-----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, DQUFNNSqzUj4jmNO9cwOusvzvC9C/TnQlRgpLrqMjOsbbBxu74X9jMziy2j1JYtb vcegl+sLv2DjJXN8QXFvug== 0000897101-98-000308.txt : 19980324 0000897101-98-000308.hdr.sgml : 19980324 ACCESSION NUMBER: 0000897101-98-000308 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 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: SEC FILE NUMBER: 000-09426 FILM NUMBER: 98571143 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, 1997 _____ 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 20, 1998, the aggregate market value of 6,764,301 shares of voting common stock, $1.25 par value, held by non-affiliates of the registrant was approximately $213,075,500 based upon the reported closing price on the NASDAQ Stock Market(SM). As of February 20, 1998, 8,057,478 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, 1997 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 22, 1998 are incorporated by reference into Part III. NATIONAL CITY BANCORPORATION FORM 10-K YEAR ENDED DECEMBER 31, 1997 - -------------------------------------------------------------------------------- PART I ITEM 1 - BUSINESS National City Bancorporation (NCBC) was incorporated in 1937 under the laws of the State of Iowa. NCBC is a bank holding company which owns 99.9% of the capital stock of National City Bank of Minneapolis (NCB), which is a commercial bank. NCBC owns 100% of the capital stock of Diversified Business Credit, Inc. (DBCI), a commercial finance company. NCBC also owns 100% of the capital stock of National City Development & Realty, Inc. an inactive subsidiary. NCB has its main banking office in the business district of downtown Minneapolis and also serves customers from two detached facilities. One of these facilities provides a drive-up location in downtown Minneapolis, and the other is a full service branch location in Edina, Minnesota, a suburb of Minneapolis. NCBC provides its subsidiaries advice and specialized services in various fields of financial and banking policy. The responsibility for the management of each subsidiary remains with the Board of Directors of each subsidiary and with the officers elected by the subsidiary Boards of Directors. NCB provides usual and customary banking services including without limitation: business, personal and real estate loans; a full range of deposit services; correspondent banking and safe deposit facilities. In addition to the services generally provided by a full-service bank, NCBC's subsidiaries offer specialized services as described below: TRUST SERVICES - NCB offers clients a wide variety of fiduciary services ranging from the management of funds for individuals to the administration of estates and trusts. For corporations, governmental bodies, and public authorities, NCB acts as fiscal and paying agent, registrar, and trustee under corporate indentures and pension and profit sharing agreements. NCB also provides record keeping and reporting for 401-K retirement savings plans. INTERNATIONAL OPERATIONS - NCB provides a wide range of services in the area of international banking including trade service products, such as letters of credit, bankers acceptances, international collections and foreign exchange. ASSET-BASED FINANCING - DBCI specializes in providing working capital loans secured by accounts receivable, inventory, and other marketable assets. All loans are made on a full recourse basis to the borrower. Personal guarantees from the owners of the borrower are normally obtained. Loans are made on a demand basis with no fixed repayment schedule. Compared to equity-based loans made by banks and others, asset-based loans usually require closer monitoring which results in higher loan servicing costs. Typically, interest rates earned on these loans are higher than rates earned on equity-based loans. OTHER SERVICES - NCBC and subsidiaries do not have more than one line of business or class of service. All income is derived from commercial banking and bank-related services. It is not dependent on a single customer or a single industry for any material part of its business. COMPETITION - Banking in Minnesota, as elsewhere, is highly competitive and NCB competes with other banks, both independent and those affiliated with other bank holding companies. Additional competitors are able to enter the Minnesota market following the June, 1997 change in banking regulations (See Supervision & Regulation). In addition, in lending funds and obtaining deposits, NCB competes with other types of institutions, such as savings and loan associations, credit unions, insurance companies, finance companies, and various institutions offering money market and mutual funds. EMPLOYEES - NCBC and its subsidiaries have approximately 272 employees, none of whom are represented by a collective bargaining organization. GOVERNMENT POLICIES - The earnings of NCBC's various operating units, as lenders of money, are affected by state and federal legislative changes and by policies of various regulatory authorities, including those of the State of Minnesota and the United States and, to a lesser extent, by those of foreign governments, and international agencies. These policies include, for example, statutory maximum legal interest rates, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, and capital adequacy and liquidity constraints imposed by bank regulatory agencies. SUPERVISION AND REGULATION - NCBC is a registered bank holding company under the Bank Holding Company Act of 1956 (the Act) and is subject to the supervision of and regulation by the Board of Governors of the Federal Reserve System (the Board). Under the Act, a bank holding company may engage in banking, managing or controlling banks, furnishing and performing services for banks which it controls, and activities which the Board has determined to be closely related to banking. NCBC must obtain approval of the Board before acquiring control of a bank or acquiring more than 5% of the outstanding voting shares of a company engaged in a bank-related business. In general, effective June 1, 1997, federal law permits the merger of insured banks within different home states, 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 examination by the Comptroller of the Currency and the Federal Reserve System. The subsidiary bank is a member of the Federal Deposit Insurance Corporation and, accordingly, is subject to examination thereby. Areas subject to regulation by federal and state authorities include deposit reserves, investments, loans, mergers, issuance of securities, payment of dividends, establishment of branches, and other aspects of operations. STATISTICAL DATA - Statistical data is presented on pages 25 through 31 of the Annual Report to Stockholders for the year ended December 31, 1997, 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 14,067 square feet of space in downtown Minneapolis. This lease expires in the year 2002. The aggregate net rentals for all of the above described facilities were approximately $2,478,000 in 1997. 