-----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, PJVobMyOgtz3gUJDWHrw5beQ+kd1UcOEobkZ2Va3ETcUNT1cpfrVbyfpOwPsDQXg Jw/eQMia+ZdmADD1tGVT6g== 0000897101-97-000299.txt : 19970324 0000897101-97-000299.hdr.sgml : 19970324 ACCESSION NUMBER: 0000897101-97-000299 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL CITY BANCORPORATION CENTRAL INDEX KEY: 0000069968 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 420316731 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09426 FILM NUMBER: 97560418 BUSINESS ADDRESS: STREET 1: 651 NICOLLET MALL CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6129048503 FORMER COMPANY: FORMER CONFORMED NAME: INDEPENDENT BANCORPORATION DATE OF NAME CHANGE: 19750326 10-K405 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, 1996 _____ 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, 1997, the aggregate market value of 6,205,566 shares of voting common stock, $1.25 par value, held by non-affiliates of the registrant was approximately $145,830,801, based upon the reported closing price on the NASDAQ National Market System. As of February 21, 1997, 7,374,479 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. [X] DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of National City Bancorporation's Annual Report to Stockholders for the year ended December 31, 1996 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 21, 1997 are incorporated by reference into Part III. NATIONAL CITY BANCORPORATION FORM 10-K - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 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. (NCDR) 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 of each subsidiary and with the officers elected by the subsidiary Boards of Directors. NCB provides the usual banking services including, but not limited to, 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 letters of credit. 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 may enter the Minnesota market after June, 1997, due to a change in banking regulations (See Supervision & Regulations). 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 280 employees. 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, the United States, 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, beginning June 1, 1997, federal law will allow the merger of insured banks within different home states, without regard to whether such transaction is prohibited under the law of any state. 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 examined by the Comptroller of the Currency and is subject to examination by the Federal Reserve System. The subsidiary bank is a member of the Federal Deposit Insurance Corporation and, as such, 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 25 through 31 of the Annual Report to Stockholders for the year ended December 31, 1996, 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. 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 also owns an 8,500 square foot banking facility and land in Edina, Minnesota. DBCI leases 7,200 square feet of space in downtown Minneapolis. This lease expires in December 1997. The aggregate net rentals for all of the above described facilities were approximately $2,170,000 in 1996. NCB relocated its banking offices to Gaviidae Common at 651 Nicollet Mall in March 1996. NCB entered into a ten year lease commencing March 16, 1996, to occupy approximately 95,200 square feet in the new location. The effective annual base rent per square foot is $4.98 for the first five years and $6.98 for the second five years of the lease term. These rents are based upon NCB advancing $3,346,608 to the landlord which was used to pay for certain base building improvements, real estate commissions, design fees and reimbursement for moving expenses. The annual cost for the first five years will be approximately $1.7 million and for the last five years will be approximately $1.8 million per year. In addition, NCB paid for all its leasehold improvements, which cost approximately $2,000,000. NCB has two options of five years each to extend the lease term at the then current fair market rents for office and retail space. NCB has the right to terminate the lease in its entirety or to give back substantial portions of the leased premises on the sixth anniversary of the lease term. NCB has expansion rights on all space on the third and fourth levels of the premises, subject to the rights of existing tenants. Rent for expansion space taken on or before March 31, 1999, would be $8.00 net per square foot. Rent for expansion space taken after March 31, 1999, would be at the lower of (i) $8.00 per square foot plus any increase in the Minneapolis CPI with March 16, 1996, as the base index, or (ii) the fair market value of the space. NCB will pay its pro rata share of taxes when due. NCB will have the right to contest real estate taxes against the premises if the landlord fails to do so. NCB will pay normal operating expenses which will include a cap on management fees and exclusions that are generally consistent with other large office tenant leases. 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 the consolidated financial position, liquidity and 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 31 of the Annual Report to Stockholders for the year ended December 31, 1996, and is incorporated herein by reference. PART II ITEM 6 - SELECTED FINANCIAL DATA Selected financial data is presented on page 18 of the Annual Report to Stockholders for the year ended December 31, 1996 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 are presented on pages 19 through 24 of the Annual Report to Stockholders for the year ended December 31, 1996 and are 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 18 and on page 31 of the Annual Report to Stockholders for the year ended December 31, 1996 and are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 5 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1997, and the 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 Chairman of the Board and Chief Executive Officer effective November 1, 1987. Mr. Andreas had been a Vice President and Senior Vice President of NCBC during the last five years prior to being elected Chairman. Mr. Andreas was elected President and Chief Executive Officer of NCB in 1994. Mr. Andreas is also a director of NCB and Chairman of DBCI and NCDR. Mr. Thomas J. Freed was elected Secretary and Controller of NCBC effective January 1, 1982. 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. ITEM 11 - EXECUTIVE COMPENSATION Executive compensation is set forth on pages 5 through 9 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1997 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 pages 1 through 5 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1997 and is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain relationships and related transactions are presented on page 8 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1997 and is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements The Following consolidated financial statements and report of independent auditors of National City Bancorporation and subsidiaries, included in the annual report of the registrant to its stockholders for the year ended December 31, 1996, are incorporated by reference in Item 8: Independent Auditors' Report Consolidated balance sheets - December 31, 1996 and 1995 Consolidated statements of earnings - years ended December 31, 1996, 1995 and 1994 Consolidated statements of stockholders' equity - years ended December 31, 1996, 1995 and 1994 Consolidated statements of cash flows - years ended December 31, 1996, 1995 and 1994 Notes to consolidated financial statements (2) Financial Statement Schedules All schedules are omitted because they are not applicable, not required, or the required information is included in the consolidated financial statements or notes thereto. (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). 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(b)1 - Amendment to Salary Continuation Agreement between NCB and David L. Andreas [incorporated herein by reference to Exhibit 10(b)1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990]. 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(e) - Change in Control Agreement by and between NCBC, NCB and Thomas J. Freed dated as of October 25, 1995. [Incorporated herein by reference to Exhibit 10(e) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 10-K").] 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. 11 - Computation of 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 No reports on Form 8-K were filed during the quarter ended December 31, 1996. 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 19, 1997 /S/David L. Andreas ------------------- David L. Andreas, Chairman 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 19, 1997 /S/David L. Andreas ------------------- David L. Andreas, Chairman of the Board of Directors (Principal Executive Officer) Date: March 19, 1997 /S/Thomas J. Freed ------------------ Thomas J. Freed, Secretary and Comptroller (Principal Financial and Accounting Officer) Date: March 19, 1997 /S/Wendell R. Anderson ---------------------- Wendell R. Anderson, Director Date: March 19, 1997 ---------------------- L.W. Andreas, Director Date: March 19, 1997 -------------------------- Terry L. Andreas, Director Date: March 19, 1997 /S/Marvin Borman ---------------- Marvin Borman, Director Date: March 19, 1997 ----------------------------- Kenneth H. Dahlberg, Director Date: March 19, 1997 /S/John H. Daniels, Jr. ----------------------- John H. Daniels, Jr., Director Date: March 19, 1997 /S/Thomas E. Holloran --------------------- Thomas E. Holloran, Director Date: March 19, 1997 --------------------------- C. Bernard Jacobs, Director Date: March 19, 1997 /S/David C. Malmberg -------------------- David C. Malmberg, Director Date: March 19, 1997 /S/Walter E. Meadley, Jr. ------------------------- Walter E. Meadley, Jr., Director Date: March 19, 1997 /S/Roger H. Scherer ------------------- Roger H. Scherer, Director NATIONAL CITY BANCORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS - --------------------------------------------------------------------------------
SUBSEQUENTLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE 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. 2-69057 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(b) Salary Continuation Agreement between NCB and David L. Andreas (incorporated herein by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987). 10(b)1 Amendment to Salary Continuation Agreement between NCB and David L. Andreas [incorporated herein by reference to Exhibit 10(b)1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990]. 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(e) Change in Control Agreement by and between NCBC, NCB and Thomas J. Freed dated as of October 25, 1995. [Incorporated herein by reference to Exhibit 10(e) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K").] 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. 11 Computation of 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
EX-10.I 2 CHANGE IN CONTROL AGREEMENT NATIONAL CITY BANCORPORATION CHANGE IN CONTROL AGREEMENT THIS AGREEMENT is made by and between NATIONAL CITY BANCORPORATION, an Iowa corporation (hereinafter called the "Holding Company"); NATIONAL CITY BANK OF MINNEAPOLIS, a national banking association controlled by the Holding Company (hereinafter called the "Bank," and together with the Holding Company, collectively referred to as the "Companies") and Thomas J. Freed (the "Executive"), as of the 19th day of November , 1996 (the "Effective Date"). RECITALS: WHEREAS, the Executive is currently employed by the Bank, and may from time to time be employed by either of the Companies; WHEREAS, the Board of Directors of the Holding Company (the "Parent Board") has determined that it is in the best interests of the Holding Company, its stockholders and the Bank to reinforce and encourage the continued attention and dedication of certain officers and senior managers of the Companies, including the Executive, to their assigned duties; WHEREAS, the existence of this Agreement and any similar agreements with other employees of either of the Companies shall not be construed to imply that any successors to their respective positions or offices (or any other employees) would ever be entitled to severance benefits similar to those provided thereunder; and WHEREAS, this Agreement sets forth the minimum severance compensation that the Executive will receive from the Employer (as defined below) if the Executive's employment with such Employer terminates under one of the circumstances described herein in connection with or following a Change in Control (as defined below). NOW THEREFORE, in consideration of the mutual covenants and conditions herein contained and in further consideration of services performed and to be performed by the Executive for the Companies, the parties hereto agree as follows: AGREEMENT 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the terms defined above and the following terms have the meanings indicated: (a) EMPLOYER. "Employer" shall mean whichever of the Companies is the employer of the Executive