714,000 compared with seven loans totaling $16,736,000 at December 31, 1998. Management has allocated $4,450,000 and $7,027,000 for 1999 and 1998, respectively, of the Allowance for Loan Losses to these loans. Impaired loans averaged $10,621,000 and $15,147,000 during 1999 and 1998, respectively. Interest payments received on non-accrual impaired loans are generally applied against principal unless the loan is well secured or in the process of collection. Non-accrual, impaired, renegotiated and loans past due 90 days or more were $16,257,000 and $17,671,000 at December 31, 1999 and 1998, respectively. Gross interest income would have been increased by approximately $803,000, $636,000, and $95,000 for the years ended December 31, 1999, 1998 and 1997, respectively, had such loans been current and in accordance with original terms. Interest income recognized on impaired accruing loans was approximately $606,000, $1,273,000, and $470,000 at December 31, 1999, 1998, and 1997, respectively. Nonperforming status is not necessarily an indication of probable loss. Loans carried at $85,352,000 were pledged at December 31, 1999 to secure borrowings in the form of Federal Home Loan Bank and Federal Reserve Bank advances. No loans were pledged at December 31, 1998. Loans to principal officers and directors of the Company and its subsidiaries aggregated approximately $5,653,000, $8,266,000, and $8,552,000 at December 31, 1999, 1998, and 1997, respectively. New loans and repayments during 1999 were $5,308,000 and $7,921,000, respectively. In the opinion of management, all such loans are made at normal interest rates and terms. 9 - -------------------------------------------------------------------------------- NOTE D. BANK PREMISES AND EQUIPMENT DECEMBER 31, --------------------- (IN THOUSANDS) 1999 1998 - --------------------------------------------------- Assets, at cost: Land $ 183 $ 183 Buildings 1,296 1,229 Leasehold improvements 2,667 2,622 Equipment 18,110 17,280 ------ ------- 22,256 21,314 Accumulated depreciation: Buildings 648 585 Leasehold improvements 1,298 1,060 Equipment 11,389 9,270 ------ ------- 13,335 10,915 ------ ------- $8,921 $10,399 ====== ======= - -------------------------------------------------------------------------------- NOTE E. DEPOSITS Approximately $187,037,000 and $112,897,000 of interest bearing time deposits were in denominations of $100,000 or more at December 31, 1999 and 1998, respectively. The scheduled maturities of time deposits at December 31, 1999 are summarized as follows: LESS THAN $100,000 (IN THOUSANDS) $100,000 OR MORE - ---------------------------------------------- 3 months or less $ 26,601 $ 58,769 3 - 6 months 17,546 42,807 6 - 12 months 26,304 62,989 1 - 2 years 31,989 20,235 2 - 3 years 9,867 1,415 3 - 5 years 3,786 822 over 5 years 77 -------- -------- $116,170 $187,037 ======== ======== - -------------------------------------------------------------------------------- NOTE F. SHORT-TERM BORROWINGS Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, treasury tax and loan deposits, Federal Home Loan Bank advances and commercial paper. Federal funds purchased generally mature the day following the date of purchase, while securities sold under agreements to repurchase generally mature within 30 days from the various dates of sale. The Company had unsecured lines of credit available in the amount of $140,000,000 at December 31, 1999, 1998 and 1997. There were no borrowings under the lines on these dates. The lines contain covenants, which require the Company to maintain certain levels of capitalization and maintain debt to capitalization ratios within prescribed limits. The following information relates to aggregate short-term borrowings: DECEMBER 31, --------------------------------------------- (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------ Maximum amount out- standing at any month end: Federal funds & repurchase $133,181 $163,128 $156,104 Commercial paper 117,584 138,323 137,714 Other 104,576 27,388 26,332 Daily average amount outstanding: Federal funds & repurchase 123,714 145,095 133,366 Commercial paper 75,035 115,197 118,154 Other 34,827 17,488 17,047 Weighted average interest rate for full year: Federal funds & repurchase 4.53% 4.91% 4.99% Commercial paper 5.53% 6.01% 6.04% Other 6.08% 5.40% 5.82% Outstanding at year-end: Federal funds & repurchase 89,950 98,702 104,399 Commercial paper 38,777 99,396 119,081 Other 45,053 12,663 23,218 Weighted average interest rate on debt outstanding as of December 31: Federal funds & repurchase 3.96% 4.03% 5.43% Commercial paper 6.06% 5.75% 5.92% Other 5.45% 5.11% 5.33% - -------------------------------------------------------------------------------- NOTE G. LONG-TERM DEBT DECEMBER 31, ------------------------ (IN THOUSANDS) 1999 1998 - ------------------------------------------------------ Diversified Business Credit, Inc. Senior Notes Series A, 8.18%, due 1999 $ 23,000 Series B, 8.45%, due 2001 $ 24,000 24,000 Series C, 7.84%, due 2007 10,000 10,000 Series D, 7.15%, due 2004 5,000 5,000 Series E, 7.22%, due 2007 5,000 5,000 Series F, 6.68%, due 2003 51,000 51,000 Series G, 6.79%, due 2005 11,000 11,000 Series H, 8.36%, due 2004 70,000 Federal Home Loan Bank Advance, 5.81%, due 2000 10,000 -------- -------- Total $176,000 $139,000 ======== ======== The Company has entered into interest rate swap agreements to effectively convert the Senior Notes to floating rate instruments. At December 31, 1999, the weighted average effective interest rate for the Senior Notes Series B, including the effects of the related swap agreements is the one month LIBOR rate plus 104 basis points, or 6.86%. The weighted average effective interest rate for the Senior Notes Series C, D, E, F, G, and H including the effects of the related swap agreements, is the three month LIBOR rate plus 119 basis points or 7.19%. 10 - -------------------------------------------------------------------------------- NOTE G. LONG-TERM DEBT (CONTINUED) The Senior Notes are unsecured and are unconditionally guaranteed by the parent company. The Senior Notes include covenants which require Diversified Business Credit, Inc. and the parent company to maintain certain levels of capitalization and maintain debt to capitalization ratios within prescribed limits. - -------------------------------------------------------------------------------- NOTE H. INCOME TAXES The components of income tax expense were: (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------- Current: Federal $ 8,942 7,860 8,383 State 2,223 2,013 2,079 ------- ----- ----- 11,165 9,873 10,462 Deferred: Federal (219) 239 (1,027) State (70) 79 (342) ------- ----- ------ (289) 318 (1,369) ------- ----- ------ $10,876 10,191 $9,093 ======= ====== ====== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: DECEMBER 31, --------------------- (IN THOUSANDS) 1999 1998 - ------------------------------------------------------------ Deferred tax assets: Loan loss reserve $5,618 $5,579 Salary continuation plan 1,075 994 Loan fees 21 Nondeductible expenses 25 20 Unrealized losses on securities 1,280 ------ ------ Total deferred tax assets 7,998 6,614 Deferred tax liabilities: Retirement plan 1,334 1,256 Prepaid expenses 131 111 Tax over book depreciation 432 482 Security discounts 25 14 Unrealized gains on securities 620 ------ ------ Total deferred tax liabilities 1,922 2,483 ------ ------ Net deferred tax assets $6,076 $4,131 ====== ====== It is more likely than not that the Company will realize the benefit of the deferred tax assets. Therefore, no valuation allowance has been recorded for any of the periods reported. The total effective tax rate for the years ended December 31, 1999, 1998 and 1997 is different than the federal income tax rate. The reasons for the differences are as follows: 1999 1998 1997 ---------- ---------- ---------- Federal income tax rate 35.0% 35.0% 35.0% Tax exempt income (0.3) (0.2) (0.1) State income taxes, net of federal income tax benefit 5.1 5.2 5.1 Cash value of life insurance (0.5) (0.5) (0.6) Other items (0.1) (0.1) ---- ---- ---- Effective rate 39.2% 39.4% 39.4% ==== ==== ==== - -------------------------------------------------------------------------------- NOTE I. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding in connection with standby letters of credit aggregating approximately $21,765,000 and $21,714,000 at December 31, 1999 and 1998, respectively. Commercial letters of credit were $2,587,000 and $2,980,000 at December 31, 1999 and 1998, respectively. Acquired standby letters of credit were $8,233,000 at December 31, 1999 and $11,419,000 at December 31, 1998. National City Bank has entered into a ten year lease which commenced March 16, 1996, for its headquarters in downtown Minneapolis. The annual cost for the first five years will be approximately $1.7 million per year and for the last five years will be approximately $1.8 million per year. The lease provides an option to extend the term for two consecutive five-year periods at the then current fair market rents. The Bank will have the right to terminate the lease or give back substantial portions of the leased premises on the sixth anniversary of the lease term. In addition, the Bank paid for all of its leasehold improvements, which approximated $2.0 million. Diversified Business Credit, Inc. has entered into a five year lease which commenced September 1, 1997, for its headquarters in downtown Minneapolis. The annual cost for the five years will be approximately $240,000. The lease provides an option to extend the term for two consecutive five-year periods at the then current fair market rents. 11 - -------------------------------------------------------------------------------- NOTE I. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company was obligated under operating leases for premises and equipment with terms of one year or more at December 31, 1999. The aggregate lease commitments outstanding as of December 31, 1999 were $14,158,000 and for the next five years are payable as follows: (IN THOUSANDS) - ------------------------- 2000 $2,469 2001 2,437 2002 2,342 2003 2,136 2004 2,136 Net rental expense on premises for the years ended December 31, 1999, 1998, and 1997, was $2,534,000, $2,332,000, and $2,478,000, respectively. Dividends declared by national banks that exceed retained net earnings for the current year plus the preceding two years must be approved by the Comptroller of the Currency. Under this formula, approximately $10,668,000 of dividends may be paid by the Company's bank subsidiary at December 31, 1999, without such approval, subject to continued maintenance of regulatory capital requirements. The Company is party to various legal proceedings incidental to its business. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, the resulting liability, if any, arising from these actions will not be material. - -------------------------------------------------------------------------------- NOTE J. RESTRICTIONS ON CASH BALANCES Federal Reserve Board regulations require that the Bank maintain certain minimum reserve balances on deposit with the Federal Reserve Bank. Cash balances maintained to meet reserve requirements are not available for use by the Company. During 1999, approximately $3,208,000 was maintained in required reserves on a daily average basis. - -------------------------------------------------------------------------------- NOTE K. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to certain financial instruments with off-balance-sheet risk which are entered in the normal course of business to meet the financing needs of its customers and to manage the Company's exposure to fluctuations in interest rates. These financial instruments include unfunded commitments to extend credit and interest rate swaps. These instruments involve, to varying degrees, amounts of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or "notional" amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Company's contractual or notional amounts for off-balance-sheet activities at December 31, 1999 and 1998, is as follows: (IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------- Credit activities: Commitments to extend credit $358,191 $315,391 Standby letters of credit 21,765 21,714 Commercial letters of credit 2,587 2,980 Acquired standby letters of credit 8,233 11,419 Other financial instrument activities: Interest rate swap agreements $176,000 $129,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral, obtained if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include cash, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. 12 - -------------------------------------------------------------------------------- NOTE K. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED) Standby letters of credit are conditional commitments issued by the Company to assure the performance of a customer to a third-party. Those standby letters of credit are primarily issued to support customers' international business transactions, and public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most standby letters of credit expire within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary. In most cases where collateral is held, coverage is 100%. Interest rate swaps involve the contractual exchange of fixed and floating rate interest payment obligations based on a notional principal amount. The Company enters into interest rate swap contracts to hedge its balance sheet for risk caused by fluctuations in interest rates. The risks associated with such swaps are the exposure to movement in interest rates (market risk) and the ability of counterparties to meet the terms of the contract (credit risk). The use of swaps for interest rate risk management purposes is integrated into the Company's overall asset/liability management process. For interest rate swap transactions, the contract or notional amounts do not represent exposure to credit loss. The Company estimates the credit risk for interest rate swap contracts by calculating the cost to replace all outstanding contracts in a gain position at current market rates. These contracts had a loss position of $2.9 million at December 31, 1999, and a gain position of $5.1 million at December 31, 1998. If the counterparties failed to perform according to the terms of the contracts, the Company could incur a loss in the amount of its current gain position. The Company controls the credit risk associated with swap agreements through credit approvals and monitoring procedures. Under the terms of certain swaps, each party may be required to pledge certain assets if the market value of the swap exceeds an amount set forth in the swap agreement or in the event of a change in their credit rating. At December 31, 1999 and 1998, interest rate swaps totaling $176 million and $129 million, respectively, hedged long-term debt. The Company is a receiver of fixed rate interest and a payer of floating rate interest based on the one month LIBOR rate on $24 million of these swaps and the three month LIBOR on $152 million. The notional balances and yields by maturity date for interest rate swaps at December 31, 1999, are as follows: WEIGHTED WEIGHTED NOTIONAL AVERAGE AVERAGE AMOUNT INTEREST RATE INTEREST RATE MATURITY DATE (IN THOUSANDS) RECEIVED PAID - --------------------------------------------------------------------- 2001 24,000 7.41% 5.38% 2003 51,000 5.89% 5.40% 2004 75,000 6.68% 5.67% 2005 11,000 5.93% 5.40% 2007 15,000 6.84% 5.40% -------- Total $176,000 6.52% 5.51% Swaps contributed to the Company's net interest income by reducing interest expense for the years ended December 31, 1999, 1998 and 1997, by $1,593,000, $971,000 and $995,000, respectively. 13 - -------------------------------------------------------------------------------- NOTE L. EMPLOYEE BENEFIT PLANS The Company has a defined benefit pension plan covering substantially all of its full-time employees. The benefits are based on years of service and the employee's compensation while employed with the Company. The Company's funding policy is to contribute annually current service costs accrued and past service costs amortized over a 30-year period. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Plan assets consist principally of equity securities and U.S. Government and corporate bonds. The following table sets forth the plan's funded status and amounts recognized in the Company's financial statements:
DECEMBER 31, --------------------------------------- (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Projected benefit obligation: Balance at beginning of period $ 12,033 $10,541 $ 9,457 Service cost 394 379 316 Interest cost 820 745 718 Actuarial (gain) or loss (1,128) (7) 758 Benefits paid during period (1,103) (523) (531) -------- ------- ------- Projected benefit obligation at end of period 11,016 11,135 10,718 Plan assets at fair value: Balance at beginning of period 15,692 14,579 13,204 Actual return on plan assets during period 1,806 1,635 1,906 Benefits paid during period (1,103) (523) (531) -------- ------- ------- Fair value of plan assets at end of period 16,395 15,691 14,579 -------- ------- ------- Plan assets in excess of projected benefit obligation 5,379 4,556 3,861 Unrecognized prior service cost 149 (98) (107) Unrecognized net loss or (gain) (1,902) (961) (431) Unrecognized transition asset (200) (261) (323) -------- ------- ------- Prepaid pension cost at end of period $ 3,426 $ 3,236 $ 3,000 ======== ======= ======= Prepaid pension cost at beginning of period $ 3,236 $ 3,000 $ 2,793 Pension cost (credit) for the period (190) (236) (207) -------- ------- ------- Prepaid pension cost at end of period $ 3,426 $ 3,236 $ 3,000 ======== ======= =======
For 1999, the discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.75% and 4.5%, respectively. For 1998, the rates were 7.5% and 4.5%. For 1997, the rates were 7.0% and 4.5%. The expected long-term rate of return on assets was 9.0% for all three years. The Company maintains a retirement savings 401(k) plan. All employees of the Company and its subsidiaries are eligible to participate in the plan after completing twelve months of service during which they have worked at least one thousand hours. Matching contributions are made at the discretion of management. Company contributions charged to operations for the years ended December 31, 1999, 1998 and 1997, were $278,000, $276,000, and $271,000, respectively. The Company and its subsidiaries have entered into agreements to provide salary continuation supplemental payments at retirement to certain officers. The benefits due under these agreements are being accrued currently. 14 - -------------------------------------------------------------------------------- NOTE M. PARENT ONLY INFORMATION The following financial information relates to National City Bancorporation (parent only) operations: BALANCE SHEETS DECEMBER 31, ------------------------- (IN THOUSANDS) 1999 1998 - -------------------------------------------------------------------------- ASSETS Cash $ 7,290 $ 4,396 Investment in bank subsidiary 62,766 64,371 Investment in non-bank subsidiary 40,413 34,256 Subordinated note receivable from affiliate 8,000 8,000 Other investments 173 183 Due from affiliates 71,800 135,200 Other assets 392 355 -------- -------- $190,834 $246,761 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper $ 38,777 $ 99,396 Other liabilities 108 77 Stockholders' equity 151,949 147,288 -------- -------- $190,834 $246,761 ======== ======== STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, --------------------------------- (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------- INCOME Dividends from bank subsidiary $ 7,800 $ 3,000 $ 3,000 Interest income 8,776 10,321 9,879 Other income 162 80 239 ------- ------- ------- 16,738 13,401 13,118 EXPENSES Interest expense 5,555 7,290 7,507 Other expenses 762 738 621 ------- ------- ------- 6,317 8,028 8,128 ------- ------- ------- Earnings before taxes 10,421 5,373 4,990 Income taxes 1,166 967 817 ------- ------- ------- 9,255 4,406 4,173 Equity in undistributed net earnings of subsidiaries 7,372 11,258 9,549 ------- ------- ------- Net earnings $16,627 $15,664 $13,722 ======= ======= =======