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 amount 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 from March 16, 1996, or (ii) the fair market value of the space. NCB will pay its pro rata share of taxes when due. NCB has the right to contest real estate taxes against the premises if the landlord fails to do so. NCB pays normal operating expenses which includes a cap on management fees and exclusions that are generally consistent with other large office tenant leases. DBCI relocated its offices to the Dain Bosworth Plaza, at 60 South Sixth Street in September, 1997. DBCI entered into a five year lease commencing September, 1, 1997, to occupy 14,067 square feet in the new location. The effective annual base rent per square foot is $21.31 for the five years. The annual cost for the five years will be approximately $242,000 per year. In addition, DBCI paid all leasehold improvements which cost approximately $108,000. DBCI has two options of five years each to extend the lease term at the then current fair market rents for office space. DBCI will pay its pro rata share of taxes when due. DBCI will have the right to contest real estate taxes against the premises if the landlord fails to do so. DBCI will pay normal operating expenses which will include exclusions that are generally consistent with other 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 NCBC's consolidated financial position, liquidity or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The market for National City Bancorporation's common stock and related stockholder matters is presented on pages 1 and 31 of the Annual Report to Stockholders for the year ended December 31, 1997, and is incorporated herein by reference. PART II ITEM 6 - SELECTED FINANCIAL DATA Selected financial data is presented on page 30 of the Annual Report to Stockholders for the year ended December 31, 1997 and is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is presented on pages 18 through 24 of the Annual Report to Stockholders for the year ended December 31, 1997 and is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary financial information of National City Bancorporation and subsidiaries are presented on pages 3 through 17 and 30 through 31 of the Annual Report to Stockholders for the year ended December 31, 1997 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 4 through 7 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 22, 1998, and said presentation is incorporated herein by reference. The executive officers referred to in this Item 10 are as follows: Mr. David L. Andreas has been a director since 1980 and was elected 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 and Secretary and Chief Financial Officer effective July, 16, 1997. Mr. Freed was elected Senior Vice President and Chief Financial Officer of NCB in 1986. Previous to 1986, Mr. Freed served as an officer of NCB for seventeen years. Mr. Robert L. Olson has been President, Chief Executive Officer and director of Diversified Business Credit, Inc. since 1985. ITEM 11 - EXECUTIVE COMPENSATION Executive compensation is set forth on pages 7 through 10 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 22, 1998 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 2 through 6 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 22, 1998 and is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain relationships and related transactions are presented on page 9 through 10 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 22, 1998 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, 1997, are incorporated by reference in Item 8: Independent Auditors' Report Consolidated balance sheets - December 31, 1997 and 1996 Consolidated statements of earnings - years ended December 31, 1997, 1996 and 1995 Consolidated statements of stockholders' equity - years ended December 31, 1997, 1996 and 1995 Consolidated statements of cash flows - years ended December 31, 1997, 1996 and 1995 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(c) - Salary Continuation Agreement between NCB and Walter E. Meadley, Jr. (incorporated herein by reference to Exhibit 10(c) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). 10(d) - Salary Continuation Agreement, as amended, between NCB and Thomas J. Freed (incorporated herein by reference to Exhibit 10(d) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10(f) - Fourth Amendment to Executive Salary Continuation Agreement by and between NCB and Thomas J. Freed dated November 31, 1995. [Incorporated herein by reference to Exhibit 10(f) to the 1995 Form 10-K.] 10(g) - Fourth Amendment to Executive Salary Continuation Agreement by and between NCB and Walter E. Meadley, Jr. dated November 31, 1995. [Incorporated herein by reference to Exhibit 10(g) to the 1995 Form 10-K.] 10(h) - Fourth Amendment to Executive Salary Continuation Agreement by and between NCB and David L. Andreas dated December 31, 1995. [Incorporated herein by reference to Exhibit 10(h) to the 1995 Form 10-K.] 10(i) - Change in Control Agreement by and between NCBC, NCB, and Thomas J. Freed dated as of November 19, 1996. [Incorporated herein by reference to Exhibit 10(i) to the 1996 Form 10-K.] 10(j) - Employment Agreement, dated December 4, 1997, by and between DBCI and Robert L. Olson. 11 - Computation of Basic Earnings Per Share. 13 - Annual Report to Stockholders (only those portions incorporated herein by reference shall be deemed filed with the Commission). 22 - Subsidiaries of Registrant are listed and described in PART I, Item 1. 23 - Consent of Ernst & Young, LLP. 27 - Financial Data Schedule Copies of the exhibits will be furnished upon request and payment of registrant's reasonable expenses in furnishing the exhibits. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1997. 