at the specified time; and shall also include any other entity that (i) employs the Executive immediately after a Change in Control, (ii) is a successor to or assignee of the business and/or assets of one of the Companies and (iii) either executes and delivers the agreement provided for in Section 5 or otherwise becomes or remains bound by all the terms and provisions of this Agreement by operation of law. (b) CHANGE IN CONTROL. A "Change in Control" of the Employer shall occur if any person (as defined in Sections 3 (a) (9) and 13(d)(3) of the '34 Act, as defined below) becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated pursuant to the '34 Act), directly or indirectly, of thirty percent (30%) or more of combined voting power of the then outstanding securities of either of the Companies; provided, however, that no Change in Control shall be deemed to occur if such person: (i) includes any individual, corporation or other entity (or any Affiliate thereof, as defined below) that is now the beneficial owner of at least five percent (5%) of such securities; or (ii) became a beneficial owner of such securities in a transaction after which the Holding Company remains as the survivor and the majority of the members of the Parent Board remain such members after the closing of the transaction. For purposes of this subsection (b), the term " '34 Act" shall mean the Securities Exchange Act of 1934, as amended; and the term "Affiliate" shall mean any individual, corporation or other entity that controls, is controlled by or is under common control with (as applicable) any other individual, corporation or other entity referred to herein. (c) CAUSE. In the case of a discharge from employment, the term "Cause" shall mean: (i) the willful and continued failure by the Executive to substantially perform his or her duties under this Agreement or any other employment agreement between the Executive and the Employer (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason), after a written demand for substantial performance is delivered by the Employer that specifically identifies the manner in which the Employer believes the Executive has not substantially performed his or her duties; or (ii) the willful engaging by the Executive in misconduct that is materially injurious to either or both of the Companies, monetarily or otherwise. No act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him or her not in good faith and without reasonable belief that his or her action or omission was in the best interest of one or both of the Companies. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without (x) a reasonable advance written notice to the Executive, given before the delivery of a Notice of Termination and setting forth the reasons for the Employer's intention to terminate for Cause; (y) an opportunity for the Executive, together with his or her counsel, to be heard before the Board; and (z) delivery to the Executive of a Notice of Termination from the Board stating that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth above in clause (i) or (ii) hereof, and specifying the particulars thereof in detail. (d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) DATE OF TERMINATION. "Date of Termination" shall mean: (i) if this Agreement is terminated by the Employer for Disability, the date 30 days after Notice of Termination is given to the Executive; provided; however, that such date shall not have been delayed pursuant to the following clause (ii); or (ii) if the Executive's employment is terminated by the Employer for any other reason, the date on which a Notice of Termination is delivered to the Executive or any later date specified in such Notice. (f) DISABILITY. "Disability" shall mean the Executive's incapacity due to physical or mental illness to substantially perform his or her duties on a full-time basis for six consecutive months. If the Executive does not agree with a determination to terminate him or her because of Disability, the question of the Executive's Disability shall be subject to the certification of a qualified medical doctor agreed to by the Employer and the Executive or, in the event of the Executive's incapacity to designate a doctor, the Executive's legal representative. In the absence of agreement between the Employer and the Executive, each party shall nominate a qualified medical doctor and the two doctors shall select a third qualified medical doctor, who shall determine the question of the Executive's Disability. (g) GOOD REASON. In the case of a resignation from employment, the term "Good Reason" shall mean: (i) the assignment to the Executive by the Employer of duties inconsistent with the Executive's position, duties, responsibilities and status with the Employer immediately prior to a Change in Control of the Employer; (ii) a reduction by the Employer in the Executive's base salary as in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement; (iii) any Relocation of Executive by the Employer; provided, however, that if Executive resigns in connection with such a Relocation, then any severance pay due under Section 3 shall be payable only at the times prescribed by Section 3(C) and shall be subject to reduction or forfeiture as provided therein; (iv) any material breach by either of the Companies of any provision of this Agreement; (v) if the assets of the Employer have been sold in connection with a Change in Control, any failure by either of the Companies to obtain the assumption of this Agreement by the purchaser pursuant to Section 5; or (vi) any purported termination of the Executive's employment that is not properly effected hereunder and pursuant to a Notice of Termination. For purposes of this Agreement, no such purported termination shall be effective. (h) NOTICE OF TERMINATION. A "Notice of Termination" shall mean a written notice, which shall indicate the specific employment termination provisions in this Agreement that are relied upon by the party giving such notice, and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the Executive's termination of employment. Any termination of the Executive's employment by the Employer shall be communicated by a Notice of Termination. (i) RELOCATION. A "Relocation" shall mean any requirement that the Executive perform his or her principal duties at any place other than (i) the location at which the Executive performed such duties prior to a Change in Control of the Employer, or (ii) within the city, town or village wherein such place was located; except for reasonably required travel by the Executive on the business of the Companies and their subsidiaries to an extent substantially consistent with the Executive's business travel obligations at the time of a Change in Control of the Employer. 2. TERM. This Agreement shall commence on the Effective Date first above written and shall continue in effect until the first anniversary of the Effective Date. Commencing on that date, and each anniversary thereof, the term of this Agreement shall automatically be extended for one additional year, unless at any time the Employer shall have given the Executive a written notice that the Companies intend to terminate this Agreement effective eighteen (18) months from the date of such notice; provided, however, that if a Change of Control shall have occurred during such term, the term of this Agreement shall be automatically extended until the end of the twenty-four (24) month period beginning on the date of such Change of Control and shall terminate at the end of such period. To the extent that any obligation of the Companies or any of their successors hereunder remains unpaid as of the end of such term, this Agreement shall remain in effect until such obligation is satisfied. 3. MINIMUM SEVERANCE COMPENSATION IN CONNECTION WITH A CHANGE OF CONTROL. In the event that (a) a Change in Control of the Employer occurs during the term of this Agreement; and (b) within the period beginning on the date either of the Companies announces such Change in Control generally to its employees and ending twenty-four (24) months after the date of the Change in Control, either (i) the Employer terminates the Executive's employment for any reason (or no reason) other than his or her death, Disability or for Cause (it being understood that a purported termination for Disability or for Cause that is finally determined not to have such reason, or not to have been properly done, shall not be a termination for Disability or for Cause), or (ii) the Executive terminates his or her employment with the Employer for Good Reason, then: (A) the Employer shall pay the Executive any unpaid installment of base salary (to the extent earned and accrued through the Date of Termination) at the rate in effect at the time the Notice of Termination is given, any accrued vacation time (at that same rate) and all other pro-rated and unpaid amounts to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Employer, including without limitation a portion of the amount (pro-rated based on the number of days in the fiscal year or any lesser measurement period) that otherwise would be earned under the Management Incentive Plan or any other executive compensation plan in which the Executive is then participating for the year in which occurs such Date of Termination; in each case determined by assuming that a bonus under such plan would have been earned for the fiscal year or any lesser measurement period in which the Date of Termination falls, by performance that reaches the previously budgeted level under the plan for that period; and all of such payments shall be made in a lump sum on or before the fifth day following the Date of Termination; (B) in lieu of any further salary or bonus payments to the Executive for periods subsequent to the Date of Termination, the Employer shall pay to the Executive as severance pay an amount equal to the product of: (i) the sum of (a) the Executive's annual base salary in effect as of the Date of Termination, and (b) the annual amount that otherwise would be earned under the Management Incentive Plan or any other executive compensation plan in which the Executive is then participating for the fiscal year in which occurs such Date of Termination, in each case determined by assuming that a bonus under such plan would have been earned for the fiscal year in which the Date of Termination falls, by performance that reaches the previously budgeted level under the plan for that year; and (ii) the number 1.5; such payment to be made in a lump sum on or before the fifth calendar day following the Date of Termination; provided, however, that the amount payable to the Executive under this Section 3(B) shall be reduced by the sum of any other severance pay amounts due the Executive from the Employer or either of the Companies under any other plan or agreement and shall be subject to the conditions of the following Section 3(C), if applicable; (C) Notwithstanding any other provision of this Agreement, if any severance pay amount payable to the Executive under Section 3(B) is due as a result of Executive's resignation in connection with a Relocation, such amount shall be payable in installments (without interest) over an eighteen (18) month period commencing on or before the fifth calendar day following the Date of Termination, at the times such amount would have been payable as salary and bonus (if applicable) if the Executive had not resigned, and such amount shall be subject to reduction or forfeiture for any one or more of the following reasons: (i) any such installment of salary or bonus due for a pay period shall be reduced by any similar compensation earned by the Executive for the same period as the result of employment after the Date of Termination by another employer; (ii) any remaining installments of salary or bonus due Executive shall be forfeited if the Executive is employed after the Date of Termination by another employer and the principal duties of such employment are required to be performed at any place outside the city, town or village wherein the place was located at which the Executive performed his or her principal duties prior to a Change in Control of the Employer; and (iii) any remaining installments of salary or bonus due Executive shall be forfeited if the Executive is employed at any location after the Date of Termination by another employer that is engaged in the business of banking. (D) for the eighteen (18) month period described in Section 3(C), the Employer shall pay the same share of the costs of health insurance of Executive as was paid for by the Employer prior to the Date of Termination, except that the Employer shall discontinue paying for such health insurance if Executive becomes eligible to be covered by the health insurance of another employer; (E) to assist Executive in getting a new job, the Employer will provide out placement assistance through a vendor selected by the Employer up to a cost of $1,000 to the Employer; provided, however, that Executive must begin to utilize out placement services within thirty (30) days of the Date of Termination and that Executive shall not receive additional compensation for any unused out placement fees. (F) Executive may, at his or her option, elect to receive the severance benefits Employee would otherwise be entitled from the Employer instead and in lieu of the payments and benefits described in Sections 3(A), (B), (C), (D) and (E), by providing written notice thereof to Employer within four (4) days after the Date of Termination. 4. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL RIGHTS. (a) Except as expressly provided in Section 3(C), the Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the Date of Termination, or otherwise. (b) The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any employee benefit plan, incentive plan, Employer securities plan, employment agreement or other contract, plan or arrangement. 5. SUCCESSORS TO THE COMPANIES. (a) Each of the Companies will require any successor or assign that purchases (other than by a merger of corporations) all or substantially all of the business and/or assets of the Employer, by agreement in form and substance reasonably satisfactory to the Executive, to expressly, absolutely and unconditionally assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such purchase had taken place. Any failure of either of the Companies to obtain such agreement prior to the effectiveness of any such purchase shall be a material breach of this Agreement and shall entitle the Executive to terminate his or her employment for Good Reason. (b) This Agreement shall inure to the benefit of and be enforceable by the Companies and their successors and assigns, and by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him or her hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's beneficiary last designated in a writing delivered to the Employer before his or her death, or otherwise to the Executive's devisee or legatee under a last will and testament or testamentary trust or, if there be none of the foregoing, to the Executive's estate. 6. NOTICE. For purposes of this Agreement, all notices and other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to either of the Companies: National City Bank of Minneapolis Attention: Chief Executive Officer 75 South 5th Street P.O. Box E-1919 Minneapolis, MN 55480 With a copy to: Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership 3300 Norwest Center Minneapolis, Minnesota 55402-4140 Attention: Joseph Alexander, Esq. If to the Executive: Thomas J. Freed Home Address: 4941 Winterset Drive Minnetonka MN 55343 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 7. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer of the Holding Company as may be specifically designated by the Parent Board. If any party hereto at any time waives any breach of this Agreement by another party hereto, or waives compliance with any condition or provision of this Agreement to be performed by another party hereto, such waiver shall not be deemed a waiver of that provision or condition at any prior or subsequent time, or any similar or dissimilar provision or condition at the same or any other time. No agreements or representations, oral or otherwise, express or impled, with respect to the subject matter hereof have been made by either party except as expressly set forth in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota. 8. VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument. 10. FEES AND LICENSES. The Employer shall pay all fees and expenses (including attorney's fees) that the Executive may incur as a result of either of the Companies contesting the validity, enforceability or the Executive's interpretation of, or any determinations under, this Agreement. 11. CONFIDENTIALITY. The Executive shall retain in confidence any and all confidential information known to the Executive concerning the Companies and their business so long as such information is not otherwise publicly disclosed. 12. EMPLOYER'S RIGHT TO TERMINATE EMPLOYMENT. Notwithstanding anything contained in this Agreement to the contrary, the Employer may terminate the Executive's employment at any time, for any reason or no reason, except as may be otherwise provided under a separate written employment agreement (if any) between the Executive and the Employer; and no provision contained herein shall affect the Employer's ability to terminate the Executive's employment at any time, with or without Cause. Nothing in this Agreement shall in any way require either of the Companies to provide any of the benefits specified in this Agreement prior to a Change in Control, nor shall this Agreement be construed in any way to establish any policies or other benefits for the Executive or any other employee of either of the Companies whose employment with either of the Companies is terminated prior to a Change in Control. 13. PREVIOUS CHANGE IN CONTROL AGREEMENT. This Agreement shall supersede and take the place of the Change in Control Agreement dated October 25, 1996 between the parties hereto and said agreement shall be of no further force or effect. IN WITNESS WHEREOF, the parties have executed this Agreement with full authority as of the Effective Date first above written. ATTEST: NATIONAL CITY BANCORPORATION /s/ Thomas J. Freed By /s/ David Andreas - ----------------------------------- ----------------------------------- Thomas J. Freed Its Chairman, David Andreas Secretary "HOLDING COMPANY" ATTEST: NATIONAL CITY BANK OF MINNEAPOLIS /s/ Thomas J. Freed By /s/ David Andreas - ----------------------------------- ----------------------------------- Thomas J. Freed Its President, David Andreas Secretary "BANK" /s/ Thomas J. Freed ---------------------------------- Thomas J. Freed "EXECUTIVE" EX-11 3 COMPUTATION OF PER SHARE EARNINGS NATIONAL CITY BANCORPORATION AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------- 1996 1995 1994 Net earnings applicable to common stock $12,686 $11,454 $8,496 Weighted average common shares outstanding* 7,374 7,375 7,377 Earnings per share $1.72 $1.55 $1.21 *Adjusted for stock dividends EX-13 4 1996 ANNUAL REPORT NATIONAL CITY BANCORPORATION 1996 ANNUAL REPORT The photographic essay on the cover of this year's annual report is the work of Carla Lee-Eichenwald, a student at Minneapolis College of Art and Design (MCAD). Working in association with Barsuhn Design, Incorporated, Carla aimed to capture the open, customer-oriented atmosphere of National City Bank while showing "an appreciation for the detail of the architecture and design of the bank." She is a freelance photographer and illustrator who's interest in photography ranges from documentary to commercial work. National City Bank is pleased to showcase the work of MCAD students as a reflection of our belief that businesses and community leaders can play an important role in supporting the arts and education in our communities. MCAD is an internationally recognized, accredited college. To find out more about the programs of Minneapolis College of Art and Design, call 612-874-3700. FINANCIAL HIGHLIGHTS (IN THOUSANDS EXCEPT PER SHARE) 1996 1995 - ------------------------------------------------------------------- For the Year Net interest income $ 39,247 $ 37,101 Net earnings 12,686 11,454 Earnings per share 1.72 1.55 At Year End Total assets $900,129 $800,637 Loans 596,504 552,581 Deposits 519,631 439,985 Stockholders' equity 118,013 106,034 Book value per share 16.00 14.38 TABLE OF CONTENTS Report to Stockholders 2 Consolidated Financial Statements 3 Notes to Consolidated Financial Statements 7 Independent Auditors' Report 17 Selected Financial Data 18 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Statistical Data 25 Selected Consolidated Quarterly Financial Data 31 Directors and Officers 32 NATIONAL CITY BANCORPORATION National City Bancorporation (NCBC) 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 Exchange Commission. A copy of the Form 10-K report is available free of charge upon written request to the Company, attention: D.L. Andreas, Chairman of the Board 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 Monday, April 21, 1997, at 2:00 p.m. MARKET FOR COMMON STOCK NCBC's common stock is traded on the over-the-counter market in the NASDAQ National Market System under the symbol NCBM. There are currently approximately 2,800 registered stockholders. [LOGO] PRINTED WITH SOY INK [Logo] 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: We have made considerable progress on our journey to the future. We relocated our offices to the Gaviidae Commons in the center of the Minneapolis core business district. The move was important for many of us who had always heard of the "heady" days at our company when we moved to our former banking offices in the remodeled Federal Reserve Bank building. At that time we had run out of space in the offices within a hotel retail concourse and needed to modernize and consolidate to efficiently serve our customers. The bank grew quickly in size immediately following the move and many of our employees experienced the challenges of managing that growth. They all remember the excitement and non-routine tasks and projects relating to the move and subsequent growth. The bank was a success, had an identity, and was showing progress. Comparing our company today to where we were in 1975, when we last moved provides some fascinating contrast. We had been growing assets at the rate of twenty percent in the years leading up to 1975. The country was in the middle of a highly variable economy with high unemployment and highly variable corporate earnings. The annual report for that year emphasized that 35 percent of our employees took advantage of educational opportunities that year. The bank had purchased its first mainframe computer six years before and had no personal computers at all. Year end loans were $112 million. Deposits were $167 million, and we had 166 employees. The company earned $2.4 million, returning 11.8 percent on average equity and 1.28 percent on average assets. The twenty-year lease on that building ended during the second quarter of 1996, and we had changed since the previous move. We had undertaken rigorous and extensive planning processes beginning two and one-half years earlier to prepare for our major move to new quarters and strategic organizational redesign. Our company now employs 280 full-time equivalent bankers who manage over $900 million of total assets and $596 million of loans. Deposits totaled $520 million at year-end. We exceeded our income for the prior year by 11 percent totaling $12.7 million, another record. Our five-year compounded growth in earnings is 21 percent. We extensively use all sizes and types of computers and communications technology to accomplish volumes of transactions and maintain quantities of information undreamed of in 1975. Now at our modern offices, our staff work with each other on plans using systems and procedures that are constantly updated and maintained to respond to constantly changing regulations and customer expectations. Training and education of ALL of our staff is a requirement simply to stay current as well as progressing into our increasingly demanding roles. We are poised to leverage our investment in our operating systems, training, and merchandising opportunities to improve our ability to reach our customer and effect improved results in their operations. We will be more available, better informed, and more capable of suggesting actions and taking actions anytime, anywhere, and in many ways. We will be perceived as a full-service financial business that is fast, effective, and informed. We will do this by continuing to be innovative and working as a team to serve and assist our customers toward their goals and being aware of what might be possible for them to improve their results. /s/ David L. Andreas David L. Andreas Chairman of the Board and Chief Executive Officer 2
CONSOLIDATED BALANCE SHEETS DECEMBER 31, -------------------- (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 47,934 $ 42,006 Federal funds sold and resale agreements 60,120 25,000 Available-for-sale securities 133,190 122,043 Held-to-maturity securities 31,505 36,126 (market value: 1996-$31,812 and 1995-$36,487) Loans 596,504 552,581 Less allowance for loan losses (8,511) (8,602) -------- -------- 587,993 543,979 Bank premises and equipment 11,798 4,312 Accrued interest receivable 6,306 6,335 Customer acceptance liability 787 478 Other assets 20,496 20,358 -------- -------- $900,129 $800,637 ======== ======== - ------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $162,895 $137,766 Interest bearing 356,736 302,219 -------- -------- 519,631 439,985 Federal funds purchased and repurchase agreements 96,640 110,535 Commercial paper 98,107 79,986 Other short-term borrowed funds 11,366 6,687 Acceptances outstanding 787 478 Other liabilities 7,665 8,812 Long-term debt 47,920 48,120 -------- -------- Total liabilities 782,116 694,603 Stockholders' equity: Common stock, par value $1.25, Authorized 20,000,000 shares; Issued: 1996-7,374,520 shares; 1995-6,705,808 shares 9,218 8,382 Additional paid-in capital 79,199 65,484 Unrealized gains (losses) net of tax effect (405) 275 Retained earnings 30,001 31,903 -------- -------- 118,013 106,044 Less common stock in treasury at cost: 1996-16 shares; 1995-562 shares (10) -------- -------- Total stockholders' equity 118,013 106,034 -------- -------- $900,129 $800,637 ======== ========
See Notes To Consolidated Financial Statements 3