15 - -------------------------------------------------------------------------------- NOTE M. PARENT ONLY INFORMATION (CONTINUED) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------- (IN THOUSANDS) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 16,627 $ 15,664 $ 13,722 Adjustments to reconcile net earnings to net cash from operating activities: Equity in undistributed earnings of subsidiaries (7,372) (11,258) (9,549) (Increase) decrease in other assets (3) 198 726 Increase (decrease) in other liabilities 31 (92) 112 -------- --------- --------- (7,344) (11,152) (8,711) -------- --------- --------- Net cash provided by operating activities 9,283 4,512 5,011 Cash flows from investing activities: Payments from (advances to) affiliates 63,400 5,450 (13,300) -------- --------- --------- Net cash provided by (used for) investing activities 63,400 5,450 (13,300) Cash flows from financing activities: Net (decrease) increase in commercial paper (60,619) (19,685) 20,974 Payment for fractional shares on stock dividends (40) (22) Cash dividends paid (7,362) Purchase of treasury stock (1,808) (1,752) (856) -------- --------- --------- Net cash (used in) provided by financing activities (69,789) (21,477) 20,096 -------- --------- --------- Net increase (decrease) in cash 2,894 (11,515) 11,807 Cash at beginning of year 4,396 15,911 4,104 -------- --------- --------- Cash at end of year $ 7,290 $ 4,396 $ 15,911 ======== ========= ========= Supplemental disclosures Cash paid during the year for: Interest $ 5,555 $ 7,290 $ 7,504 Income taxes 1,176 1,058 660
- -------------------------------------------------------------------------------- NOTE N. SECURITIES Securities consist of the following:
DECEMBER 31, 1999 -------------------------------------------------------- COST OR APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET (IN THOUSANDS) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $ 4,983 $ 25 $ 4,958 U.S. Government agencies 21,944 307 21,637 Federal agency mortgage-backed 98,006 $ 68 2,153 95,921 Securities of states and political subdivisions 9,935 746 9,189 Other securities 3,635 3,635 -------- ---- ------ -------- $138,503 $ 68 $3,231 $135,340 ======== ==== ====== ======== Held-to-maturity Collateralized mortgage obligations $ 46,572 $ 21 $1,296 $ 45,297 ======== ==== ====== ========
16 - -------------------------------------------------------------------------------- NOTE N. SECURITIES (CONTINUED)
DECEMBER 31, 1998 -------------------------------------------------------- COST OR APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET (IN THOUSANDS) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $ 4,969 $ 108 $ 5,077 U.S. Government agencies 17,057 84 $52 17,089 Federal agency mortgage-backed 107,537 1,436 43 108,930 Other securities 2,801 2,801 -------- ------ --- -------- $132,364 $1,628 $95 $133,897 ======== ====== === ======== Held-to-maturity Collateralized mortgage obligations $ 41,255 $ 314 $ 41,569 ======== ====== ========
Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. CONTRACTUAL MATURITIES AND MARKET VALUE
DECEMBER 31, 1999 ------------------------------------------------------------------------------------- AFTER ONE AFTER FIVE WITHIN BUT WITHIN BUT WITHIN AFTER TEN ONE YEAR FIVE YEARS TEN YEARS YEARS ------------------- --------------------- --------------------- --------------------- (IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ---------------------------------------------------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $ 4,958 5.69% U.S. Government agencies $6,991 5.69% 6,806 5.23% $ 7,840 6.51% Federal agency mortgage-backed 6,376 5.82% $14,099 6.49% 75,446 6.91% Municipal securities 991 6.14% 8,198 7.18% Other securities 3,635 6.64% ------ ------- ------- ------- $6,991 5.69% $18,140 5.56% $15,090 6.47% $95,119 6.90% ====== ======= ======= ======= Held-to-maturity Collateralized mortgage obligations $ 7,314 5.62% $39,258 6.32% ======= ======= Approximate market value $ 7,186 $38,111 ======= =======
DECEMBER 31, 1998 ------------------------------------------------------------------------------------- AFTER ONE AFTER FIVE WITHIN BUT WITHIN BUT WITHIN AFTER TEN ONE YEAR FIVE YEARS TEN YEARS YEARS ------------------- --------------------- --------------------- --------------------- (IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ---------------------------------------------------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $ 5,077 5.69% U.S. Government agencies $5,077 6.17% 12,012 5.25% Federal agency mortgage-backed 4,368 5.82% $10,129 6.28% $94,433 6.71% Other securities 2,801 6.56% ------ ------- ------- ------- $5,077 6.17% $21,457 5.47% $10,129 6.28% $97,234 6.71% ====== ======= ======= ======= Held-to-maturity Collateralized mortgage obligations $ 2,271 7.25% $38,984 6.60% ======= ======= Approximate market value $ 2,288 $39,281 ======= =======
Securities carried at $140,460,000 and $124,468,000 at December 31, 1999 and 1998, respectively, were pledged to secure government, public and trust deposits, borrowings in the form of repurchase agreements and FHLB advances and for other purposes as required by law. Average yields on available-for-sale securities is based on amortized cost. 17 - -------------------------------------------------------------------------------- NOTE N. SECURITIES (CONTINUED) The Company retains possession of most securities sold under agreements to repurchase. The Company takes possession of securities purchased under agreement to resell. The underlying collateral for collateralized mortgage obligations consists of Federal agency mortgage-backed securities. The average life of Federal agency mortgage-backed securities and collateralized mortgage obligations is expected to be considerably less than the contractual maturities shown in the table because of scheduled payments and prepayments. The estimated average lives for these instruments depend on the level of interest rates. The estimated average lives as of the reporting date are 2.9 years for agency mortgage-backed securities and 2.9 years for collateralized mortgage obligations. - -------------------------------------------------------------------------------- NOTE O. BUSINESS SEGMENTS The Company provides a wide range of banking and financial services and products through its subsidiaries. The business segments are managed with a focus on various performance objectives including net income, return on average equity, and operating efficiency. The Company has two business segments: National City Bank of Minneapolis (Bank) and Diversified Business Credit, Inc. (DBCI). The Bank offers a full range of banking services to businesses and individuals including loans, deposit services, trust services, cash management services, and investment sales. DBCI is a commercial finance company offering asset-based lending to businesses. The revenues, expenses, and assets of the business segments are summarized below:
DECEMBER 31, 1999 --------------------------------------------------------- COMMERCIAL COMMERCIAL CONSOLIDATED (IN THOUSANDS) BANKING FINANCE OTHER* COMPANY - --------------------------------------------------------------------------------------------------- Interest income $ 53,497 $ 35,054 $ (155) $ 88,396 Interest expense 24,470 17,846 (3,297) 39,019 -------- -------- -------- ---------- Net interest income 29,027 17,208 3,142 49,377 Non-interest income 10,509 461 (273) 10,697 -------- -------- -------- ---------- Total revenue 39,536 17,669 2,869 60,074 Loan loss provision 941 2,539 3,480 Depreciation and amortization expense 2,649 133 5 2,787 Other non-interest expense 21,230 4,675 399 26,304 Income taxes 5,701 4,165 1,010 10,876 Net earnings $ 9,015 $ 6,157 $ 1,455 $ 16,627 ======== ======== ======== ========== Total loans $540,984 $297,601 $ 838,585 Total assets 841,149 302,742 $ (3,711) 1,140,180
DECEMBER 31, 1998 ---------------------------------------------------------- COMMERCIAL COMMERCIAL CONSOLIDATED (IN THOUSANDS) BANKING FINANCE OTHER* COMPANY - ---------------------------------------------------------------------------------------------------- Interest income $ 52,737 $ 32,932 $ (94) $ 85,575 Interest expense 24,967 16,203 (3,147) 38,023 -------- -------- -------- ---------- Net interest income 27,770 16,729 3,053 47,552 Non-interest income 9,002 599 (359) 9,242 -------- -------- -------- ---------- Total revenue 36,772 17,328 2,694 56,794 Loan loss provision 640 2,250 2,890 Depreciation and amortization expense 2,792 129 6 2,927 Other non-interest expense 20,383 4,330 409 25,122 Income taxes 5,031 4,287 873 10,191 Net earnings $ 7,926 $ 6,332 $ 1,406 $ 15,664 ======== ======== ======== ========== Total loans $461,324 $304,785 $ 766,109 Total assets 721,570 310,638 $ (6,526) 1,025,682
18 - -------------------------------------------------------------------------------- NOTE O. BUSINESS SEGMENTS (CONTINUED)
DECEMBER 31, 1997 --------------------------------------------------------- COMMERCIAL COMMERCIAL CONSOLIDATED (IN THOUSANDS) BANKING FINANCE OTHER* COMPANY - --------------------------------------------------------------------------------------------------- Interest income $ 51,167 $ 28,692 $ (59) $ 79,800 Interest expense 24,182 13,600 (2,491) 35,291 -------- -------- -------- -------- Net interest income 26,985 15,092 2,432 44,509 Non-interest income 10,729 749 (88) 11,390 -------- -------- -------- -------- Total revenue 37,714 15,841 2,344 55,899 Loan loss provision 1,607 3,212 4,819 Depreciation and amortization expense 3,159 82 4 3,245 Other non-interest expense 20,683 3,928 409 25,020 Income taxes 4,738 3,597 758 9,093 Net earnings $ 7,527 $ 5,022 $ 1,173 $ 13,722 ======== ======== ======== ======== Total loans $426,495 $244,099 $670,594 Total assets 693,065 246,584 $ (4,477) 935,172