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 18, 1998 /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 18, 1998 /S/David L. Andreas --------------------------------------- David L. Andreas, Chairman of the Board of Directors (Principal Executive Officer) Date: March 18, 1998 /S/Thomas J. Freed --------------------------------------- Thomas J. Freed, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 18, 1998 /S/Wendell R. Anderson --------------------------------------- Wendell R. Anderson, Director Date: March 18, 1998 --------------------------------------- L.W. Andreas, Director Date: March 18, 1998 --------------------------------------- Terry L. Andreas, Director Date: March 18, 1998 /S/Marvin Borman --------------------------------------- Marvin Borman, Director Date: March 18, 1998 --------------------------------------- Kenneth H. Dahlberg, Director Date: March 18, 1998 --------------------------------------- John H. Daniels, Jr., Director Date: March 18, 1998 /S/Thomas E. Holloran --------------------------------------- Thomas E. Holloran, Director Date: March 18, 1998 --------------------------------------- C. Bernard Jacobs, Director Date: March 18, 1998 /S/David C. Malmberg --------------------------------------- David C. Malmberg, Director Date: March 18, 1998 /S/Walter E. Meadley, Jr. --------------------------------------- Walter E. Meadley, Jr., Director Date: March 18, 1998 /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(c) Salary Continuation Agreement between NCB and Walter E. Meadley, Jr. [incorporated herein by reference to Exhibit 10(c) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990]. 10(d) Salary Continuation Agreement, as amended, between NCB and Thomas J. Freed (incorporated herein by reference to Exhibit 10(d) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10(f) Fourth Amendment to Executive Salary Continuation Agreement by and between NCB and Thomas J. Freed dated November 31, 1995. [Incorporated herein by reference to Exhibit 10(f) to the 1995 Form 10-K.] 10(g) Fourth Amendment to Executive Salary Continuation Agreement by and between NCB and Walter E. Meadley, Jr. dated November 31, 1995. [Incorporated herein by reference to Exhibit 10(g) to the 1995 Form 10-K.] 10(h) Fourth Amendment to Executive Salary Continuation Agreement by and between NCB and David L. Andreas dated December 31, 1995. [Incorporated herein by reference to Exhibit 10(h) to the 1995 Form 10-K.] 10(i) Change in Control Agreement by and between NCBC, NCB, and Thomas J. Freed dated as of November 19, 1996. [Incorporated herein by reference to Exhibit 10(i) to the 1996 Form 10-K.] 10(j) Employment Agreement, dated December 4, 1997, by and between DBCI and Robert L. Olson. 11 Computation of Basic Earnings Per Share. 13 Annual Report to Stockholders (only those portions incorporated herein by reference shall be deemed filed with the Commission). 22 Subsidiaries of Registrant are listed and described in PART I, Item 1. 23 Consent of Ernst & Young, LLP. 27 Financial Data Schedule EX-10.J 2 EMPLOYMENT AGREEMENT EXHIBIT 10j EMPLOYMENT AGREEMENT THIS AGREEMENT made and entered into as of the 4th day of December, 1997, between DIVERSIFIED BUSINESS CREDIT, INC. ("DBCI") and NATIONAL CITY BANCORPORATION ("NCB") (hereafter collectively referred to as "Employer") and ROBERT L. OLSON (hereafter referred to as "Employee"). 1. Employment. Commencing January 1, 1998, Employer shall employ Employee as Chief Executive officer and President of DBCI for a period of two (2) years (initial term). 2. Option. Upon the expiration of the original two (2) year term hereof, Employee shall have the option to extend the term of this Agreement for an additional two (2) year period (option term). This option shall be automatically exercised unless Employee gives Employer notice of his intent not to exercise the option prior to the expiration of the initial term hereof. 3. Duties. During the initial term, and option term, if exercised, Employee shall serve DBCI to the best of his ability as Chief Executive Officer and President of DBCI. Employee shall devote his full time, energy and skill to such employment during normal business hours, except during periods of vacation or disability. Employee shall not perform any services for other persons except with the prior, written consent of Employer and Employee shall not at any time or in any way compete with the Employer or be employed by or associated with any individual, firm, company or business which in any way competes with the Employer. Employee shall report directly to the Chairman of the Board of Directors of NCB, or the Chairman's designee, or the Board's designee. In no event shall Employee be required to relocate outside the Minneapolis-St. Paul metropolitan area, nor be required to perform duties outside of such area for extended periods of time. 4. Authority. Employee shall have final authority over all hiring and terminating of DBCI personnel with the concurrence of the Chairman of the Board of Directors of NCB, or the Chairman's designee, or the Board's designee, subject to compliance with applicable law. 5. Board of Directors. Employee shall be elected to the Board of Directors of DBCI while he is an employee of DBCI for each year during the initial term of this Agreement, and the option term, if exercised. 6. Base Salary. Employee shall receive an annual base salary of Two Hundred Eighty Thousand Dollars ($280,000.00) per year, paid in equal semi-monthly installments. In no event shall Employee's annual base salary be decreased in any year from the annual base salary existing in any prior year, but the base salary shall be reviewed annually for increases. 7. Bonus. (a) Annual Amount. Employee shall be paid a bonus equal to five percent (5%) of the combined pretax profits of DBCI for each fiscal year of DBCI, or portion thereof, during which Employee is employed under this Agreement. "Pretax profits" shall be calculated and determined as provided in paragraph (b) of this Section 7. In no event shall the bonus, if any, due Employee under this Section 7 exceed an amount equal to two hundred percent (200%) of the annual base salary paid to Employee in the fiscal year of DBCI with respect to which the bonus is calculated. (b) Calculation of Profits (Losses). Pre-tax profits of DBCI shall be determined in accordance with generally accepted accounting principles, except, with respect to the treatment of losses on loans and loss carry forwards which, for purposes of this Agreement alone, shall not be equal to bad debt reserves established by DBCI, but, in lieu, shall be determined as provided in this paragraph (b) of this Section 7. "Losses on loans" shall be the aggregate amount of any unpaid loan balances, principal and interest, reflected on the books of DBCI which are determined for the year under consideration to be uncollectible in whole or in part in the opinion of the Board of Directors of DBCI. In exercising their judgment and discretion, the Board of Directors will consider all pertinent evidence relating to an indebtedness, including the value of the collateral, if any, securing the debt, the financial condition of the debtor and whether legal action will, in all probability, not result