CONSOLIDATED STATEMENTS OF EARNINGS YEAR ENDED DECEMBER 31, ----------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995 1994 - ------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $57,992 $54,952 $41,046 Interest on federal funds sold and resale agreements 804 727 725 Interest and dividends on securities: Taxable 10,580 9,369 8,028 Exempt from federal income taxes 20 321 426 ------- ------- ------- 10,600 9,690 8,454 ------- ------- ------- Total interest income 69,396 65,369 50,225 - ------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 14,980 12,950 8,490 Interest on short-term borrowed funds 11,908 11,680 8,933 Interest on long-term debt 3,261 3,638 1,015 ------- ------- ------- Total interest expense 30,149 28,268 18,438 ------- ------- ------- Net interest income 39,247 37,101 31,787 Provision for loan losses 2,345 1,502 1,150 ------- ------- ------- Net interest income after provision for loan losses 36,902 35,599 30,637 - ------------------------------------------------------------------------------------- NON-INTEREST INCOME Service charges on deposit accounts 2,189 1,862 2,113 Fees for other customer services 1,837 1,655 2,386 Trust fees 4,605 4,839 4,683 Gains (losses) on sale of securities 133 (122) (32) Other 1,318 943 791 ------- ------- ------- 10,082 9,177 9,941 - ------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits 14,965 15,156 15,325 Net occupancy expense of bank premises 2,750 2,272 2,476 Equipment rentals, depreciation and maintenance 2,731 2,481 2,228 Other 5,743 6,144 6,255 ------- ------- ------- 26,189 26,053 26,284 ------- ------- ------- Earnings before income taxes 20,795 18,723 14,294 Income taxes 8,109 7,269 5,348 ------- ------- ------- Net earnings $12,686 $11,454 $ 8,946 ======= ======= ======= Earnings Per Common Share Net earnings $ 1.72 $ 1.55 $ 1.21 ======= ======= ======= Average common and common equivalent shares outstanding 7,374 7,375 7,377
See Notes To Consolidated Financial Statements 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY COMMON STOCK TREASURY STOCK -------------------- ADDITIONAL UNREALIZED ------------------ (IN THOUSANDS EXCEPT NUMBER NUMBER PAID-IN RETAINED GAINS NUMBER OF SHARES) OF SHARES AMOUNT CAPITAL EARNINGS (LOSSES) OF SHARES AMOUNT TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1994 5,974,108 $ 7,467 $ 51,455 $ 32,649 $ 229 390,540 ($ 5,604) $ 86,196 Net earnings for the year 8,946 8,946 Ten percent stock dividend 553,179 693 8,299 (9,010) (18) Unrealized securities (losses) net of tax effect (3,369) (3,369) Cancellation of treasury stock (429,967) (538) (3,702) (1,924) (429,967) 6,164 Purchase of treasury stock 39,446 (560) (560) ---------- -------- -------- -------- --------- -------- -------- --------- Balance at December 31, 1994 6,097,320 7,622 56,052 30,661 (3,140) 19 0 91,195 Net earnings for the year 11,454 11,454 Ten percent stock dividend 608,488 760 9,432 (10,212) (20) Unrealized securities gains net of tax effect 3,415 3,415 Purchase of treasury stock 543 (10) (10) ---------- -------- -------- -------- --------- -------- -------- --------- Balance at December 31, 1995 6,705,808 8,382 65,484 31,903 275 562 (10) 106,034 Net earnings for the year 12,686 12,686 Ten percent stock dividend 669,352 837 13,721 (14,584) (26) Unrealized securities (losses) net of tax effect (680) (680) Cancellation of treasury stock (640) (1) (6) (4) (640) 11 Purchase of treasury stock 94 (1) (1) ---------- -------- -------- -------- --------- -------- -------- --------- Balance at December 31, 1996 7,374,520 $ 9,218 $ 79,199 $ 30,001 $ (405) 16 $ 0 $ 118,013 ========== ======== ======== ======== ========= ======== ======== =========
See Notes to Consolidated Financial Statements 5
CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, ----------------------------------- (IN THOUSANDS) 1996 1995 1994 - --------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 12,686 $ 11,454 $ 8,946 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 2,169 1,664 1,556 Amortization of securities premiums and discounts 426 387 641 Provision for loan losses 2,345 1,502 1,150 Security write down 350 Deferred income taxes 472 (390) 99 (Gain) loss on sale of securities (133) 122 32 Decrease in trading securities, net 3,671 (Increase) decrease in accrued interest receivable 29 568 (2,027) (Increase) in other assets (138) (3,874) (764) Increase (decrease) in other liabilities (1,147) 103 (866) Other (increase) decrease (853) 779 (2,134) --------- --------- --------- Total operating adjustments 3,170 861 1,708 --------- --------- --------- Net cash from operating activities 15,856 12,315 10,654 Cash flows from investing activities: Net (increase) in loans (43,923) (85,528) (60,833) Net (increase) decrease in federal funds sold (35,120) (24,950) 20,400 Available-for-sale securities: Proceeds from maturities and principal repayments 50,740 20,772 37,699 Proceeds from sale of securities 4,688 7,848 18,764 Purchases of securities (68,114) (31,269) (67,962) Held-to-maturity securities: Proceeds from maturities and principal repayments 13,581 11,588 20,268 Proceeds from sale of securities 45 Purchases of securities (9,000) (22,426) (11,670) Purchase of premises and equipment (9,365) (1,892) (1,968) Payment of prepaid expenses (1,739) --------- --------- --------- Net cash (used in) investing activities (98,252) (125,812) (45,302) --------- --------- --------- Cash flows from financing activities: Net increase in non-interest bearing and savings deposits 26,326 28,094 14,536 Net increase in time deposits 53,320 44,164 54,702 Net increase (decrease) in federal funds purchased and repurchase agreements (13,895) 34,979 (43,742) Net increase (decrease) in commercial paper 18,121 17,563 (19,281) Net increase (decrease) in other short-term borrowed funds 4,679 (11,400) 2,974 Net increase (decrease) in long-term debt (200) (5,000) 47,000 Purchase of treasury stock (1) (10) (560) Payment for fractional shares on stock dividends (26) (20) (18) --------- --------- --------- Net cash from financing activities 88,324 108,370 55,611 --------- --------- --------- Net increase (decrease) in cash and due from banks 5,928 (5,127) 20,963 Cash and due from banks at beginning of year 42,006 47,133 26,170 --------- --------- --------- Cash and due from banks at end of year $ 47,934 $ 42,006 $ 47,133 ========= ========= ========= Supplemental disclosures Cash paid during the year for: Interest $ 30,266 $ 27,259 $ 16,147 Income taxes 7,206 7,725 5,474 Unrealized securities gains (losses) net of tax (680) 3,415 (3,369)
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. The preparation of the financial statements in conformity with Generally Accepted Accounting Principles 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. 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 deferred and recognized over the loan and/or commitment period as a yield adjustment on a straight-line basis. Loans are generally placed on nonaccrual 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 nonaccrual status, interest previously accrued in the current year is reversed against current period interest income. Interest payments received on nonaccrual 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 entire balance of the allowance is available to absorb losses on loans that become uncollectible. OTHER REAL ESTATE OWNED--Other real estate is recorded at the lower of fair value at the time of repossession or the amount of the loan outstanding at the time of foreclosure. When a property is acquired, the excess of the recorded investment in the property over its estimated fair value, if any, is charged to the allowance for loan losses. Expenses related to other real estate owned, including reductions in value subsequent to acquisition, are reported as net cost of other real estate owned in the Consolidated Statements of Earnings. There was no other real estate owned in other assets at December 31, 1996 and 1995. BANK PREMISES AND EQUIPMENT--Bank premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are primarily computed on the straight-line basis over the estimated useful life on the asset or lease term. TREASURY STOCK--The Company's board of directors has authorized the repurchase of shares from stockholders who have 100 or less 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 disposed of, 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 EARNINGS PER COMMON SHARE--Earnings per common share are computed by dividing net earnings by the weighted average number of shares of common stock and common stock equivalents outstanding during each year, as adjusted for issuance of stock dividends. STATEMENT OF CASH FLOWS--For purposes of the statement of cash flows, cash equivalents includes cash and due from banks. RECLASSIFICATIONS--Certain amounts for prior periods have been reclassified for comparative purposes. The reclassifications had no effect on net earnings or stockholders' equity as previously reported. 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, 1996 ---------------------- CARRYING ESTIMATED (IN THOUSANDS) AMOUNT FAIR VALUE - -------------------------------------------------------- ASSETS: Cash and due from banks $ 47,934 $ 47,934 Federal funds sold and resale agreements 60,120 60,120 Available-for-sale securities 133,190 133,190 Held-to-maturity securities 31,505 31,812 Loans 587,993 591,324 LIABILITIES: Deposits 519,631 519,997 Federal funds purchased and repurchase agreements 96,640 96,640 Commercial paper and other short-term funds 109,473 109,473 Long-term debt 47,920 49,268 OFF-BALANCE SHEET UNREALIZED GAINS: Interest rate swap agreements 1,347 DECEMBER 31, 1995 ---------------------- CARRYING ESTIMATED (IN THOUSANDS) AMOUNT FAIR VALUE - -------------------------------------------------------- ASSETS: Cash and due from banks $ 42,006 $ 42,006 Federal funds sold and resale agreements 25,000 25,000 Available-for-sale securities 122,043 122,043 Held-to-maturity securities 36,126 36,487 Loans 543,979 548,522 LIABILITIES: Deposits 439,985 441,040 Federal funds purchased and repurchase agreements 110,535 110,535 Commercial paper and other short-term funds 86,673 86,673 Long-term debt 48,120 51,183 OFF-BALANCE SHEET UNREALIZED GAINS: Interest rate swap agreements 3,288 The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily 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 84% 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. 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. 8 COMMITMENTS TO EXTEND CREDIT, STANDBY AND COMMERCIAL LETTERS OF CREDIT, AND ACCEPTANCE PARTICIPATIONS ACQUIRED--The majority of the Company's commitment agreements and letters of credit contain variable interest rates and counterparty credit deterioration clauses. Therefore, the carrying value of the Company's commitments to extend credit and letters of credit approximates fair value. NOTE C. LOANS The following loans were outstanding: DECEMBER 31, --------------------- (IN THOUSANDS) 1996 1995 - ------------------------------------------------- Commercial & Industrial $389,718 $379,290 Real estate: Construction 10,444 16,089 Residential mortgage 40,323 32,125 Non-residential mortgage 76,086 68,504 Loans to individuals for personal expenditures 56,973 33,966 Other 22,960 22,607 -------- -------- $596,504 $552,581 ======== ======== At December 31, 1996 and 1995, receivables from and standby letters of credit issued on behalf of commercial real estate developers and investors were approximately $77 million and $72 million, respectively. An analysis of the allowance for loan losses is presented below: YEAR ENDED DECEMBER 31, ----------------------------- (IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------- Balance at beginning of period $ 8,602 $7,946 $ 8,006 Provision charged to operating expense 2,345 1,502 1,150 Charge-offs (2,552) (951) (1,372) Recoveries 116 105 162 ------- ------ ------- Balance at end of period $ 8,511 $8,602 $ 7,946 ======= ====== ======= In the opinion of management, the allowance for loan losses is adequate to provide for known and estimated exposures in the loan portfolio. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan." At December 31, 1996, the Company had 4 impaired commercial loans totalling $1,017,000 compared with 2 loans totalling $2,409,000 at December 31, 1995. Management has allocated $280,000 of the Allowance for Loan Losses to these loans. Impaired loans averaged $3,976,000 and $581,000 during 1996 and 1995, respectively. Interest payments received on 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 $3,217,000 and $3,858,000 at December 31, 1996 and 1995, respectively. Gross interest income would have been increased by approximately $426,000, $311,000, and $103,000 for the years ended December 31, 1996, 1995 and 1994, respectively, had such loans been current and in accordance with original terms. Nonperforming status is not necessarily an indication of probable loss. Loans to principal officers and directors of the Company and its subsidiaries aggregated approximately $8,822,000 and $8,431,000 at December 31, 1996 and 1995, respectively. New loans and repayments during 1996 were $749,000 and $358,000, respectively. In the opinion of management, all such loans are made at normal interest rates and terms. NOTE D. BANK PREMISES AND EQUIPMENT DECEMBER 31, ------------------ (IN THOUSANDS) 1996 1995 - ----------------------------------------------- Assets, at cost: Land $ 183 $ 183 Buildings 885 885 Leasehold improvements 2,452 3,386 Construction in progress 1,113 Equipment 15,681 9,901 ------- ------- 19,201 15,468 Accumulated depreciation: Buildings 500 476 Leasehold improvements 616 3,378 Equipment 6,287 7,302 ------- ------- 7,403 11,156 ------- ------- $11,798 $ 4,312 ======= ======= NOTE E. DEPOSITS Approximately $143,727,000 and $74,325,000 of interest bearing time deposits were in denominations of $100,000 or more at December 31, 1996 and 1995, respectively. The scheduled maturities of time deposits at December 31, 1996 are summarized as follows: LESS THAN $100,000 (IN THOUSANDS) $100,000 OR MORE - ---------------------------------------- 3 months or less $13,177 $ 77,605 3 - 6 months 14,336 37,572 6 - 12 months 24,534 3,381 1 - 2 years 28,210 2,129 2 - 3 years 6,766 1,801 3 - 5 years 6,691 1,139 over 5 years 174 20,100 ------- -------- $93,888 $143,727 ======= ======== 9 NOTE F. SHORT-TERM BORROWINGS Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, treasury tax and loan deposits 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, $115,000,000, and $80,000,000 at December 31, 1996, 1995 and 1994, respectively. 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) 1996 1995 1994 - --------------------------------------------------------------------- Maximum amount out- standing at any month end: Federal funds & repurchase $137,883 $122,722 $117,506 Commercial paper 109,079 91,464 84,988 Other 20,391 20,853 51,077 Daily average amount outstanding: Federal funds & repurchase 116,973 113,245 100,339 Commercial paper 95,950 77,426 79,365 Other 6,967 8,350 23,747 Weighted average interest rate for full year: Federal funds & repurchase 4.83% 5.33% 3.74% Commercial paper 6.09% 6.49% 4.80% Other 5.37% 7.34% 5.75% Outstanding at year-end: Federal funds and repurchase 96,640 110,535 75,556 Commercial paper 98,107 79,986 62,423 Other 11,366 6,687 18,087 Weighted average interest rate on debt outstanding as of December 31: Federal funds & repurchase 5.36% 5.17% 5.03% Commercial paper 6.11% 6.12% 5.91% Other 5.11% 5.16% 5.46% NOTE G. LONG-TERM DEBT DECEMBER 31, ------------------ (IN THOUSANDS) 1996 1995 - ------------------------------------------------------ Diversified Business Credit, Inc. Senior Notes Series A, 8.18%, due 1999 $23,000 $23,000 Series B, 8.45%, due 2001 24,000 24,000 Federal Home Loan Bank Advances, 5.26% to 5.38%, due 1997 through 1998 920 1,120 ------- ------- Total $47,920 $48,120 ======= ======= The Company has entered into interest rate swap agreements to effectively convert the Senior Notes to floating rate instruments. The weighted average effective interest rate for the Senior Notes, including the effects of the related swap agreements, is the one month LIBOR rate plus 102 basis points, 6.63% at December 31, 1996. 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) 1996 1995 1994 - ---------------------------------------------- Current: Federal $6,080 $5,786 $3,916 State 1,557 1,873 1,333 ------ ------ ------ 7,637 7,659 5,249 Deferred: Federal 357 (296) 75 State 115 (94) 24 ------ ------ ------ 472 (390) 99 ------ ------ ------ $8,109 $7,269 $5,348 ====== ====== ====== 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) 1996 1995 - --------------------------------------------------- Deferred tax assets: Loan loss reserves $3,444 $3,481 Salary continuation plan 817 714 Loan fees 54 87 Nondeductible expenses 43 111 Unrealized losses on securities 276 Book over tax depreciation 307 ------ ------ Total deferred tax assets 4,634 4,700 Deferred tax liabilities: Retirement plan 1,059 991 Prepaid expenses 127 180 Tax over book depreciation 152 Security discounts 4 41 Unrealized gains on securities 187 ------ ------ Total deferred tax liabilities 1,342 1,399 ------ ------ Net deferred tax assets $3,292 $3,301 ====== ====== 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. 10 The total effective tax rate for the years ended December 31, 1996, 1995 and 1994 is different than the federal income tax rate. The reasons for the differences are as follows: 1996 1995 1994 - --------------------------------------------------- Federal income tax rate 35.0% 34.0% 34.0% Tax exempt income (0.2) (0.7) (1.6) State income taxes, net of federal income tax benefit 5.2 6.6 6.2 Goodwill 0.1 Cash value of life insurance (0.8) (0.7) (0.8) Other items (0.2) (0.4) (0.5) ---- ---- ---- Effective rate 39.0% 38.8% 37.4% ==== ==== ==== NOTE I. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding in connection with standby letters of credit aggregating approximately $24,877,000 and $27,606,000 at December 31, 1996 and 1995, respectively. Commercial letters of credit were $3,373,000 and $2,531,000 at December 31, 1996 and 1995, respectively. Acceptance participations acquired were $9,607,000 at December 31, 1996 and $4,348,000 at December 31, 1995. National City Bank has entered into a ten year lease which commenced March 16, 1996, for its new 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. The Company was obligated under operating leases for premises and equipment with terms of one year or more at December 31, 1996. The aggregate lease commitments outstanding as of December 31, 1996, were $17,179,000 and for the next five years are payable as follows: (IN THOUSANDS) - -------------------------- 1997 $2,392 1998 2,182 1999 2,152 2000 1,970 2001 1,988 Net rental expense for the years ended December 31, 1996, 1995 and 1994, was $2,170,000, $1,637,000, and $1,630,000, 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 $5,120,000 of dividends may be paid by the Company's bank subsidiary at December 31, 1996, 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 1996, approximately $4,596,000 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 reduce 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. 11 A summary of the Company's contractual or notional amounts for off-balance-sheet activities at December 31, 1996 and 1995, is as follows: (IN THOUSANDS) 1996 1995 - --------------------------------------------------------------- Credit activities: Commitments to extend credit $292,923 $286,174 Standby letters of credit 24,877 27,606 Commercial letters of credit 3,373 2,531 Acceptance participations acquired 9,607 4,348 Other financial instrument activities: Interest rate swap agreements $ 67,000 $ 47,000 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. Since 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. 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. At December 31, 1996 and 1995, the gain position of these contracts was $1.9 million and $3.5 million, respectively. 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, 1996 and 1995, interest rate swaps totaling $47 million hedged long-term debt. At December 31, 1996, swaps totaling $20 million hedged interest bearing deposits. The Company is a receiver of fixed rate interest and a payer of floating rate interest based on the one month LIBOR rate on all of these swaps. The notional balances and yields by maturity date for interest rate swaps at December 31, 1996, are as follows: WEIGHTED WEIGHTED NOTIONAL AVERAGE AVERAGE AMOUNT INTEREST RATE INTEREST RATE MATURITY DATE (IN THOUSANDS) RECEIVED PAID - ------------------------------------------------------------------ 1999 $ 23,000 7.19% 5.61% 2001 44,000 7.00% 5.57% -------- Total $ 67,000 7.06% 5.58% Swaps contributed to the Company's net interest income by reducing interest expense for the years ended December 31, 1996, 1995 and 1994, by $799,000, $564,000 and $266,000, respectively. 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. 12 The following table sets forth the plan's funded status and amounts recognized in the Company's financial statements:
DECEMBER 31, --------------------------------- (IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $9,040 in 1996, $8,321 in 1995 and $7,756 in 1994 $ (9,222) $(8,578) $(7,926) ======== ======= ======= Projected benefit obligation for service rendered to date $(10,235) $(9,473) $(8,812) Plan assets at fair value 13,204 12,730 11,500 -------- ------- ------- Plan assets in excess of projected benefit obligation 2,969 3,257 2,688 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 209 (160) 359 Unrecognized transition asset at January 1, 1986 being recognized over 17 years (385) (446) (508) -------- ------- ------- Prepaid pension cost included in other assets $ 2,793 $ 2,651 $ 2,539 ======== ======= ======= Net pension costs include the following components: Service cost--benefits earned during the period $ 344 $ 253 $ 575 Interest cost on projected benefit obligation 716 725 725 Actual return on plan assets (1,472) (2,364) (1,170) Net amortization and deferral 270 1,274 75 -------- ------- ------- Net periodic pension cost $ (142) $ (112) $ 205 ======== ======= =======
For 1996, the discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 4.5%, respectively. For 1995, the rates were 7% and 4.5%. For 1994, the rates were 8.75% and 4.5%. The expected long-term rate of return on assets was 9% 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, 1996, 1995 and 1994, were $263,000, $257,000, and $218,000, 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. NOTE M. PARENT ONLY INFORMATION The following financial information relates to National City Bancorporation (parent only) operations: BALANCE SHEETS DECEMBER 31, --------------------- (IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------- ASSETS Cash $ 4,104 $ 4,718 Investment in bank subsidiary 53,648 50,848 Investment in non-bank subsidiary 21,661 16,542 Subordinated note receivable from affiliate 8,000 8,000 Other investments 663 605 Due from affiliates 127,350 104,155 Other assets 751 1,301 -------- -------- $216,177 $186,169 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper $ 98,107 $ 79,986 Other liabilities 57 149 Stockholders' equity 118,013 106,034 -------- -------- $216,177 $186,169 ======== ======== 13
STATEMENTS OF EARNINGS YEAR ENDED DECEMBER 31, ----------------------------- (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------ INCOME Dividends from bank subsidiary $ 3,120 $ 5,515 $ 4,796 Interest income 7,836 6,917 5,692 Other income 296 208 392 ------- ------- ------- 11,252 12,640 10,880 EXPENSES Interest expense 5,909 5,088 4,572 Other expenses 628 592 674 ------- ------- ------- 6,537 5,680 5,246 Earnings before taxes 4,715 6,960 5,634 Income taxes 652 595 335 ------- ------- ------- 4,063 6,365 5,299 Equity in undistributed net earnings of subsidiaries 8,623 5,089 3,647 ------- ------- ------- Net earnings $12,686 $11,454 $ 8,946 ======= ======= =======
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, --------------------------------- (IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 12,686 $ 11,454 $ 8,946 Adjustments to reconcile net earnings to net cash from operating activities: Equity in undistributed earnings of subsidiaries (8,623) (5,089) (3,647) (Increase) decrease in other assets 550 (279) (611) (Decrease) in other liabilities (92) (109) (706) -------- -------- -------- (8,165) (5,477) (4,964) -------- -------- -------- Net cash from operating activities 4,521 5,977 3,982 Cash flows from investing activities: (Advances to) payments from affiliates (23,195) (19,592) 20,821 Subordinated note with affiliate (8,000) Decrease in other investments 260 1,925 -------- -------- -------- Net cash from (used for) investing activities (23,195) (19,332) 14,746 Cash flows from financing activities: Net increase (decrease) in commercial paper 18,121 17,563 (19,281) Payment for fractional shares on stock dividends (26) (20) (19) Purchase of treasury stock (1) (10) (560) Other (34) 29 29 -------- -------- -------- Net cash from (used for) financing activities 18,060 17,562 (19,831) -------- -------- -------- Net increase (decrease) in cash (614) 4,207 (1,103) Cash at beginning of year 4,718 511 1,614 -------- -------- -------- Cash at end of year $ 4,104 $ 4,718 $ 511 ======== ======== ======== Supplemental disclosures Cash paid (received) during the year for: Interest $ 5,465 $ 5,270 $ 4,635 Income taxes 690 889 (358)
14 NOTE N. SECURITIES Securities consist of the following:
DECEMBER 31, 1996 --------------------------------------------------- COST OR APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET (IN THOUSANDS) COST GAINS LOSSES VALUE - --------------------------------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $ 24,019 $ 39 $ 155 $ 23,903 U.S. Government agencies 9,646 16 1 9,661 Federal agency mortgage-backed 95,252 511 1,092 94,671 Other securities 4,955 4,955 -------- ---- ------ -------- $133,872 $566 $1,248 $133,190 ======== ==== ====== ======== Held-to-maturity Collateralized mortgage obligations $ 31,254 $314 $ 7 $ 31,561 Other securities 251 251 -------- ---- ------ -------- $ 31,505 $314 $ 7 $ 31,812 ======== ==== ====== ======== DECEMBER 31, 1995 -------------------------------------------------- Available-for-sale U.S. Treasury $ 21,993 $ 30 $ 21,963 U.S. Government agencies 11,999 $ 19 1 12,017 Federal agency mortgage-backed 82,717 877 402 83,192 Other securities 4,871 4,871 -------- ---- ------ -------- $121,580 $896 $ 433 $122,043 ======== ==== ====== ======== Held-to-maturity Collateralized mortgage obligations $ 35,109 $401 $ 60 $ 35,450 Obligations of states and politicial subdivisions 642 13 655 Other securities 375 7 382 -------- ---- ------ -------- $ 36,126 $421 $ 60 $ 36,487 ======== ==== ====== ========