*Other includes parent only and consolidating eliminations The Bank has experienced increased net interest income related primarily to a growth in loans, while containing growth in non-interest expense. The Bank received state tax refunds in 1999 and 1997 of $1,233,000 and $1,369,000, respectively, which were included in non-interest income. DBCI has also experienced higher interest income related to loan growth, offset by an increase in funding costs. - ------------------------------------------------------------------------------ REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders National City Bancorporation Minneapolis, Minnesota We have audited the accompanying consolidated balance sheets of National City Bancorporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 1999. 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 consolidated 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 National City Bancorporation and subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Minneapolis, Minnesota January 14, 2000 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY RESULTS Net earnings for 1999 were $16,627,000 compared with $15,664,000 in 1998, up 6 percent. Basic earnings per share increased to $1.90 in 1999 compared with $1.77 in 1998. The net earnings for 1999 include a state income tax refund, related to taxes paid in prior years, of $1,233,000 with a net earnings effect of approximately $769,000. Without regard for the tax refund, net earnings for 1999 increased 1 percent. The major factors contributing to the earnings increase in 1999 were higher net interest income resulting from growth in loans offset by an increased provision for loan losses, associated primarily with the Company's commercial finance subsidiary, and increased funding costs relative to rates received on earning assets. The Company issued stock dividends in each year from 1981 to 1998. The Company began paying cash dividends in 1999. NET INTEREST INCOME Net interest income, on a fully taxable equivalent basis, increased to $49.5 million up from $47.6 million in 1998 and $44.6 million in 1997. Fluctuations in net interest income can result from changes in the volume of assets and liabilities as well as changes in interest rates. These changes are presented in the analysis on page 29. The average base rate decreased to 8.00 percent from 8.35 percent in 1999. Approximately 80 percent of the Company's loan portfolio has floating interest rates that generate more income during periods of rising rates. Net interest margin, the relationship between net interest income and average earning assets, was 5.01 percent compared with 5.15 percent in 1998. Average earning assets grew to $989 million in 1999, an increase of $63 million or 7 percent. Average loans increased to $799 million in 1999 from $724 million in 1998, an increase of 10 percent. Loans were 80.8 percent of total earning assets in 1999, compared with 78.2 percent in 1998. The general decrease in interest rates during 1999 resulted in a decrease in the cost of interest bearing deposits and borrowed funds from 5.33 percent to 5.12 percent. While the average base rate and yield on interest bearing assets decreased 29 basis points, the average cost of interest bearing liabilities decreased 21 basis points. As a result, interest rate spread declined to 3.84 percent from 3.92 percent in 1998. Interest bearing time deposits of $100,000 or more decreased and averaged $56.1 million in 1999 compared with $59.5 million in 1998. Other interest bearing deposit accounts increased $5.7 million compared with last year and comprise approximately 30 percent of interest bearing sources. Brokered deposits averaged $95.1 million in 1999 compared with $59.0 million in 1998. While the Company's emphasis remains on increasing funding from direct deposits, the brokered deposit market is an important funding option. Commercial paper proceeds are used to fund the loans of the Company's commercial finance subsidiary, Diversified Business Credit, Inc. (DBCI). DBCI issues long-term debt to investors in private placement transactions. At December 31, 1999, long-term debt totaled $176 million. Detail information about long-term debt is presented in Note G to the financial statements. Non-interest bearing deposits increased from 1998 and averaged $133.9 million in 1999. 20 The following table summarizes the changes in funding sources since 1997:
1999 1998 --------------------------- ----------------------- % CHANGE % CHANGE (DAILY AVERAGES IN THOUSANDS) AMOUNT FROM 1998 AMOUNT FROM 1997 - ------------------------------------------------------------------------------------------------------------ Interest bearing time deposits of $100,000 or more $ 56,102 (5.8)% $ 59,528 14.9% Brokered deposits 95,095 61.2 58,987 (11.8) Other interest bearing deposits 227,460 2.6 221,779 2.2 Commercial paper 75,035 (34.9) 115,197 (3.4) Other short-term borrowed funds 158,541 (2.5) 162,583 8.8 Long-term debt 149,565 57.4 94,994 65.2 ---------- -------- Total interest bearing 761,798 6.8 713,068 7.8 Non-interest bearing deposits 133,926 2.4 130,761 11.2 Other liabilities 11,487 13.5 10,118 11.6 Stockholders' equity 147,802 5.8 139,725 12.4 ---------- -------- $1,055,013 6.2% $993,672 8.9% ========== ========
CREDIT RISK MANAGEMENT The responsibility for credit administration rests with the credit committees of each subsidiary. The credit committees, with approval by the Board of Directors, determine applicable policies and credit approval authorities used in the Company. Management monitors compliance with credit standards. Lending officers are responsible for applying credit standards and the Company uses a rating system to assess and monitor the credit risk associated with loans. Detecting negative trends at the earliest possible stage is essential in managing risk of loan loss to the Company and assisting the borrowing customer. A diligent follow-up process is used to monitor, communicate and correct credit weaknesses that are revealed. The Bank has established a risk management function that is responsible for assessing credit risk associated with new loans and lines of credit as well as monitoring credit risk factors on an ongoing basis. The Company uses an independent review procedure to monitor compliance with its credit granting process. The review includes an assessment of credit policy application and the accuracy of the loan rating system. The review of credit process covers all lending industry segments on a schedule determined by assessment of risk. Management and the Examining and Audit Committee of the Board of Directors are informed directly of the results of the reviews. Additionally, DBCI monitors collateral values and related credit risks through its staff of field auditors. The largest loan category is commercial and industrial loans, which grew from $521 million in 1998 to $571 million in 1999, an increase of 10 percent. Management monitors loan concentrations by industry segment to develop a diverse mix of credits. Industry Credit Exposure Guidelines are established and managed based on the current and anticipated economic conditions and the perceived risk profile of an industry. The Company's ability to manage the credit risk within an industry is also considered. A high percentage of the commercial and industrial loans originate from the Minneapolis/St. Paul metropolitan area. Those industry sectors showing signs of weakness are targeted by management for slow or no growth in credit facilities. Underwriting Guidelines including profitability, cash flow, leverage, collateral, guarantee and monitoring standards are applicable for the bulk of the commercial and industrial loans. The Bank also purchases loans from correspondent banks. Purchased loans were $93.4 million and $66.5 million at December 31, 1999, and 1998, respectively. Loans secured by commercial real estate were approximately $144 million as of December 31, 1999 and $117 million as of the previous year end. Included in this total is approximately $32 million of construction financing. The Company makes commercial real estate loans for owner occupied real estate (commercial and industrial borrowers), as well as to commercial real estate developers and investors. A diversification of property types is maintained within the commercial real estate 21 portfolio with office and warehouse buildings being the largest category at 19 percent. Commercial real estate lending activities are guided by Credit Policies, Underwriting Guidelines, Operating Procedures, Collateral Standards and Environmental Risk Procedures. Loans secured by residential mortgages totaled $42 million at December 31, 1999, compared with $40 million last year. This category includes $12 million secured by first liens on 1-4 family housing, $19 million secured by junior liens on 1-4 family housing and $11 million revolving Executive Line loans that are secured by either first or second mortgages. The comparable 1998 amounts are $16 million first liens, $16 million junior liens and $8 million revolving Executive Lines. Collateral standards for residential real estate lending generally call for a maximum 80 percent loan-to-value ratio for properties up to $300,000 and lesser advance rates for properties above $300,000. Loans to individuals were $43 million at December 31, 1999, compared with $47 million in 1998. These loans are from a variety of sources including loans to higher net-worth individuals in which smaller loan amounts are typically unsecured and where larger amounts are normally secured by marketable securities or home equity. The Company has experienced a low level of loss in the residential mortgage and loans to individuals categories. This resulted from a combination of favorable economic conditions in the Twin Cities over the past several years and the effective performance of credit risk management functions. Other loans were $39 million on December 31, 1999, compared with $42 million in 1998. These loans are comprised primarily of loans to owners of community banks and bank holding companies to finance the purchase and expansion of those banks. The management of risks related to bank stock loans includes specific underwriting guidelines, periodic reviews performed