in the satisfaction of any judgment obtained. If such calculation results in combined pretax losses, such combined pretax losses shall be carried forward to subsequent years in either the initial term or the option term. (c) The following hypothetical illustrates the intended operation and effect of paragraphs (a) and (b) of this Section 7. (i) Assume that, for the fiscal year under consideration, DBCI has income before taxes and provision for loan losses of $1,100,000. (ii) There is no reduction to income before taxes and provision for loan losses as a result of loan loss reserves established for DBCI. (iii) Assume, however, that the Board of Directors of DBCI determines that, for the year under consideration, unpaid loan balances, including principal and accrued interest reflected on the books of DBCI, in the amount of $100,000 are uncollectible. (iv) Income before taxes and provision for loan losses would be reduced by the amount of $100,000, resulting in pretax profits of $1,000,000. (v) Under this hypothetical, Employee would be paid five percent (5%) of pretax profits or $50,000 (5% x $1,000,000). (d) Short Year, Payment. If Employee's employment terminates prior to the end of any fiscal year, the calculation of pre-tax earnings shall be made as of the close of the fiscal quarter-annual period immediately succeeding Employee's termination of employment. The bonus provided for in this Section 7, if any be due, shall be paid no later than the fifteenth (15th) day of the fourth (4th) calendar month following the close of the fiscal year for which the bonus is determined. 8. Fringe Benefits. Employee shall receive the use of an Employer-owned automobile, and shall be provided a parking space in the immediate vicinity of DBCI's main office at no cost to Employee. Employee shall receive five (5) weeks of paid vacation per year; provided, however, no more than one week of paid vacation may be carried over from one calendar year to the next calendar year with the remainder of any unused vacation expiring as of the calendar year end. Employee shall also participate in the pension and other qualified retirement plans of Employer, in the same manner as employees of National City Bank (the "Bank"), to wit, the Retirement Plan (defined benefit pension plan) and Incentive Savings Plan (401-K), in all fringe benefits, perquisite and benefit programs as made available to officers or employees of the Bank (excluding Bank's Senior or Middle Management Incentive Compensation Plans as adopted and effective February, 1993) and in the group term life insurance, major medical, disability, hospitalization, dental and accident insurance plans as made available to Bank employees. 9. Expense Account. Employee shall be reimbursed for all ordinary expenses incurred by him in performance of his duties against presentation of appropriate vouchers. 10. Disability. If, during the initial term or the option term, both Employer and Employee agree Employee is prevented from carrying on his duties in accordance with the terms of this Agreement as a result of mental or physical illness or injury ("disability"), Employer shall continue Employee's full compensation until the last day of the sixth calendar month following the month during which the onset of such disability occurs. Thereafter, Employee's compensation shall be discontinued. If the parties do not mutually concur that a disability exists or has occurred, the determination shall be made by a reputable practicing physician, not regularly employed or consulted by any party hereto, appointed by the Dean of the School of Medicine of the University of Minnesota, upon application by any party and the determination of the appointed physician on the issue of disability shall be in writing and shall be binding upon all of the parties. In the event the medical opinion deems Employee disabled within the meaning of this paragraph, then the date of Employee's disability shall be the date the written medical opinion is issued. In the event the medical opinion determines that Employee is not disabled, then this Employment Agreement shall remain in full force and effect. All costs related to the issuing of the medical opinion hereunder shall be divided equally between Employer and Employee. If Employee is found to be disabled and has unused vacation time for the fiscal year, Employee may use any part or all thereof before his absence will be deemed to be disability time hereunder. To the extent that Employer carries disability insurance on Employee and pays premiums therefor, the disability benefits received thereunder shall be paid over to the Employee, and the compensation to be paid to Employee under this section shall be reduced by such disability benefits. All disability benefits shall terminate at Employee's death. 11. Events of Termination. This agreement shall terminate, prior to its scheduled expiration as follows: (a) by mutual agreement of the parties; (b) upon death of Employee; (c) upon expiration of the six-month disability period provided for in Section 10, provided, however, that said expiration shall not effect Employee's rights to receive disability insurance benefits following the expiration; or (d) the Employer may terminate this Agreement by written notice to Employee, immediately, if: (1) Employee is convicted of a felony; (2) Employee is determined by a court of law to have committed a fraudulent act; or (3) Employee is determined by a court of law to have acted dishonestly with respect to any business of Employer. 12. Nondisclosure of Proprietary Information. Except in the ordinary course of his duties for and on behalf of Employer, unless authorized in writing by Employer, Employee shall not disclose to any person or entity (other than Employer or Bank) any of Employer's or Bank's trade secrets, designs, processes, technology, marketing plans, customer lists or other information as to the services, activities, operations or plans of Employer or Bank which is not generally made available to the public at large, either during employment or afterwards. All records, documents or other tangible property relating in any way to the business of Employer which are conceived or generated by Employee or come into his possession during his employment shall be and remain the exclusive property of Employer, and Employee agrees promptly to return all such documents and tangible property to Employer on termination of his employment. 13. Attorney's Fees and Costs. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs, and necessary disbursements in addition to any other relief to which he or it may be entitled. 