15 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, 1996 ----------------------------------------------- WITHIN AFTER ONE AFTER FIVE AFTER ONE BUT WITHIN BUT WITHIN TEN (IN THOUSANDS) YEAR FIVE YEARS TEN YEARS YEARS - --------------------------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $23,903 U.S. Government agencies $ 4,999 4,662 Federal agency mortgage-backed 7,240 $16,896 $70,535 Other securities 4,955 ------- ------- ------- ------- $12,239 $28,565 $16,896 $75,490 ======= ======= ======= ======= Held-to-maturity Collateralized mortgage obligations $31,254 Other securities $ 251 ------- ------- $ 251 $31,254 ======= ======= Approximate market value $ 251 $31,561 ======= ======= DECEMBER 31, 1995 ----------------------------------------------- Available-for-sale U.S. Treasury $21,963 U.S. Government agencies 12,017 Federal agency mortgage-backed $10,921 $21,581 $50,690 Other securities 4,871 ------- ------- ------- ------- $33,980 $10,921 $21,581 $55,561 ======= ======= ======= ======= Held-to-maturity Collateralized mortgage obligations $ 1,532 $33,577 Obligations of states and political subdivisions $ 107 $ 255 280 Other securities 375 ------- ------- ------- ------- $ 107 $ 630 $ 1,812 $33,577 ======= ======= ======= ======= Approximate market value $ 108 $ 645 $ 1,818 $33,916 ======= ======= ======= =======
Realized gains (losses) on securities sales in the years ended December 31, 1996 and 1995 were $133,000 and ($122,000), respectively. Income tax expense or benefit on these amounts for December 31, 1996 and 1995 was $54,000 and ($49,000), respectively. Securities carried at $115,925,000 and $127,434,000 at December 31, 1996 and 1995, 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. The Company retains possession of most securities sold under agreements to repurchase. The Company takes possession of securities purchased under agreement to resell. 16 INDEPENDENT AUDITORS' REPORT 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, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing standards. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst $ Young LLP Minneapolis, Minnesota January 15, 1997 17
SELECTED FINANCIAL DATA 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------- BALANCE SHEET ITEMS (IN MILLIONS) Securities $ 165 $ 158 $ 139 $ 141 $ 136 Loans 597 553 467 406 361 All other assets 138 90 67 67 60 Total assets 900 801 673 614 557 Total deposits 520 440 368 298 298 Short-term borrowed funds 206 198 156 216 168 Long-term debt 48 48 53 6 All other liabilities 8 9 5 8 7 Total liabilities 782 695 582 528 473 Stockholders' equity 118 106 91 86 84 INCOME AND EXPENSE ITEMS (IN THOUSANDS) Interest and fees on loans 57,992 54,952 41,046 31,584 30,100 All other interest income 11,404 10,417 9,179 8,997 8,709 Total interest income 69,396 65,369 50,225 40,581 38,809 Interest expense on deposits 14,980 12,950 8,490 6,780 8,316 Interest expense on short-term borrowed funds 11,908 11,680 8,933 6,572 6,001 Interest expense on long-term debt 3,261 3,638 1,015 101 Total interest expense 30,149 28,268 18,438 13,453 14,317 Net interest income 39,247 37,101 31,787 27,128 24,492 Provision for loan losses 2,345 1,502 1,150 1,050 1,007 Trust fees 4,605 4,839 4,683 4,544 4,114 Gains (losses) on sale of securities 133 (122) (32) 343 1,007 All other income 5,344 4,460 5,290 7,325 7,141 All other expenses 26,189 26,053 26,284 27,151 24,838 Earnings before cumulative effect of change in accounting principle 12,686 11,454 8,946 7,135 6,919 Cumulative effect of change in accounting principle 204 Net earnings 12,686 11,454 8,946 7,339 6,919 PER COMMON SHARE Earnings before cumulative effect of change in accounting principle 1.72 1.55 1.21 0.92 0.89 Cumulative effect of change in accounting principle 0.03 Net earnings 1.72 1.55 1.21 0.95 0.89
18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY RESULTS Net earnings for 1996 were $12,686,000 compared with $11,454,000 in 1995, up 11 percent. Net earnings per share increased to $1.72 in 1996 compared with $1.55 in 1995. This increase was accomplished during a year marked by significant change including the Bank's relocation to new quarters in Gaviidae Common, and a redesigned organizational structure intended to refocus our efforts to improve service to businesses, their owners and employees. Major factors contributing to the earnings increase in 1996 were higher net interest income resulting from growth in loans and investments and an increase in non-interest income. We accomplished this growth as well as the relocation to Gaviidae Common while holding non-interest expenses to an increase of less than one percent. These positive factors were partially offset by an increase in the provision for loan losses. The Company has issued stock dividends in each year beginning in 1981. The Company has not paid cash dividends. NET INTEREST INCOME Net interest income, on a fully taxable equivalent basis, increased to $39.3 million up from $37.4 million in 1995 and $32.2 million in 1994. 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 25. The average base rate decreased to 8.28 percent from 8.83 percent in 1995. Approximately 84 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 5.26 percent compared with 5.54 percent in 1995. Average earning assets grew to $747 million in 1996, an increase of $73 million or 11 percent. Average loans increased to $571 million in 1996 from $510 million in 1995, an increase of 12 percent. Loans were 76.4 percent of total earning assets in 1996, up from 75.7 percent in 1995. The general decline in interest rates during 1996 decreased the cost of interest bearing deposits and borrowed funds to 5.18 percent from 5.47 percent in 1995, a decrease of 29 basis points. While the average base rate decreased 55 basis points, the average yield on earning assets, including fixed rate securities, decreased 44 basis points. As a result, interest rate spread declined to 4.12 percent from 4.27 percent in 1995. Interest bearing time deposits of $100,000 or more increased significantly and averaged $103.8 million in 1996. Other interest bearing deposit accounts increased compared with last year and comprise approximately 36 percent of interest bearing sources. The largest component of the increase represents a greater use of brokered deposits in the Bank. Brokered deposits averaged $64.8 million in 1996 compared with $58.7 million in 1995. While the Company's emphasis remains 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). Long-term debt is issued by DBCI, and National City Bank (Bank) borrows from the Federal Home Loan Bank. At December 31, 1996, long-term debt totaled $47.9 million. Non-interest bearing deposits increased from 1995 and averaged $110 million in 1996. 19 The following table summarizes the changes in funding sources since 1994:
1996 1995 ---------------------- --------------------- % CHANGE % CHANGE (DAILY AVERAGES IN THOUSANDS) AMOUNT FROM 1995 AMOUNT FROM 1994 - ----------------------------------------------------------------------------------------------------- Interest bearing time deposits of $100,000 or more $103,797 56.6% $ 66,277 (6.8)% Other interest bearing deposits 210,329 5.2 199,980 26.3 Commercial paper 95,950 23.9 77,426 (2.4) Other short-term borrowed funds 123,940 1.9 121,595 (2.0) Long-term debt 48,054 (5.9) 51,052 180.1 -------- -------- Total interest bearing 582,070 12.7 516,330 14.4 Non-interest bearing deposits 110,222 6.0 103,945 .8 Other liabilities 8,533 3.4 8,250 38.4 Stockholders' equity 110,595 12.5 98,350 11.9 -------- -------- $811,420 11.6% $726,875 12.1% ======== ========
CREDIT RISK MANAGEMENT The responsibility for credit administration rests with the credit committees of each subsidiary's board of directors. The credit committees 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 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 Bank 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. 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 $379 million in 1995 to $390 million in 1996, an increase of 3 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. Geographically, a high percentage of the commercial and industrial loans originate from the Minneapolis/St. Paul metropolitan area that has seen moderate to strong growth in most industry sectors in 1996. 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 $40.3 million and $37.3 million at December 31, 1996, and 1995, respectively. Loans secured by commercial real estate were approximately $86 million as of December 31, 1996 and 1995. Included in this total is approximately $10 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 portfolio with office and warehouse facilities to manufacturers or distributors being the largest category at 26%. Commercial real estate lending activities are guided by Credit Policies, Underwriting Guidelines, Operating Procedures, Collateral Standards and Environmental Risk Procedures. 20 Loans secured by residential mortgages totaled $40 million at December 31, 1996, up from $32 million last year. This category includes $20 million secured by first liens on 1-4 family housing, $10 million secured by junior liens on 1-4 family housing and $10 million revolving Executive Line loans that are secured by either first or second mortgages. The comparable 1995 amounts are $14 million first liens, $7 million junior liens and $11 million revolving Executive Lines. Collateral standards for residential real estate lending generally call for a maximum 80% loan-to-value ratio for properties up to $300,000 and lesser advance rates for properties above $300,000. Loans to individuals were $57 million at December 31, 1996, up 68% from $34 million in 1995. This higher growth percentage is in line with management's strategy for greater loan diversification. Growth continues to come 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. Growth also occurred in home improvement loans to individuals referred through various contractors. Other loans were $23 million on December 31, 1996, and 1995. These loans are comprised primarily of loans to owners of other community banks to finance the purchase and capital 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 $2.3 million in 1996 up from $1.5 million in 1995. 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 uses a system of risk grading to establish monthly assessments of the portfolio and reviews the adequacy of the valuation allowance for loan losses quarterly. The allowance for Loan Losses decreased slightly to $8.5 million as a result of the higher net losses in 1996. At December 31, 1996, the reserve was 1.43 percent of loans compared with 1.56 percent in 1995. Actual net loan losses in 1996 were $2.4 million compared with $846,000 in 1995. Charge-offs were $2.5 million in 1996, and recoveries were $116,000. The largest single loss of $1.5 million was in the commercial loan portfolio of the Bank. During the same period, the Company reduced non-performing assets from $3.9 million to $3.2 million. The reserve coverage of these assets increased from 223 percent to 265 percent. The Company's receivables from and letters of credit issued for customers in the real estate industry were approximately $77 million at December 31, 1996, compared with $72 million at December 31, 1995. 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. NON-PERFORMING ASSETS Non-performing assets were $3.2 million at December 31, 1996, compared with $3.9 million in 1995 and $6.2 million in 1994. At the current year-end, non-performing assets consisted primarily of loans on non-accrual status. 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. Nonperforming loans include loans on which principal payments are contractually delinquent 90 days or more and interest is still being accrued. 21 These loans are well secured and in the process of collection. Other real estate owned includes assets acquired in partial or full satisfaction of loan obligations or "in-substance" foreclosures. These assets are classified as other assets and are recorded at the lower of fair value or the amount of the loan outstanding at the time of foreclosure. The Company had no other real estate owned at December 31, 1996 or 1995. In addition to non-accrual loans and accruing loans 90 days or more past due, there were real estate-construction and commercial business loans with an aggregate principal balance of $18 million outstanding at December 31, 1996, to borrowers who are currently experiencing financial difficulties. Although these loans are adequately secured by commercial real estate or other corporate assets, 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. 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 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 2 percent shift in the absolute level of interest rates would change the market value of equity by less than 4 percent. This represents a relatively risk neutral position from an economic perspective. The following table summarizes the Company's repricing gap for various time intervals.