by experienced consultants or bank staff, receipt and analysis of quarterly financial data and frequent calls with bank ownership and management. PROVISION FOR LOAN LOSSES The provision for loan losses was $3.5 million in 1999 compared with $2.9 million in 1998. Management determines an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, including estimates and appraisals of collateral values, prior loss experience, and current economic conditions. Changes in these estimates, appraisals and evaluations might be required quickly in the event of changing economic conditions and the economic prospects of borrowers. Management engages in a detailed review of loans showing weakness based on established criteria. A system of risk grading is used to establish monthly assessments of the portfolio and such assessments are the basis for a quarterly review of the allowance for loan losses. The Summary of Loan Loss Experience presented on page 33 shows the changes in the percentage from 1995 to 1999. The allowance for loan losses was $13.9 million at December 31, 1999 and was 1.66 percent of loans compared with 1.80 percent in 1998. Actual net loan losses were $3.4 million in 1999 and 1998. Charge-offs were $3.6 million in 1999, and recoveries were $178,000. The method used and assumptions made in the determination of the provision and allowance for loan losses is consistent for all periods presented in the Company's financial statements. The Company experienced a higher level of loss in 1999 and 1998 than in the previous three years as presented in the Summary of Loan Loss Experience on page 33. The losses occurred in the commercial lending portfolio of DBCI. The Company's percent of net loan charge-offs to average loans was .42 percent compared with .47 percent in 1998. The allocation of the allowance for loan losses is presented on pages 33 and 34. NON-PERFORMING ASSETS Non-performing assets were $16.3 million at December 31, 1999, compared with $17.7 million in 1998 and $15.1 million in 1997. At the current year-end, non-performing assets consisted of loans on non-accrual status, impaired loans, restructured loans, and loans past due 90 days or more. Non-performing assets are presented on page 32. 22 In addition to loans considered non-performing, there were loans with an aggregate principal balance of $19.2 million outstanding at December 31, 1999, to borrowers who are currently experiencing financial difficulties. This compares with $38.8 million at December 31, 1998. Although these loans are adequately secured, management has concerns regarding the ability of such borrowers to continue meeting existing loan repayment terms. Accordingly, these loans may be subject to future modifications of their terms or may become non-performing. Management is monitoring the performance and classification of such loans and the financial condition of these borrowers and has considered the risk associated with these loans in determining the adequacy of the allowance for loan losses. Non-accrual loans are loans on which the accrual of interest ceases when the collection of principal or interest is determined to be doubtful by management. It is the Company's policy to cease the accrual of interest when principal or interest payments are delinquent 90 days or more. Any unpaid amounts previously accrued in the current year are reversed from income, and thereafter interest is recognized only when payments are received. Impaired loans are loans on which it is probable that the Company will be unable to collect all principal and interest due according to contractual terms. To the extent management anticipates losses on these loans, appropriate loan loss reserve allocations have been provided. Restructured loans are loans on which the Company, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. Non-performing loans include loans on which principal payments are contractually delinquent 90 days or more and interest is still being accrued. These loans are well secured and in the process of collection. The Company had no other real estate owned acquired in foreclosure at December 31, 1999 or 1998. INTEREST RATE RISK MANAGEMENT Because of the rate sensitivity of financial instruments, fluctuations in interest rates expose the Company to potential gains and losses resulting from changes in the fair value of the instruments. The objective of interest rate risk management is to control exposure of net interest income to risks associated with interest rate movements. The Company actively manages its interest rate risk position. The tools used to measure interest rate risk include simulation of future net earnings, gap analysis and a market valuation model that measures interest rate risk from an economic perspective. Significant assumptions required in the use of these tools include prepayment risks and the timing of changes in deposit rates compared with changes in money market rates. The market value of each asset and liability is calculated in the market valuation model by computing the present value of all cash flows generated. In each case, the cash flows are discounted by a market interest rate chosen to reflect as closely as possible the characteristics of the given asset or liability. As of the reporting date, this internal valuation model indicates that a two percent shift in the absolute level of interest rates would change the market value of equity by less than six percent. This represents a relatively risk neutral position from an economic perspective. 23 The following table summarizes the Company's repricing gap for various time intervals at December 31, 1999:
WITHIN 3 MONTHS 1 YEAR MORE THAN (IN MILLIONS) 3 MONTHS TO 1 YEAR TO 5 YEARS 5 YEARS - --------------------------------------------------------------------------------------------------- Loans $ 658 $ 40 $ 86 $ 41 Securities 13 27 99 43 Other assets 55 78 ----- ------ ------ ------ 726 67 185 162 ----- ------ ------ ------ Non-interest bearing deposits 7 19 104 36 Interest bearing deposits 182 165 101 Short-term borrowings 134 40 Long-term debt 150 26 Interest rate swaps 176 (150) (26) Other liabilities and stockholders' equity 176 ----- ------ ------ ------ 499 224 205 212 ----- ------ ------ ------ Repricing gap $ 227 $ (157) $ (20) $ (50) ----- ------ ------ ------ Cumulative gap 227 70 50 0 Cumulative gap as a percent of assets 20% 6% 4% 0%
As indicated by the Gap table, assets reprice slightly faster than liabilities as of the reporting date. With this balance sheet position, which is typical for the Company, interest margins are projected to increase slightly in an environment of rising short-term rates and decline slightly in a declining rate environment. A lower interest rate environment is preferable for the Company from a credit perspective, however, as there is less pressure on customers to meet variable rate debt servicing obligations. The following table provides information about the Company's derivative financial instruments and other financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For loans, securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the Company's historical experience of the impact of interest rate fluctuations on the prepayment of residential and home equity loans and mortgage-backed securities. For other rate sensitive liabilities that have no contracted maturity (e.g., non-interest bearing checking and interest bearing checking and savings), the table presents principal cash flows and, as applicable, related weighted-average interest rates based on the Company's historical experience, management's judgment, and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. 24
FAIR VALUE AS OF (IN MILLIONS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99 - --------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS: Fixed interest rate loans $ 35 $ 21 $ 31 $ 16 $ 15 $ 53 $ 171 $170 Average interest rate 8.05% 8.53% 8.53% 8.36% 8.36% 8.27% 8.32% Variable interest rate loans 548 40 20 17 17 26 668 667 Average interest rate 10.40% 8.35% 8.28% 7.52% 7.52% 7.06% 9.93% Fixed interest rate securities 28 30 26 22 21 43 170 169 Average interest rate 6.33% 6.46% 6.45% 6.47% 6.47% 6.38% 6.42% Variable interest rate securities 1 1 10 12 12 Average interest rate 6.81% 6.06% 5.94% 5.89% Other interest bearing assets 56 56 56 Average interest rate 5.75% 5.75% RATE SENSITIVE LIABILITIES: Non-interest bearing checking 26 26 26 26 26 36 166 166 Interest bearing checking & savings 112 9 8 8 8 145 145 Average interest rate 3.63% 1.09% .92% .92% .92% 3.03% Time deposits 235 52 11 3 2 303 302 Average interest rate 5.72% 5.99% 6.04% 5.68% 5.68% 5.77% Fixed interest rate borrowings 174 24 51 75 26 350 347 Average interest rate 5.18% 6.75% 5.95% 6.24% 6.43% 5.72% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swaps 24 51 75 26 176 (3) Average pay rate 5.38% 5.40% 5.67% 5.40% Average receive rate 7.41% 5.89% 6.68% 6.46%
NON-INTEREST INCOME Total non-interest income was $10.7 million, compared with $9.2 million in 1998, and $11.4 million in 1997. 1999 and 1997 included a state income tax refund related to taxes paid in prior years and interest earned to the date of the refund. In 1997, the bank discontinued origination of mortgage loans from its own mortgage banking unit, and instead, accommodates customers through a referral arrangement with another lender. The decline in mortgage fee income is offset by a decline in corresponding salary and other expense. The Bank realized no gains or losses on the sale of investment securities in 1999, 1998 or 1997. The table below summarizes the major components of non-interest income:
(IN THOUSANDS) 1999 1998 1997 - ---------------------------------------------------------------------------------------- Trust income $ 4,512 $4,641 $ 4,801 Service charges on deposit accounts 2,433 2,145 2,195 Mortgage banking fees 39 50 204 Sale of financial services and investment products 409 306 292 State income tax refund 1,233 1,369 Letter of credit commissions 545 609 558 Other 1,526 1,491 1,971 ------- ------ ------- $10,697 $9,242 $11,390 ======= ====== =======