14. Notices. Any notices to be given hereunder by either party to the other may be effective either by personal delivery in writing or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses appearing on the signature page of this Agreement, but each party may change its or his address by written notice in accordance with this paragraph. Notices delivered personally shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three (3) days after mailing. 15. Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of the Employee by the Employer and contains all of the covenants and agreements between the parties with respect to such employment in any manner whatsoever; provided, however, nothing contained herein shall be construed to alter, amend or modify any of the terms or provisions of that certain agreement by and between Employee and NCB, dated June 10, 1986 and entitled "Salary Continuation Agreement." Each party to this Employment Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding. Any modification of this Agreement will be effective only if it is in writing signed by the party to be charged. 16. Partial Invalidity. If any provision in this Employment Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way. 17. Law Governing Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota. 18. Binding Effect. This Agreement is and shall be binding on the heirs, personal representatives, legal representatives, successors and assigns of the parties hereto. 19. Assignment. Employee may not assign this Agreement. Employer may assign this Agreement only upon written consent of Employee. 20. Superseding Agreement. This Agreement supersedes and replaces the Employment Agreement between DBCI, NCB and Employee dated January 1, 1996; provided, however, said Employment Agreement dated January 1, 1996 shall continue in effect for the remainder of the calendar year ended December 31, 1997. EXECUTED at Minneapolis, Minnesota, the day and year first above written. EMPLOYEE: EMPLOYER: DIVERSIFIED BUSINESS CREDIT, INC. 3970 Multifoods Tower /s/ Robert L. Olson 33 South Sixth Street - -------------------------- Minneapolis, MN 55402 Robert L. Olson 925 Crystal Lake Road Burnsville, MN 55337 By: /s/ David L. Andreas ------------------------------ Its: Chairman NATIONAL CITY BANCORPORATION 651 Nicollet Mall Minneapolis, MN 55402 By: /s/ David L. Andreas ------------------------------ Its: Chairman and CEO GUARANTY National City Bank of Minneapolis hereby unconditionally guarantees the performance by Employer of all terms, duties, obligations and conditions (including but not necessarily limited to the payment of all Base Salary, Bonuses and Fringe Benefits accorded to Employee) imposed upon Employer by the foregoing Employment Agreement. NATIONAL CITY BANK OF MINNEAPOLIS By: /s/ David L. Andreas ------------------------------ Its: Chief Executive Officer EX-11 3 COMPUTATION OF BASIC EARNINGS PER SHARE NATIONAL CITY BANCORPORATION AND SUBSIDIARIES COMPUTATION OF BASIC EARNINGS PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - -------------------------------------------------------------------------------- 1997 1996 1995 Net earnings applicable to common stock $14,964 $12,686 $11,454 Weighted average common shares outstanding* 8,097 8,111 8,111 Basic earnings per share $1.85 $1.56 $1.41 *Adjusted for stock dividends EX-13 4 1997 ANNUAL REPORT 1997 ANNUAL REPORT NATIONAL CITY BANCORPORATION This year's annual report cover was designed by Minneapolis College of Art and Design (MCAD) Senior, Ken Sakurai, who works in MCAD DesignWorks, the college's in-house design studio. A graduate of Kanto Gakuin University, Yokahama, Japan, Ken will graduate from MCAD in May, after which he looks forward to working in a small or medium-size graphic design studio. Says Sakurai, "My intention here is to depict the relationships that National City has created with their clients, and the focus they have on customer service." A program of the college's design division, MCAD DesignWorks is committed to providing professional opportunities to outstanding students of graphic design, illustration, advertising and interactive multimedia. The studio offers professional practice opportunities to students and provides creative solutions to Minnesota's non-profit and business communities. This project was managed by Barsuhn Design Incorporated. National City Bancorporation's work with DesignWorks is one of the many ways we support MCAD, an internationally recognized, non-profit, accredited college of art and design. Our community benefits when businesses and community leaders support arts and education. We are all richer for these relationships. For more information about MCAD DesignWorks call Pamela Arnold, Coordinator, at (612) 874-3767, or e-mail: pamela_arnold@mn.mcad.edu. ================================================================================ FINANCIAL HIGHLIGHTS ================================================================================ (IN THOUSANDS EXCEPT PER SHARE) 1997 1996 - -------------------------------------------------------------------------------- For the Year Net interest income $ 43,709 $ 39,247 Net earnings 14,964 12,686 Basic earnings per share 1.85 1.56 At Year End Total assets $935,172 $900,129 Loans 666,382 596,504 Deposits 478,650 519,631 Stockholders' equity 132,927 118,013 Book value per share 16.46 14.55 ================================================================================ TABLE OF CONTENTS ================================================================================
Report to Stockholders 2 Statistical Data 25 Consolidated Financial Statements 3 Selected Financial Data 30 Notes to Consolidated Financial Statements 7 Selected Ratios and Consolidated Report of Independent Auditors 17 Quarterly Financial Data 31 Management's Discussion and Analysis of Directors and Officers 32 Financial Condition and Results of Operations 18