WITHIN 3 MONTHS 1 YEAR MORE THAN (IN MILLIONS) 3 MONTHS TO 1 YEAR TO 5 YEARS 5 YEARS - --------------------------------------------------------------------------------------------- Loans $494 $ 36 $ 52 $ 14 Securities 16 28 82 39 Other assets 103 36 ---- ---- ---- ---- 613 64 134 89 Non-interest bearing deposits 126 6 31 Interest bearing deposits 166 97 94 Short-term borrowings 198 8 Long-term debt 48 Interest rate swaps 67 (67) Other liabilities and stockholders' equity 126 ---- ---- ---- ---- 557 111 106 126 ---- ---- ---- ---- Repricing gap $ 56 $(47) $ 28 $(37) Cumulative gap 56 9 37 0 Cumulative gap as a percent of assets 6% 1% 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 22 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. NON-INTEREST INCOME Total non-interest income was $10.1 million, up from $9.2 million in 1995 and $9.9 million in 1994. Increases resulted primarily from mortgage refinancing activity, service charges on deposit accounts, sales of financial services and investment products and loan prepayment fees. The Bank realized gains of $133,000 on the sale of investment securities in 1996 compared with losses of $122,000 in 1995, and losses of $32,000 in 1994. The table below summarizes the major components of non-interest income: (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------- Trust income $ 4,605 $4,839 $4,683 Service charges on deposit accounts 2,189 1,862 2,113 Mortgage banking fees 514 399 775 Sale of financial services and investment products 383 291 579 Securities gains (losses) 133 (122) (32) Letter of credit commissions 374 389 333 Other 1,884 1,519 1,490 ------- ------ ------ $10,082 $9,177 $9,941 ======= ====== ====== NON-INTEREST EXPENSE Non-interest expense totaled $26.2 million in 1996, compared with $26.1 million in 1995 and $26.3 million in 1994. Lower personnel expense reflects a reduction in the Company's staff and lower accruals for performance based incentive compensation at the Bank. Fees and assessments were lower in 1996 resulting primarily from a reduction in attorney fees of $170,000 and lower FDIC insurance premiums by $416,000. The table below summarizes the major components of non-interest expense: (IN THOUSANDS) 1996 1995 1994 - --------------------------------------------------------------- Salaries and employee benefits $14,965 $15,156 $15,325 Net occupancy 2,750 2,272 2,476 Equipment 2,731 2,481 2,228 Fees and assessments 1,102 1,771 2,626 Advertising and marketing 844 511 345 Other 3,797 3,862 3,284 ------- ------- ------- $26,189 $26,053 $26,284 ======= ======= ======= CAPITAL AND LIQUIDITY Stockholders' equity was $118 million or 13.1 percent of total assets at December 31, 1996, compared with $106 million and 13.2 percent in 1995. 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. The Office of the Comptroller of the Currency has categorized the Company as well capitalized under existing regulatory guidelines. The required risk based ratio for capital adequacy purposes is eight percent and the required leverage ratio is four percent. A well capitalized company under prompt corrective action provisions must maintain a risk based ratio of ten percent and a leverage ratio of five percent. The table below states the Company's capital ratios: 23 DECEMBER 31, ---------------- 1996 1995 - ---------------------------------------- RISK CAPITAL RATIOS Tier I Capital 15.97% 16.04% Total Capital 17.12% 17.34% LEVERAGE RATIO 13.11% 13.23% 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. DBCI has original maturity five and seven-year term notes in the amount of $47 million with an investment grade rating. DBCI is in the process of obtaining additional term funding of $10 million to provide for future growth. Available-for-sale securities provide liquidity through scheduled maturities and the cash convertibility of these assets at market value. At December 31, 1996, the market value of available-for-sale securities was less than amortized cost by $682,000. At December 31, 1995, the market value exceeded amortized cost by $463,000. 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, 1996. In 1996, net cash provided from operating activities increased to $15.9 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 1996, net cash used in investing activities decreased by $27.6 million. The reduction reflects lower loan growth as compared with the prior year and the increased investment in premises and equipment in connection with the move to new quarters. Cash provided from financing activities decreased by $20 million in 1996 reflecting reduced funding needs. Increased funding sources included deposits and commercial paper with a corresponding lower use of federal funds purchased and repurchase agreements. 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. 1995 VERSUS 1994 The major factors contributing to the earnings increase were higher net interest income and lower non-interest expense, partially offset by lower non-interest income. Net interest income increased to $37.4 million, up 16 percent. The increase resulted from a higher volume of earning assets and an increase in net interest margin. Excluding losses on sale of securities, non-interest income decreased $674,000 resulting from reduced mortgage financing activity and lower fees from the sale of financial services and investment products. Non-interest expense was down $231,000 from 1994 reflecting lower personnel expenses and a reduction in attorney fees and FDIC insurance premiums. 24 CHANGE IN INTEREST INCOME AND EXPENSE
YEAR-ENDED DECEMBER 31, ----------------------------------------------------------- 1996 OVER 1995 1995 OVER 1994 ----------------------------- -------------------------- CHANGES CHANGES RESULTING FROM RESULTING FROM ------------------ ---------------- (IN THOUSANDS ON A FULLY TAXABLE EQUIVALENT BASIS) TOTAL RATES VOLUME TOTAL RATES VOLUME - ------------------------------------------------------------------------------------------------------------------- Interest Earned on: Funds sold $ 77 $ (68) $ 145 $ (1) $ 195 $ (196) Taxable securities 1,211 395 816 1,341 847 494 Tax-exempt securities (440) 4 (444) (171) 36 (207) Loans 3,001 (3,614) 6,615 13,826 6,802 7,024 ------ ------- ------ ------- ------ ------ Total earning assets 3,849 (3,283) 7,132 14,995 7,880 7,115 Interest Paid on: Savings deposits 756 145 611 959 899 60 Time deposits 1,254 (577) 1,831 3,480 1,707 1,773 Other deposits 20 7 13 21 36 (15) Short-term funds borrowed 228 (997) 1,225 2,747 2,942 (195) Long-term debt (377) (163) (214) 2,623 795 1,828 ------ ------- ------ ------- ------ ------ Total interest bearing liabilities 1,881 (1,585) 3,466 9,830 6,379 3,451 ------ ------- ------ ------- ------ ------ Increase (decrease) in net interest income $1,968 $(1,698) $3,666 $ 5,165 $1,501 $3,664 ====== ======= ====== ======= ====== ======
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. 25 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
1996 ------------------------------- INTEREST (DAILY AVERAGES IN THOUSANDS AND ON A FULLY TAXABLE EQUIVALENT AVERAGE INCOME/ AVERAGE BASIS) BALANCE EXPENSE RATE - ------------------------------------------------------------------------------------------------------- ASSETS Federal funds sold and resale agreements $ 14,561 $ 804 5.52% Securities: Taxable 161,473 10,580 6.55 Tax-exempt 170 27 15.88 -------- ------- Total securities 161,643 10,607 6.56 Loans 571,159 58,062 10.17 -------- ------- Total earning assets 747,363 69,473 9.30 Cash and due from banks 37,245 Other assets 26,812 -------- $811,420 ======== - ------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing deposits: Savings $ 84,778 $ 3,346 3.95% Time 197,808 11,254 5.69 Other 31,540 380 1.20 -------- ------- Total 314,126 14,980 4.77 Short-term borrowed funds 219,890 11,908 5.42 Long-term debt 48,054 3,261 6.79 -------- ------- Total interest bearing liabilities 582,070 30,149 5.18 Non-interest bearing deposits 110,222 Other liabilities 8,533 Stockholders' equity 110,595 -------- $811,420 ======== ------- Net interest income and interest rate spread $39,324 4.12 ======= Net interest margin 5.26 Fees on loans included above $ 2,326 =======
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. 26 [WIDE TABLE CONTINUED FROM ABOVE]
1995 1994 -------------------------------- ------------------------------- INTEREST INTEREST (DAILY AVERAGES IN THOUSANDS AND ON A FULLY TAXABLE EQUIVALENT AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE BASIS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Federal funds sold and resale agreements $ 12,134 $ 727 5.99% $ 16,608 $ 728 4.38% Securities: Taxable 148,543 9,369 6.31 139,933 8,028 5.74 Tax-exempt 3,428 467 13.62 5,071 638 12.58 -------- ------- -------- ------- Total securities 151,971 9,836 6.47 145,004 8,666 5.98 Loans 509,899 55,061 10.80 435,684 41,235 9.46 -------- ------- -------- ------- Total earning assets 674,004 65,624 9.74 597,296 50,629 8.48 Cash and due from banks 34,412 33,753 Other assets 18,459 17,087 -------- -------- $726,875 $648,136 ======== ======== - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing deposits: $ 68,598 $ 2,590 3.78% $ 66,180 $ 1,631 2.46% Savings 167,200 10,000 5.98 131,448 6,520 4.96 Time 30,459 360 1.18 31,882 339 1.06 Other -------- ------- -------- ------- 266,257 12,950 4.86 229,510 8,490 3.70 Total 199,021 11,680 5.87 203,451 8,933 4.39 Short-term borrowed funds 51,052 3,638 7.13 18,224 1,015 5.57 Long-term debt -------- ------- -------- ------- 516,330 28,268 5.47 451,185 18,438 4.09 Total interest bearing liabilities 103,945 103,091 Non-interest bearing deposits 8,250 5,963 Other liabilities 98,350 87,897 Stockholders' equity -------- -------- $726,875 $648,136 ======== ======== ------- ------- $37,356 4.27 $32,191 4.39 Net interest income and interest rate spread ======= ======= 5.54 5.39 Net interest margin $ 2,135 $ 1,994 Fees on loans included above ======= =======
27 SECURITIES
CARRYING VALUE OF SECURITIES DECEMBER 31, -------------------------------- (IN THOUSANDS) 1996 1995 1994 - ------------------------------------------------------------------------------------ Available-for-sale U.S. Treasury $ 23,903 $ 21,963 $ 35,865 U.S. Government agencies 9,661 12,017 13,714 Federal agency mortgage-backed 94,671 83,192 59,632 Other securities 4,955 4,871 4,871 -------- -------- -------- $133,190 $122,043 $114,082 ======== ======== ======== Held-to-maturity Collateralized mortgage obligations $ 31,254 $ 35,109 $ 20,567 Obligations of states and political subdivisions 642 4,304 Other securities 251 375 542 -------- -------- -------- $ 31,505 $ 36,126 $ 25,413 ======== ======== ========
Contractual Maturities and Weighted Average Yields of Debt Securities at December 31, 1996:
AFTER ONE AFTER FIVE WITHIN BUT WITHIN BUT WITHIN AFTER TEN ONE YEAR FIVE YEARS TEN YEARS YEARS ---------------- ---------------- --------------- ---------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ----------------------------------------------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $23,903 5.32% U.S. Government agencies $ 4,999 5.03% 4,662 6.05% Federal agency mortgage-backed 7,240 6.69% $16,896 5.80% $70,535 7.16% Other securities 4,955 6.85% ------- ------- ------- ------- $12,239 6.01% $28,565 5.44% $16,896 5.80% $75,490 7.14% ======= ======= ======= ======= Held-to-maturity Collateralized mortgage obligations $31,254 7.38% Other securities $ 251 8.85% ------- ------- $ 251 8.85% $31,254 7.38% ======= ======= Approximate market value $ 251 $31,561 ======= =======