25 NON-INTEREST EXPENSE Non-interest expense totaled $29.1 million in 1999, compared with $28.0 million in 1998 and $28.3 million in 1997. The table below summarizes the major components of non-interest expense: (IN THOUSANDS) 1999 1998 1997 - ----------------------------------------------------------------------- Salaries and employee benefits $16,379 $15,238 $15,110 Net occupancy 3,308 3,062 3,194 Equipment 3,531 3,512 3,648 Fees and assessments 1,554 1,374 1,539 Advertising and marketing 636 742 909 Other 3,683 4,121 3,865 ------- ------- ------- $29,091 $28,049 $28,265 ======= ======= ======= YEAR 2000 The Company has completed replacing or modifying certain systems to ensure Year 2000 compliance. The Company estimates that the cost of its Year 2000 compliance program was approximately $1.1 million. A significant amount of the total cost represents enhancements and improvements, which will be amortized over the estimated useful life of the enhancement or improvement. The Company completed all Year 2000 readiness work. No significant disruptions resulting from the century date change have been detected in any of its critical systems. CAPITAL AND LIQUIDITY Stockholders' equity was $152 million or 13.4 percent of total assets at December 31, 1999, compared with $147 million and 14.3 percent in 1998. The Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Banking regulatory agencies have categorized the Company as well capitalized under existing regulatory guidelines for 1999 and 1998. The required risk based ratio for capital adequacy purposes is eight percent and the required leverage ratio is four percent. The table below states the Company's capital ratios: DECEMBER 31, ------------------------- 1999 1998 - -------------------------------------------------- RISK CAPITAL RATIOS Tier I Capital 15.40% 16.33% Total Capital 16.65% 17.58% LEVERAGE RATIO 13.42% 14.27% Liquidity is the ability to raise funds in all market environments to meet the commitments of the Company. Liquidity is available through the management of liabilities and from various asset sources. It is the policy of the Company to rely primarily on managed liabilities, but to recognize the potential need for asset liquidity in meeting liquidity requirements. Liability sources include large denomination certificates of deposit and borrowing as federal funds purchased, repurchase agreements, and Federal Home Loan Bank advances in the bank subsidiary. The sale of commercial paper as well as back up lines of credit available to the parent Company provide additional sources of liquidity. The Bank's holding of short-term money market investments such as federal funds sold and securities purchased under agreements to resell enhances asset liquidity. The Company issues commercial paper to finance the loans of DBCI. The Company's commercial paper has an independent rating and is backed by supporting lines of credit of $140 million. 26 DBCI has original maturity five, seven, and ten-year term notes in the amount of $176 million with an investment grade rating. Available-for-sale securities provide liquidity through scheduled maturities and the cash convertibility of these assets at market value. At December 31, 1999, the market value of available-for-sale securities was less than amortized cost by $3.2 million. At December 31, 1998, the market value exceeded amortized cost by $1.5 million. Held-to-maturity securities provide liquidity through scheduled maturities. The majority of the securities are readily marketable. Management has structured the loan portfolio to provide additional liquidity with at least 55 percent of total loans having scheduled maturities within one year. Cash flows from operations and changes in the balance sheet also affect liquidity. The Consolidated Statement of Cash Flows on page 6 shows the component changes in the Company's cash position for the three years ending December 31, 1999. In 1999, net cash provided from operating activities increased to $35 million. Investing activities reflect loan originations and principal repayments as well as activity in short-term money market investments, the investment portfolio and investment in premises and equipment. In 1999, net cash used in investing activities increased by $39 million. The increase reflects a higher volume of federal funds sold offset by a lower volume of loan originations as compared with the prior year. Cash provided from financing activities increased by $15 million in 1999. Increased funding sources included time deposits, other short-term borrowings and long term debt, offset by decreased non-interest bearing and savings deposits and commercial paper. The Company paid $7.4 million in cash dividends in 1999. The Company is not aware of any current recommendations by regulatory authorities, which if they were to be implemented would have a material effect on liquidity, capital resources or operations. 1998 VERSUS 1997 The major factors contributing to the earnings increase were higher net interest income and lower loan loss provision expense, partially offset by lower non-interest income. Net interest income increased to $47.6 million, up 7 percent. The increase resulted from a higher volume of earning assets offset by a decrease in net interest margin. Non-interest income was $9.2 million compared with $11.4 million in 1997. 1997 included a state income tax refund of $1.4 million. Non-interest expense decreased $216,000 from 1997. Most categories of expense decreased from the previous year, with slight increases in personnel and other expenses, such as, supplies, travel and entertainment, and delivery expense. BUSINESS SEGMENTS The Company has two business segments, National City Bank of Minneapolis (commercial bank) and Diversified Business Credit, Inc. (commercial finance). The main offices of each segment are located in the business district of downtown Minneapolis. In addition to the main office, the commercial bank has a drive-up location in downtown Minneapolis and a full service bank in Edina, Minnesota. The commercial finance segment has a office in Milwaukee, Wisconsin. The commercial bank offers the usual banking services including business, consumer, and real estate loans, deposit and cash management services, correspondent banking, and safe deposit. In addition, the commercial bank also offers trust services including management of funds for individuals, the administration of estates and trusts, and for corporations, governmental bodies, and public authorities, paying agent services, trustee under corporate indenture, pension and profit sharing agreements, and record keeping and reporting for 401-K savings plans. The commercial bank originates the majority of its business in the Minneapolis/St. Paul area. The net income of the commercial bank increased to $9.0 million in 1999 from $7.9 million in 1998 and $7.5 million in 1997. The non-interest income in 1999 and 1997 included state income tax refunds of $1,233,000 and $1,369,000, respectively which increased net earnings approximately $769,000 in 1999 and $850,000 in 1997. The bank has increased its net earnings through the growth of its loan portfolio and the use of lower cost funding sources, primarily deposits. 27 The following table summarizes the commercial bank's performance measures: (IN THOUSANDS) 1999 1998 1997 - ----------------------------------------------------------------------- Net interest income $ 29,027 $ 27,770 $ 26,985 Net earnings 9,015 7,926 7,527 Average assets 747,781 720,504 684,609 Average loans 490,553 446,950 418,270 Average deposits 528,189 486,590 470,206 Return on average equity 14.40% 13.19% 13.16% Efficiency ratio 60.40% 63.03% 63.22% The commercial finance segment specializes in providing working capital loans secured by accounts receivable, inventory, and other marketable assets. Loans are made on a demand basis with no fixed repayment schedule. Compared to equity-based loans made by commercial banks, asset-based loans require closer monitoring of collateral values and typically interest rates earned on these loans are higher. The commercial finance segment funds its loans through the issuance of long-term debt in the form of Senior Notes and borrowings from the parent company. Additional Senior Notes were issued in 1999. At December 31, 1999, 59 percent of the commercial finance segment's loans were funded by Senior Notes, compared with 42 percent in 1998. The commercial finance segment originates the majority of its loans in Minnesota with approximately 17 percent originated in its Wisconsin office. The net earnings of the commercial finance segment were $6.2 million in 1999 compared with $6.3 million in 1998 and $5.0 million in 1997. The earnings of the commercial finance segment were negatively impacted in 1999 by a lower interest rate spread, resulting from a decreased yield on earning assets and higher funding costs. The commercial finance segment also experienced a higher loan loss provision and higher non-interest expenses in 1999. The following table summarizes the commercial finance segment's performance measures: (IN THOUSANDS) 1999 1998 1997 - ----------------------------------------------------------------------- Net interest income $ 17,208 $ 16,729 $ 15,092 Net earnings 6,157 6,332 5,022 Average assets 312,783 278,737 233,260 Average loans 307,965 277,162 231,370 Return on average equity 16.88% 20.59% 20.76% Efficiency ratio 27.21% 25.73% 25.31% PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this annual report to stockholders and other material filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities as well as other capital spending, financing sources and the effects of regulation and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results in the future and, accordingly, such results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, changes in federal or state tax laws or the administration of such laws, litigation or claims, as well as all other risks and uncertainties described in the Company's filings. 28 - ------------------------------------------------------------------------------ CHANGE IN INTEREST INCOME AND EXPENSE