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 and 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 Wednesday, April 22, 1998, at 10:00 a.m. MARKET FOR COMMON STOCK NCBC's common stock is traded on the over-the-counter market in the NASDAQ Stock Market (SM) under the symbol NCBM. There are currently approximately 2,600 registered stockholders. COMPANY INFORMATION Current news and other information about your Company can be found on the internet at http://www.shareholdernews.com/NCBM. The site includes our current stock price, press releases and a link to Securities and Exchange Commission filings. [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: Over the last year, we at National City Bancorporation have been working hard to generate consistent performance, which you will see in our financial results on the following pages. We know it's important to you, as it is to us, that we grow the company consistently while improving our key operating measures and reducing variability of earnings related to risk. Now, both subsidiaries are in new leased space, designed for customers to take advantage of communication and information technology, creating a closer relationship between customers and their financial teams. All of this happened while we were increasing assets, reducing operating cost ratios, and increasing return on your investment. Our financial measures reflect a strong company. For the year, total assets increased just under four percent and were $935 million at year-end. Loans grew by twelve percent and were at an all-time high of $666 million at year-end. Both subsidiaries accounted for these increases. Net income grew by eighteen percent and equaled $14,964,000, or $1.85 per share in 1997, compared with $12,686,000, and $1.56 per share in 1996. Total stockholders' equity was almost $133 million at year-end and equaled $16.46 per share. Non-performing assets were $1.2 million, .2 percent of total loans. We increased the reserve for losses to $10,071,000 representing 1.51 percent of total loans and 843 percent of non-performing assets. Our operating ratio was 51.3 percent, indicating improved efficiency over prior years. The fourth quarter of 1997 reflected our year's performance. Net earnings were $3,889,000 for the quarter. That equals $.48 per share, a fourteen percent increase over the same quarter of 1996 adjusted for stock dividends. Our focus on mid-sized businesses, their owners' financial needs, and their employees' needs has driven us to provide highly integrated financial services to a responsive market. Our own bank teams have developed the first installations of Aveo(tm) kiosk banking, an innovative way for businesses to access banking and business services in their workplaces. We know this and other markets are ready for a financial institution that understands and respects people who are taking risks, managing their promises, and performing in an increasingly fast-paced global marketplace. National City Bancorporation is proving through inventive services that we can anticipate the needs of those companies and provide tools to enhance their access to the financial and business marketplace. In 1998 we will continue to focus on innovation and profitability. Thank you for your support and I welcome your suggestions and comments as we work together into the future. /s/ David L. Andreas David L. Andreas Chairman of the Board and Chief Executive Officer 2 ================================================================================ CONSOLIDATED BALANCE SHEETS ================================================================================
DECEMBER 31, ----------------------- (IN THOUSANDS) 1997 1996 - ----------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 52,847 $ 47,934 Federal funds sold and resale agreements 3,740 60,120 Available-for-sale securities 141,325 133,190 Held-to-maturity securities (market value: 1997--$37,861 and 1996--$31,812) 37,402 31,505 Loans 666,382 596,504 Less allowance for loan losses (10,071) (8,511) --------- --------- 656,311 587,993 Bank premises and equipment 11,413 11,798 Accrued interest receivable 7,260 6,306 Customer acceptance liability 811 787 Other assets 24,063 20,496 --------- --------- $ 935,172 $ 900,129 ========= ========= - ----------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 149,624 $ 162,895 Interest bearing 329,026 356,736 --------- --------- 478,650 519,631 Federal funds purchased and repurchase agreements 104,399 96,640 Commercial paper 119,081 98,107 Other short-term borrowed funds 23,218 11,366 Acceptances outstanding 811 787 Other liabilities 9,086 7,665 Long-term debt 67,000 47,920 --------- --------- Total liabilities 802,245 782,116 Stockholders' equity: Common stock, par value $1.25, Authorized 20,000,000 shares; Issued: 1997--8,110,836 shares; 1996--7,374,520 shares 10,139 9,218 Additional paid-in capital 94,756 79,199 Unrealized gains (losses) net of tax effect 424 (405) Retained earnings 28,464 30,001 --------- --------- 133,783 118,013 Less common stock in treasury at cost: 1997--33,553 shares; 1996--16 shares (856) --------- --------- Total stockholders' equity 132,927 118,013 --------- --------- $ 935,172 $ 900,129 ========= =========
See Notes To Consolidated Financial Statements 3 ================================================================================ CONSOLIDATED STATEMENTS OF EARNINGS ================================================================================
YEAR ENDED DECEMBER 31, --------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) 1997 1996 1995 - --------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 66,110 $ 57,992 $ 54,952 Interest on federal funds sold and resale agreements 1,450 804 727 Interest and dividends on securities: Taxable 11,440 10,580 9,369 Exempt from federal income taxes 20 321 -------- -------- -------- 11,440 10,600 9,690 -------- -------- -------- Total interest income 79,000 69,396 65,369 - --------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 16,281 14,980 12,950 Interest on short-term borrowed funds 15,069 11,908 11,680 Interest on long-term debt 3,941 3,261 3,638 -------- -------- -------- Total interest expense 35,291 30,149 28,268 -------- -------- -------- Net interest income 43,709 39,247 37,101 Provision for loan losses 2,134 2,345 1,502 -------- -------- -------- Net interest income after provision for loan losses 41,575 36,902 35,599 - --------------------------------------------------------------------------------------------- NON-INTEREST INCOME Service charges on deposit accounts 2,195 2,189 1,862 Fees for other customer services 1,698 1,837 1,655 Trust fees 4,801 4,605 4,839 State income tax refund 1,369 Gains (losses) on sale of securities 133 (122) Other 1,327 1,318 943 -------- -------- -------- 11,390 10,082 9,177 - --------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits 15,110 14,965 15,156 Net occupancy expense of bank premises 3,194 2,750 2,272 Equipment rentals, depreciation and maintenance 3,648 2,731 2,481 Other 6,313 5,743 6,144 -------- -------- -------- 28,265 26,189 26,053 -------- -------- -------- Earnings before income taxes 24,700 20,795 18,723 Income taxes 9,736 8,109 7,269 -------- -------- -------- Net earnings $ 14,964 $ 12,686 $ 11,454 ======== ======== ======== - --------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE $ 1.85 $ 1.56 $ 1.41 ======== ======== ======== Average common and common equivalent shares outstanding 8,097 8,111 8,111