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 4.5 years for agency mortgage-backed securities and 2.7 years for collateralized mortgage obligations. 28 LOAN PORTFOLIO ANALYSIS
TYPES OF LOANS DECEMBER 31, -------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- Commercial and industrial $389,718 $379,290 $304,913 $286,359 $259,054 Real estate: Construction 10,444 16,089 16,582 23,651 28,656 Residential mortgage 40,323 32,125 25,828 32,421 19,827 Non-residential mortgage 76,086 68,504 62,731 13,079 10,618 Loans to individuals for personal expenditures 56,973 33,966 27,272 25,474 24,692 Other loans 22,960 22,607 29,727 25,236 18,429 -------- -------- -------- -------- -------- $596,504 $552,581 $467,053 $406,220 $361,276 ======== ======== ======== ======== ========
Certain loans were reclassified from Commercial and Industrial to Non-residential mortgage in 1994. Comparable information for prior years is not available. 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, 1996:
AFTER ONE AFTER WITHIN BUT WITHIN FIVE ONE YEAR FIVE YEARS YEARS TOTAL - --------------------------------------------------------------------------------------- Commercial and industrial $323,726 $61,048 $4,944 $389,718 Real estate construction 5,631 670 4,143 10,444 -------- ------- ------ -------- $329,357 $61,718 $9,087 $400,162 ======== ======= ====== ======== Loans with predetermined interest rates $ 7,503 $ 7,491 $ 767 $ 15,761 Loans with floating interest rates 321,854 54,227 8,320 384,401 -------- ------- ------ -------- $329,357 $61,718 $9,087 $400,162 ======== ======= ====== ========
The following table summarizes nonperforming assets:
DECEMBER 31, ------------------------------------------------ (IN THOUSANDS) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------- Non-accrual loans $1,329 $1,314 $6,193 $9,175 $3,056 Impaired non-accrual loans 1,017 2,409 Loans past due 90 days or more as to interest or principal 871 135 8 1,963 ------ ------ ------ ------ ------ Nonperforming loans $3,217 $3,858 $6,201 $9,175 $5,019 ====== ====== ====== ====== ====== Percent of total loans 0.5% 0.7% 1.3% 2.3% 1.4% Other assets and real estate owned $ 500 $ 175
The gross interest income that would have been recorded in 1996 had nonperforming assets remained current and in accordance with original terms, is approximately $453,000. The amount of interest included in income was $27,000. 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. 29 SUMMARY OF LOAN LOSS EXPERIENCE
YEAR ENDED DECEMBER 31, -------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- Beginning balance of allowance for losses $ 8,602 $ 7,946 $ 8,006 $ 7,657 $ 7,131 Provision charged to operating expense 2,345 1,502 1,150 1,050 1,007 Charge-offs: Commercial and industrial 2,059 907 850 805 1,388 Real estate (includes construction and real estate) 195 153 20 Individuals for personal expenditures 298 44 172 257 324 Other 350 -------- -------- -------- -------- -------- 2,552 951 1,372 1,215 1,732 Recoveries: Commercial and industrial 29 45 41 286 1,062 Real estate (includes construction and real estate) 31 36 32 114 159 Individuals for personal expenditures 17 24 89 114 30 Other 39 -------- -------- -------- -------- -------- 116 105 162 514 1,251 -------- -------- -------- -------- -------- Charge-offs net of recoveries 2,436 846 1,210 701 481 -------- -------- -------- -------- -------- Ending balance of allowance for losses $ 8,511 $ 8,602 $ 7,946 $ 8,006 $ 7,657 ======== ======== ======== ======== ======== Average gross loans outstanding $571,159 $509,899 $435,684 $384,685 $351,487 Percent of net loan charge-offs to average loans 0.43% 0.17% 0.28% 0.18% 0.14% Percent of allowance for losses to loans outstanding at end of period 1.43% 1.56% 1.70% 1.97% 2.12%
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. 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 installment loans. 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 installment loans which are considered past due are reported to management on a monthly basis. The following is management's allocation of the valuation allowance:
INDIVIDUALS COMMERCIAL FOR PERSONAL YEAR ENDED DECEMBER 31 AND INDUSTRIAL REAL ESTATE EXPENDITURES UNALLOCATED TOTAL - ------------------------------------------------------------------------------------------------------ 1996 Amount allocated $1,919 $100 $300 $6,192 $8,511 Outstandings to total loans 65.33% 21.27% 9.55% 1995 Amount allocated 1,185 100 300 7,017 8,602 Outstandings to total loans 68.64% 21.12% 6.15% 1994 Amount allocated 1,619 100 300 5,927 7,946 Outstandings to total loans 65.28% 22.51% 5.84% 1993 Amount allocated 2,236 94 305 5,371 8,006 Outstandings to total loans 70.49% 17.02% 6.27% 1992 Amount allocated 2,358 108 300 4,891 7,657 Outstandings to total loans 71.71% 16.36% 6.83%
30 SELECTED RATIOS YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Net earnings to average assets 1.56% 1.57% 1.37% Net earnings to average stockholders' equity 11.40 11.52 10.01 Average stockholders' equity to average total assets 13.71 13.66 13.74 Regulatory Capital Ratios: Tier 1 risk capital 15.97 16.04 16.83 Total risk capital 17.12 17.34 18.25 Leverage 13.11 13.23 13.84 (ratios calculated before unrealized gains or losses) SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
1996 ------------------------------------------ (UNAUDITED) FIRST SECOND THIRD FOURTH (IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER - --------------------------------------------------------------------------------- Interest income $16,882 $16,741 $17,392 $18,381 Interest expense 7,182 7,238 7,539 8,190 Net interest income 9,700 9,503 9,853 10,191 Provision for loan losses 435 465 495 950 Gains on sale of securities 133 Other non-interest income 2,362 2,410 2,381 2,796 Non-interest expense 6,913 6,664 6,033 6,579 Income tax expense 1,875 1,842 2,277 2,115 Net earnings 2,839 2,942 3,429 3,476 Net earnings per share** 0.38 0.40 0.47 0.47 1995 ----------------------------------------- (UNAUDITED) FIRST SECOND THIRD FOURTH (IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER - --------------------------------------------------------------------------------- Interest income $14,848 $16,187 $16,839 $17,495 Interest expense 6,151 7,069 7,460 7,588 Net interest income 8,697 9,118 9,379 9,907 Provision for loan losses 75 195 762 470 (Losses) on sale of securities (122) Other non-interest income 1,985 2,493 2,419 2,402 Non-interest expense 6,597 6,470 6,109 6,877 Income tax expense 1,478 1,905 1,908 1,978 Net earnings 2,410 3,041 3,019 2,984 Net earnings per share** 0.33 0.41 0.41 0.40
1996 1995 -------------------- -------------------- LOW HIGH LOW HIGH --------------------------------------------- Stock Price Range** First quarter $ 17 3/4 $ 20 $ 11 5/8 $ 13 3/4 Second quarter 19 1/2 22 1/4 13 3/8 15 Third quarter 17 1/2 20 13 3/8 17 1/2 Fourth quarter 18 20 3/4 16 3/8 21 5/8 December 31 (Closing Price) $20 3/4 $19 3/8
- ----------------------- **Adjusted for stock dividends 31 DIRECTORS NATIONAL CITY BANCORPORATION David L. Andreas Chairman of the Board and Chief Executive Officer National City Bancorporation Wendell R. Anderson* Of Counsel Larkin, Hoffman, Daly & Lindgren Ltd. L.W. Andreas Retired Chairman of the Board and Chief Executive Officer National City Bancorporation Terry L. Andreas Chairman of the Board School for Field Studies Beverly, Massachusetts Marvin Borman* Partner Maslon, Edelman, Borman & Brand Kenneth H. Dahlberg Chairman of the Board Dahlberg, Inc. John H. Daniels, Jr.* Partner Willeke & Daniels Thomas E. Holloran* Professor, Graduate Programs in Management University of St. Thomas C. Bernard Jacobs Retired President and Chief Executive Officer National City Bancorporation Retired Chairman of the Board National City Bank David C. Malmberg Non-executive Chairman of the Board National City Bank Walter E. Meadley, Jr. Retired Vice Chairman of the Board National City Bank Roger H. Scherer* Chairman of the Board Scherer Bros. Lumber Company *Members of the Audit Committee NATIONAL CITY BANK OF MINNEAPOLIS David C. Malmberg Non-executive Chairman of the Board National City Bank Walter E. Meadley, Jr. Retired Vice Chairman of the Board National City Bank David L. Andreas President and Chief Executive Officer National City Bank Chairman of the Board and Chief Executive Officer National City Bancorporation Sharon N. Bredeson President and Chief Executive Officer STAFF-PLUS Inc. John H. Daniels, Jr. Partner Willeke & Daniels James B. Goetz President Goetz Associates Esperanza Guerrero-Anderson President and Chief Executive Officer Milestone Growth Fund Thomas E. Holloran Professor, Graduate Programs in Management University of St. Thomas PRINCIPAL OFFICERS NATIONAL CITY BANCORPORATION David L. Andreas Chairman of the Board and Chief Executive Officer Thomas J. Freed Secretary and Controller NATIONAL CITY BANK OF MINNEAPOLIS David L. Andreas President and Chief Executive Officer CLIENT SERVICES DIVISION William J. Klein Executive Vice President Donna M. DeMatteo Vice President Ann H. Hengel Senior Vice President Timothy M. Murphy Vice President David M. Nash Senior Vice President Margrette A. Newhouse Vice President Daniel D. Schroeder Vice President BANK OPERATIONS DIVISION Donald W. Kjonaas Senior Vice President and Security Officer Laura J. Carlson Vice President Sherri L. Kelly Vice President James R. Kitchen Vice President DeWayne A. Hoium Vice President Susan E. Martenson Vice President FINANCIAL MANAGEMENT DIVISION Thomas J. Freed Senior Vice President and Chief Financial Officer Robert A. Kramer Vice President and Controller Robert B. Buck Vice President Robert A. Steuck Vice President Stephan G. Gilats Vice President COMPLIANCE COUNSEL Connie G. Weinman Vice President HUMAN RESOURCES DEPARTMENT Claudith M. Washington Senior Vice President MARKETING DEPARTMENT Craig E. Cina Senior Vice President DIVERSIFIED BUSINESS CREDIT, INC. David L. Andreas Chairman of the Board Robert L. Olson President and Chief Executive Officer Anthony R. Bassett Vice President William D. Farrar Vice President Jeffrey S. Holland Vice President Robert L. Johnson Vice President and Treasurer Bridget A. Manahan Vice President Allen J. Olson Vice President Mark W. Schwieters Vice President Janet L. Pomeroy Vice President Walter D. Tomaszek Vice President 32 NATIONAL CITY BANCORPORATION SIXTH ON THE MALL 651 NICOLLET MALL MINNEAPOLIS MINNESOTA 55402-1611 PHONE (612) 904-8500 EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement (Form S-8, No. 33-84638) pertaining to the National City Bancorporation Incentive Savings Plan of our report dated January 15, 1997, with respect to the consolidated financial statements of National City Bancorporation incorporated by reference in its Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Minneapolis, Minnesota March 18, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1996 DEC-31-1996 47,934 0 60,120 0 133,190 31,505 31,812 596,504 8,511 900,129 519,631 206,113 7,665 47,920 0 0 9,218 108,795 900,129 57,992 10,600 804 69,396 14,980 30,149 39,247 2,345 133 26,189 20,795 12,686 0 0 12,686 1.72 1.72 5.26 2,346 871 0 18,292 8,602 2,552 116 8,511 1,830 189 6,492
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