YEAR-ENDED DECEMBER 31, ------------------------------------------------------------------------- 1999 OVER 1998 1998 OVER 1997 ----------------------------------- ------------------------------------- CHANGES CHANGES RESULTING FROM RESULTING FROM ------------------------ ------------------------ (IN THOUSANDS ON A FULLY TAXABLE EQUIVALENT BASIS) TOTAL RATES VOLUME TOTAL RATES VOLUME - ---------------------------------------------------- ---------- ------------- ---------- ------------ ------------- ---------- Earned on: Funds sold $ (401) $ (17) $ (384) $ (358) $ (59) $ (299) Total securities (384) (125) (259) 3 (577) 580 Loans 3,667 (3,848) 7,515 6,165 (1,512) 7,677 -------- --------- -------- ------ --------- ------ Total earning assets 2,882 (3,990) 6,872 5,810 (2,148) 7,958 Interest Paid on: Savings deposits (158) (680) 522 573 186 387 Time deposits (977) (522) (455) (1) (143) 142 Brokered deposits 1,916 (157) 2,073 (468) (14) (454) Other deposits (131) (104) (27) 8 3 5 Short-term funds borrowed (2,950) (519) (2,431) 206 (311) 517 Long-term debt 3,296 (355) 3,651 2,414 (155) 2,569 -------- --------- -------- ------ --------- ------ Total interest bearing liabilities 996 (2,337) 3,333 2,732 (434) 3,166 -------- --------- -------- ------ --------- ------ Increase (decrease) in net interest income $ 1,886 $ (1,653) $ 3,539 $3,078 $ (1,714) $4,792 ======== ========= ======== ====== ========= ======
In the above analysis, rate differences were computed as the change in the rate between the current and prior period times the volume of the current year, while the volume differences were computed as the change in volume between the current and prior period times the prior year's rate. - ------------------------------------------------------------------------------ SECURITIES DECEMBER 31, CARRYING VALUE OF SECURITIES -------------------------------------- (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $ 4,958 $ 5,077 $ 23,997 U.S. Government agencies 21,637 17,089 9,844 Federal agency mortgage-backed 95,921 108,930 102,529 Municipal securities 9,189 Other securities 3,635 2,801 4,955 -------- -------- -------- $135,340 $133,897 $141,325 ======== ======== ======== Held-to-maturity Collateralized mortgage obligations $ 46,572 $ 41,255 $ 37,402 -------- -------- -------- $ 46,572 $ 41,255 $ 37,402 ======== ======== ======== 29 - -------------------------------------------------------------------------------- DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
1999 -------------------------------------- INTEREST AVERAGE INCOME/ AVERAGE (DAILY AVERAGES IN THOUSANDS AND ON A FULLY TAXABLE EQUIVALENT BASIS) BALANCE EXPENSE RATE - ---------------------------------------------------------------------------------------------------------------- ASSETS Federal funds sold and resale agreements $ 13,507 $ 691 5.12% Securities: Taxable 171,215 10,664 6.23 Tax-exempt 5,403 395 7.31 ---------- ------- Total securities 176,618 11,059 6.26 Loans 798,518 76,801 9.62 ---------- ------- Total earning assets 988,643 88,551 8.96 Cash and due from banks 41,768 Other assets 24,602 ---------- $1,055,013 ========== - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing deposits: Savings $ 114,398 $ 4,125 3.61% Time 232,433 12,633 5.44 Other 31,826 285 .90 ---------- ------- Total 378,657 17,043 4.50 Short-term borrowed funds 233,576 12,325 5.28 Long-term debt 149,565 9,651 6.45 ---------- ------- Total interest bearing liabilities 761,798 39,019 5.12 Non-interest bearing deposits 133,926 Other liabilities 11,487 Stockholders' equity 147,802 ---------- $1,055,013 ========== ------- Net interest income and interest rate spread $49,532 3.84 ======= Net interest margin 5.01 Fees on loans included above $ 3,446 =======
Average balance of non-accruing loans is included in the above analysis. Interest income attributable to non-accruing loans has not been included in the above analysis except as collected. 30
1998 1997 ------------------------------------ ------------------------------------ INTEREST INTEREST AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE BALANCE EXPENSE RATE BALANCE EXPENSE RATE --------------------------------------------------------------------------- $ 20,844 $ 1,092 5.24% $ 26,268 $ 1,450 5.52% 180,705 11,443 6.33 171,981 11,440 6.65 -------- ------- -------- ------- 180,705 11,443 6.33 171,981 11,440 6.65 724,112 73,134 10.10 649,640 66,969 10.31 -------- ------- -------- ------- 925,661 85,669 9.25 847,889 79,859 9.42 44,819 39,733 23,192 25,155 -------- -------- $993,672 $912,777 ======== ======== - ---------------------------------------------------------------------------------- $101,964 $ 4,283 4.20% $ 92,338 $ 3,710 4.02% 204,296 11,694 5.72 209,737 12,163 5.80 34,034 416 1.22 33,629 408 1.21 -------- ------- -------- ------- 340,294 16,393 4.82 335,704 16,281 4.85 277,780 15,275 5.50 268,567 15,069 5.61 94,994 6,355 6.69 57,509 3,941 6.85 -------- ------- -------- ------- 713,068 38,023 5.33 661,780 35,291 5.33 130,761 117,605 10,118 9,069 139,725 124,323 -------- -------- $993,672 $912,777 ======== ======== ------- ------- $47,646 3.92 $44,568 4.09 ======= ======= 5.15 5.26 $ 3,281 $ 2,378 ======= =======
31 - ------------------------------------------------------------------------------ LOAN PORTFOLIO ANALYSIS
DECEMBER 31, TYPES OF LOANS ------------------------------------------------------------------- (IN THOUSANDS) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Commercial and industrial $570,879 $520,672 $442,328 $393,534 $381,506 Real estate: Construction 31,967 24,196 10,405 10,444 16,089 Residential mortgage 42,096 40,074 43,295 40,323 32,125 Non-residential mortgage 111,794 92,769 88,448 76,086 68,504 Loans to individuals for personal expenditures 42,704 46,800 54,987 56,973 33,966 Other loans 39,145 41,598 31,131 22,960 22,607 -------- -------- -------- -------- -------- $838,585 $766,109 $670,594 $600,320 $554,797 ======== ======== ======== ======== ========
Maturities and sensitivity to changes in interest rates in the commercial and industrial and real estate construction loan portfolio are summarized below as of December 31, 1999:
AFTER ONE AFTER WITHIN BUT WITHIN FIVE ONE YEAR FIVE YEARS YEARS TOTAL - ------------------------------------------------------------------------------------------------ Commercial and industrial $444,106 $112,486 $14,287 $570,879 Real estate construction 16,895 7,593 7,479 31,967 -------- -------- ------- -------- $461,001 $120,079 $21,766 $602,846 ======== ======== ======= ======== Loans with predetermined interest rates $ 7,956 $ 44,128 $17,772 $ 69,856 Loans with floating interest rates 453,045 75,951 3,994 532,990 -------- -------- ------- -------- $461,001 $120,079 $21,766 $602,846 ======== ======== ======= ========
The following table summarizes non-performing assets:
DECEMBER 31, ------------------------------------------------------------------- (IN THOUSANDS) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- Non-accrual loans $ 322 $ 696 $ 320 $ 1,329 $ 1,314 Impaired non-accrual loans 1,316 10,562 171 1,017 2,409 Restructured loans 221 235 Loans past due 90 days or more as to interest or principal 4 703 871 135 ------- ------- ------- ------- ------- 1,859 11,497 1,194 3,217 3,858 Percent of total loans 0.2% 1.5% 0.2% 0.5% 0.7% Impaired accruing loans 14,398 6,174 13,935 7,797 176 ------- ------- ------- ------- ------- $16,257 $17,671 $15,129 $11,014 $ 4,034 ======= ======= ======= ======= ======= Percent of total loans 1.9% 2.3% 2.3% 1.8% 0.7%
The gross interest income that would have been recorded in 1999 had non-performing assets remained current and in accordance with original terms, is approximately $816,000. The amount of interest included in income was $13,000. It is the Company's policy to consider loans for non-accrual when they are past due 90 days or more, unless such loans are well secured and in the process of collection. All such loans have been reviewed by management, and where so determined are included in the non-accrual totals above. 32 - ------------------------------------------------------------------------------ SUMMARY OF LOAN LOSS EXPERIENCE
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- (IN THOUSANDS) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Beginning balance of allowance for losses $ 13,785 $ 14,283 $ 10,111 $ 8,602 $ 9,726 Provision charged to operating expense 3,480 2,890 4,819 3,148 452 Charge-offs: Commercial and industrial 3,414 3,252 898 2,062 1,637 Real estate (includes construction and real estate) 155 125 195 Individuals for personal expenditures 60 37 156 298 44 Other 86 --------- --------- --------- --------- --------- 3,560 3,444 1,179 2,555 1,681 Recoveries: Commercial and industrial 138 37 267 829 45 Real estate (includes construction and real estate) 1 12 31 36 Individuals for personal expenditures 3 4 47 17 24 Foreign 8 Other 37 14 198 39 --------- --------- --------- --------- --------- 178 56 532 916 105 --------- --------- --------- --------- --------- Charge-offs net of recoveries 3,382 3,388 647 1,639 1,576 --------- --------- --------- --------- --------- Ending balance of allowance for losses $ 13,883 $ 13,785 $ 14,283 $ 10,111 $ 8,602 ========= ========= ========= ========= ========= Average gross loans outstanding $ 798,518 $ 724,112 $ 649,640 $ 571,959 $ 509,899 Percent of net loan charge-offs to average loans 0.42% 0.47% 0.10% 0.29% 0.31% Percent of allowance for losses to loans outstanding at end of period 1.66% 1.80% 2.13% 1.68% 1.55%