See Notes To Consolidated Financial Statements 4 ================================================================================ CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ================================================================================
COMMON STOCK TREASURY STOCK --------------------- ADDITIONAL UNREALIZED ----------------- NUMBER PAID-IN RETAINED GAINS NUMBER (IN THOUSANDS EXCEPT NUMBER OF SHARES) OF SHARES AMOUNT CAPITAL EARNINGS (LOSSES) OF SHARES AMOUNT TOTAL - --------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 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 Net earnings for the year 14,964 14,964 Ten percent stock dividend 736,374 921 15,558 (16,500) (21) Unrealized securities gains net of tax effect 829 829 Cancellation of treasury stock (58) (1) (1) (58) 1 (1) Purchase of treasury stock 33,595 (857) (857) --------- --------- --------- --------- -------- ------ ------ --------- Balance at December 31, 1997 8,110,836 $ 10,139 $ 94,756 $ 28,464 $ 424 33,553 $ (856) $ 132,927 ========= ========= ========= ========= ======== ====== ====== =========
See Notes to Consolidated Financial Statements 5 ================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================
YEAR ENDED DECEMBER 31, ------------------------------------- (IN THOUSANDS) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 14,964 $ 12,686 $ 11,454 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 3,245 2,169 1,664 Amortization of securities premiums and discounts 469 426 387 Provision for loan losses 2,134 2,345 1,502 Deferred income taxes (347) 472 (390) (Gain) loss on sale of securities (133) 122 (Increase) decrease in accrued interest receivable (954) 29 568 (Increase) in other assets (3,567) (138) (3,874) Increase (decrease) in other liabilities 1,421 (1,147) 103 Other (increase) decrease (1,216) (853) 779 --------- --------- --------- Total operating adjustments 1,185 3,170 861 --------- --------- --------- Net cash from operating activities 16,149 15,856 12,315 Cash flows from investing activities: Net (increase) in loans (69,878) (43,923) (85,528) Net (increase) decrease in federal funds sold 56,380 (35,120) (24,950) Available-for-sale securities: Proceeds from maturities and principal repayments 27,274 50,740 20,772 Proceeds from sale of securities 4,688 7,848 Purchases of securities (34,476) (68,114) (31,269) Held-to-maturity securities: Proceeds from maturities and principal repayments 9,233 13,581 11,588 Proceeds from sale of securities 45 Purchases of securities (15,139) (9,000) (22,426) Purchase of premises and equipment (2,436) (9,365) (1,892) Payment of prepaid expenses (1,739) --------- --------- --------- Net cash (used in) investing activities (29,042) (98,252) (125,812) --------- --------- --------- Cash flows from financing activities: Net increase in non-interest bearing and savings deposits 2,151 26,326 28,094 Net increase (decrease) in time deposits (43,132) 53,320 44,164 Net increase (decrease) in federal funds purchased and repurchase agreements 7,759 (13,895) 34,979 Net increase in commercial paper 20,974 18,121 17,563 Net increase (decrease) in other short-term borrowed funds 11,852 4,679 (11,400) Net increase (decrease) in long-term debt 19,080 (200) (5,000) Purchase of treasury stock (856) (1) (10) Payment for fractional shares on stock dividends (22) (26) (20) --------- --------- --------- Net cash from financing activities 17,806 88,324 108,370 --------- --------- --------- Net increase (decrease) in cash and due from banks 4,913 5,928 (5,127) Cash and due from banks at beginning of year 47,934 42,006 47,133 --------- --------- --------- Cash and due from banks at end of year $ 52,847 $ 47,934 $ 42,006 ========= ========= ========= Supplemental disclosures Cash paid during the year for: Interest $ 35,194 $ 30,266 $ 27,259 Income taxes 10,076 7,206 7,725 Unrealized securities gains (losses) net of tax 829 (680) 3,415
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. 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 of the asset or lease term. IMPAIRMENT OF LONG-LIVED ASSETS--The Company adopted in 1997 Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This standard requires a reduction in the carrying amounts of certain impaired assets to their estimated fair value, determined on the basis of estimated cash flows or net realizable value. The impairments relate to assets not currently in use, assets significantly underutilized, and assets with limited planned future use. The Company had no impaired assets requiring adjustments in 1997. 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 ================================================================================ NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE--In February 1997, the Financial Accounting Standards Board issued Statement of Financial Standards (SFAS) No. 128, "Earnings per Share". The Company adopted SFAS No. 128 in the fourth quarter of 1997. This standard requires dual presentation on basic and diluted earnings per share (EPS) in the statement of earnings. Basic EPS excludes dilution, if any, and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS recognizes all potential common shares outstanding during the period, such as, outstanding stock options. The Company had no dilutive options outstanding during 1997 and at December 31, 1997. There was no impact on the Company's financial condition or results of operation due to the adoption of SFAS No. 128. STATEMENT OF CASH FLOWS--For purposes of the statement of cash flows, cash equivalents includes cash and due from banks. CAPITAL STRUCTURE--SFAS No. 129, "Disclosures of Information about Capital Structure" was issued in February 1997. The Company's current disclosures regarding capital structure were not materially different under this standard. MARKET RISK--The Securities and Exchange Commission has adopted rules requiring expanded disclosure or risks and policies concerning derivatives and market risk. Adoption of these rules was required in 1997. There will be no impact on the Company's financial condition or results of operations due to the adoption of these rules. 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, 1997 ---------------------- CARRYING ESTIMATED (IN THOUSANDS) AMOUNT FAIR VALUE - -------------------------------------------------------- ASSETS: Cash and due from banks $52,847 $52,847 Federal funds sold and resale agreements 3,740 3,740 Available-for-sale securities 141,325 141,325 Held-to-maturity securities 37,402 37,861 Loans-net of allowance for loan losses 656,311 660,971 LIABILITIES: Deposits 478,650 478,787 Federal funds purchased and repurchase agreements 104,399 104,412 Commercial paper and other short-term funds 142,299 142,331 Long-term debt 67,000 69,203 OFF-BALANCE SHEET UNREALIZED GAINS: Interest rate swap agreements 2,013 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-net of allowance for loan losses 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 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. 