The provision for loan losses charged to operating expenses is based upon several factors which are evaluated by management including prior loss experience, current and anticipated economic conditions, regular examinations by supervisory authorities and continuing review of problem loans. The allowance for loan losses is allocated to individual loan categories based on the relative risk characteristics of the loan portfolio. For purposes of evaluating the adequacy of the reserve, management concentrates on the major components of the loan portfolio which are commercial loans, real estate loans and loans to individuals. Commercial and real estate-construction loans are reviewed and graded in one of several categories describing their quality, and problem loans are monitored by senior management. Real estate and loans to individuals which are considered past due are reported to management on a monthly basis. The Company also routinely maintains an unallocated allowance to recognize its exposure to unanticipated losses within the loan portfolio. This exposure is caused by inherent delays in obtaining information regarding an individual borrower's financial condition or change in their specific business condition; the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends; the volatility of general economic or specific customer conditions affecting the identification and quantification of losses for large individual credits; and the sensitivity assumptions used in establishing allocated allowances for general categories of loans. The unallocated allowance also addresses risk in concentration of credit to specific borrowers, products, or industries. 33 The following is management's allocation of the allowance for loan losses:
INDIVIDUALS COMMERCIAL FOR PERSONAL YEAR ENDED DECEMBER 31 AND INDUSTRIAL REAL ESTATE EXPENDITURES UNALLOCATED TOTAL - --------------------------------------------------------------------------------------------------------------- 1999 Amount allocated $ 11,329 $ 100 $ 300 $2,154 $13,883 Outstandings to total loans 68.08% 22.16% 5.09% 1998 Amount allocated 12,628 100 300 757 13,785 Outstandings to total loans 67.96% 20.50% 6.11% 1997 Amount allocated 8,449 200 300 5,334 14,283 Outstandings to total loans 65.96% 21.20% 8.20% 1996 Amount allocated 6,624 100 300 3,087 10,111 Outstandings to total loans 65.55% 21.13% 9.49% 1995 Amount allocated 3,268 100 300 4,934 8,602 Outstandings to total loans 68.76% 21.04% 6.12%
The increase in the unallocated allowance for loan losses in 1999 is the result of the resolution of a large non-accrual loan. - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- BALANCE SHEET ITEMS (IN MILLIONS) Securities $ 182 $ 175 $ 179 $ 165 $ 158 Loans 839 766 671 600 555 All other assets 119 85 85 137 90 Total assets 1,140 1,026 935 902 803 Total deposits 614 517 479 520 440 Short-term borrowed funds 174 211 246 206 198 Long-term debt 176 139 67 48 48 All other liabilities 24 12 10 9 10 Total liabilities 988 879 802 783 696 Stockholders' equity 152 147 133 119 107 INCOME AND EXPENSE ITEMS (IN THOUSANDS) Interest and fees on loans 76,779 73,040 66,910 58,795 55,972 All other interest income 11,617 12,535 12,890 11,404 10,417 Total interest income 88,396 85,575 79,800 70,199 66,389 Interest expense on deposits 17,043 16,393 16,281 14,980 12,950 Interest expense on short-term borrowed funds 12,325 15,275 15,069 11,908 11,680 Interest expense on long-term debt 9,651 6,355 3,941 3,261 3,638 Total interest expense 39,019 38,023 35,291 30,149 28,268 Net interest income 49,377 47,552 44,509 40,050 38,121 Provision for loan losses 3,480 2,890 4,819 3,148 452 Trust fees 4,512 4,641 4,801 4,605 4,839 State income tax refund 1,233 1,369 Gains (losses) on sale of securities 133 (122) All other income 4,952 4,601 5,220 5,344 4,460 All other expenses 29,091 28,049 28,265 26,189 26,053 Net earnings 16,627 15,664 13,722 12,686 12,696 Basic Earnings Per Share Net earnings 1.90 1.77 1.54 1.42 1.42
34 - ------------------------------------------------------------------------------ SELECTED RATIOS
YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 - ----------------------------------------------------------------------------------------------- Net earnings to average assets 1.58% 1.58% 1.50% Net earnings to average stockholders' equity 11.23 11.26 11.26 Average stockholders' equity to average total assets 14.03 14.00 14.00 Dividend payout ratio 25.26 27.12 Regulatory Capital Ratios: Tier 1 risk capital 15.40 16.33 16.52 Total risk capital 16.65 17.58 17.77 Leverage 13.42 14.27 14.15 (ratios calculated before unrealized gains or losses)
- ------------------------------------------------------------------------------ SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
1999 --------------------------------------------------------- (UNAUDITED) FIRST SECOND THIRD FOURTH (IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------------------- Interest income $ 20,531 $ 21,459 $ 22,960 $ 23,446 Interest expense 8,814 9,152 10,231 10,822 Net interest income 11,717 12,307 12,729 12,624 Provision for loan losses 862 997 1,111 510 Other non-interest income 2,413 2,423 3,647 2,214 Non-interest expense 7,304 7,263 7,045 7,479 Income tax expense 2,359 2,556 3,197 2,764 Net earnings 3,605 3,914 5,023 4,085 Basic earnings per share 0.41 0.45 0.57 0.47
1998 --------------------------------------------------------- (UNAUDITED) FIRST SECOND THIRD FOURTH (IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER - -------------------------------------- ------------ ------------ ------------ ------------ Interest income $ 20,074 $ 20,881 $ 22,485 $ 22,135 Interest expense 8,875 9,127 9,959 10,062 Net interest income 11,199 11,754 12,526 12,073 Provision for loan losses 228 57 535 2,070 Other non-interest income 2,409 2,678 2,177 1,978 Non-interest expense 7,350 7,219 7,146 6,334 Income tax expense 2,379 2,836 2,759 2,217 Net earnings 3,651 4,320 4,263 3,430 Basic earnings per share* 0.41 0.49 0.48 0.39
Certain information has been restated from the information originally reported in the Company's Quarterly Reports on Form 10-Q. The restatements reflect the correction of previously reported information as discussed in the Company's Current Report on Form 8-K, dated November 15, 1999.
1999 1998 -------------------- --------------------- LOW HIGH LOW HIGH -------------------------------------------- Stock Price Range* First quarter $21 $27 1/2 $23 3/8 $29 1/2 Second quarter 17 1/4 22 5/8 30 35 1/4 Third quarter 17 3/8 21 24 34 1/2 Fourth quarter 16 20 3/8 23 1/2 28 December 31 (Closing Price) $16 3/4 $26 1/4
- ----------------- *Adjusted for stock dividends 35 - -------------------------------------------------------------------------------- DIRECTORS
NATIONAL CITY BANCORPORATION David C. Malmberg Michael J. Boris* James B. Goetz, Sr. Walter E. Meadley, Jr. Chairman of the Board Private investor and President and Chief Retired Vice Chairman National City Bancorporation Consultant Executive Officer of the Board Goetz Companies National City Bank Wendell R. Anderson* Marvin Borman* Of Counsel Partner Esperanza Guerrero-Anderson* Robert L. Olson Larkin, Hoffman, Maslon, Edelman, President and Chief President and Chief Daly & Lindgren Ltd Borman & Brand Executive Officer Executive Officer Milestone Growth Fund, Inc. Diversified Business Credit, Inc. David L. Andreas Sharon N. Bredeson President and President and Chief Thomas E. Holloran* Roger H. Scherer* Chief Executive Officer Executive Officer Professor, Graduate Programs Chairman of the Board National City Bancorporation STAFF-PLUS, Inc. in Management Scherer Bros. Lumber Company President and University of St. Thomas Chief Executive Officer Kenneth H. Dahlberg National City Bank Chairman of the Board C. Bernard Jacobs Dahlberg, Inc. Retired President and Terry L. Andreas Chief Executive Officer School for Field Studies John H. Daniels, Jr.* National City Bancorporation Chairman of the Board Partner Retired Chairman of the Board Beverly, Massachusetts Willeke & Daniels National City Bank *Members of the Audit Committee
- -------------------------------------------------------------------------------- PRINCIPAL OFFICERS
NATIONAL CITY BANCORPORATION David L. Andreas Thomas J. Freed President and Secretary and Chief Financial Officer Chief Executive Officer NATIONAL CITY BANK OF MINNEAPOLIS David L. Andreas Margaret A. Newhouse DeWayne A. Hoium FINANCIAL MANAGEMENT DIVISION President and Vice President Vice President Thomas J. Freed Chief Executive Officer Senior Vice President Scott D. Thorson Sherri L. Kelly and Chief Financial Officer CLIENT SERVICES DIVISION Vice President Vice President William J. Klein Robert A. Duncan Executive Vice President BANK OPERATIONS DIVISION James R. Kitchen Vice President Donald W. Kjonaas Vice President Donna M. DeMatteo Senior Vice President Michael G. Jensen Vice President and Security Officer Susan E. Martenson Vice President Vice President David M. Nash Laura J. Carlson Robert A. Kramer Senior Vice President Vice President Lisa A. Ruhl Vice President and Controller Vice President Robert A. Steuck COMPLIANCE COUNSEL Vice President and Auditor Connie G. Weinman DIVERSIFIED BUSINESS CREDIT, INC. Robert L. Olson William D. Farrar Bridget A. Manahan Walter D. Tomaszek President and Chief Vice President Vice President Vice President Executive Officer Jeffrey S. Holland Kevin D. Schrader Janet L. Pomeroy Vice President Vice President Senior Vice President Robert L. Johnson Mark W. Schwieters Anthony R. Bassett Vice President Vice President Vice President
36 NATIONAL CITY BANCORPORATION Sixth On The Mall 651 Nicollet Mall, Minneapolis, MN 55402-1611 (612) 904-8500 www.nationalcitybank.com www.businesscredit.com EX-23 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3, No. 333-93941) of National City Bancorporation and in the related Prospectus of our report dated January 14, 2000, with respect to the consolidated financial statements and schedules of National City Bancorporation incorporated by reference in its Annual Report on Form 10-K for the year ended December 31, 1999. /s/ Ernst & Young LLP Minneapolis, Minnesota March 28, 2000 EX-27 7 ARTICLE 9 - FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 36,997 0 55,655 0 135,340 46,572 45,297 838,585 13,883 1,140,180 614,308 173,780 22,719 176,000 0 0 11,077 140,872 1,140,180 76,779 10,926 691 88,396 17,043 39,019 49,377 3,480 0 29,091 27,503 27,503 0 0 16,627 1.90 1.90 5.01 1,638 0 221 33,569 13,785 3,560 178 13,883 11,729 0 2,154
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