8 ================================================================================ NOTE B. ESTIMATED FAIR VALUE (CONTINUED) 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 82% 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. 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) 1997 1996 - ---------------------------------------------------- Commercial & Industrial $439,802 $389,718 Real estate: Construction 10,405 10,444 Residential mortgage 43,295 40,323 Non-residential mortgage 86,762 76,086 Loans to individuals for personal expenditures 54,987 56,973 Other 31,131 22,960 -------- -------- $666,382 $596,504 ======== ======== At December 31, 1997 and 1996, receivables from and standby letters of credit issued on behalf of commercial real estate developers and investors were approximately $92 million and $77 million, respectively. An analysis of the allowance for loan losses is presented below: YEAR ENDED DECEMBER 31, ----------------------------------- (IN THOUSANDS) 1997 1996 1995 - ---------------------------------------------------------------- Balance at beginning of period $ 8,511 $8,602 $7,946 Provision charged to operating expense 2,134 2,345 1,502 Charge-offs (1,106) (2,552) (951) Recoveries 532 116 105 ------- ------ ------ Balance at end of period $10,071 $8,511 $8,602 ======= ====== ====== 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, 1997, the Company had two impaired commercial loans totaling $171,000 compared with four loans totaling $1,017,000 at December 31, 1996. Management has allocated $171,000 of the Allowance for Loan Losses to these loans. Impaired loans averaged $209,000 and $3,976,000 during 1997 and 1996, 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 $1,194,000 and $3,217,000 at December 31, 1997 and 1996, respectively. Gross interest income would have been increased by approximately $95,000, $426,000, and $311,000 for the years ended December 31, 1997, 1996 and 1995, respectively, had such loans been current and in accordance with original terms. Nonperforming status is not necessarily an indication of probable loss. 9 ================================================================================ NOTE C. LOANS (CONTINUED) Loans to principal officers and directors of the Company and its subsidiaries aggregated approximately $8,552,000 and $8,822,000 at December 31, 1997 and 1996, respectively. New loans and repayments during 1997 were $524,000 and $794,000, 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) 1997 1996 - ------------------------------------------------- Assets, at cost: Land $ 183 $ 183 Buildings 1,222 885 Leasehold improvements 2,613 2,452 Equipment 16,419 15,681 ------- ------- 20,437 19,201 Accumulated depreciation: Buildings 528 500 Leasehold improvements 829 616 Equipment 7,667 6,287 ------- ------- 9,024 7,403 ------- ------- $11,413 $11,798 ======= ======= ================================================================================ NOTE E. DEPOSITS Approximately $93,975,000 and $143,727,000 of interest bearing time deposits were in denominations of $100,000 or more at December 31, 1997 and 1996, respectively. The scheduled maturities of time deposits at December 31, 1997 are summarized as follows: LESS THAN $100,000 (IN THOUSANDS) $100,000 OR MORE - ------------------------------------------ 3 months or less $ 19,879 $29,960 3 - 6 months 26,356 31,431 6 - 12 months 20,997 6,914 1 - 2 years 18,082 3,691 2 - 3 years 6,637 853 3 - 5 years 8,536 21,026 over 5 years 100 100 -------- ------- $100,587 $93,975 ======== ======= ================================================================================ 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, $140,000,000, and $115,000,000 at December 31, 1997, 1996 and 1995, 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) 1997 1996 1995 - ---------------------------------------------------------------------- Maximum amount out- standing at any month end: Federal funds & repurchase $156,104 $137,883 $122,722 Commercial paper 137,714 109,079 91,464 Other 26,332 20,391 20,853 Daily average amount outstanding: Federal funds & repurchase 133,366 116,973 113,245 Commercial paper 118,154 95,950 77,426 Other 17,047 6,967 8,350 Weighted average interest rate for full year: Federal funds & repurchase 4.99% 4.83% 5.33% Commercial paper 6.28% 6.09% 6.49% Other 5.82% 5.37% 7.34% Outstanding at year-end: Federal funds and repurchase 104,399 96,640 110,535 Commercial paper 119,081 98,107 79,986 Other 23,218 11,366 6,687 Weighted average interest rate on debt outstanding as of December 31: Federal funds & repurchase 5.43% 5.36% 5.17% Commercial paper 6.04% 6.11% 6.12% Other 5.33% 5.11% 5.16% ================================================================================ NOTE G. LONG-TERM DEBT DECEMBER 31, -------------------- (IN THOUSANDS) 1997 1996 - --------------------------------------------------------- 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 Series C, 7.84%, due 2007 10,000 Series D, 7.15%, due 2004 5,000 Series E, 7.22%, due 2007 5,000 Federal Home Loan Bank Advances, 5.38% to 6.19%, due 1997 through 1998 920 ------- ------- Total $67,000 $47,920 ======= ======= The Company has entered into interest rate swap agreements to effectively convert the Senior Notes to floating rate instruments. At December 31, 1997, the weighted average effective interest rate for the Senior Notes Series A and B, including the effects of the related swap agreements is the one month LIBOR rate plus 102 basis points, or 7.00%. The weighted average effective interest rate for the Senior Notes Series C, D, and E, including the effects of the related swap agreements, is the three month LIBOR rate plus 77 basis points or 6.62%. The Senior Notes are unsecured and are unconditionally guaranteed by the parent company. The 10 ================================================================================ NOTE G. LONG-TERM DEBT (CONTINUED) 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) 1997 1996 1995 - -------------------------------------------------- Current: Federal $8,074 $6,080 $5,786 State 2,009 1,557 1,873 ------ ------ ------ 10,083 7,637 7,659 Deferred: Federal (263) 357 (296) State (84) 115 (94) ------ ------ ------ (347) 472 (390) ------ ------ ------ $9,736 $8,109 $7,269 ====== ====== ====== 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) 1997 1996 - ------------------------------------------------------- Deferred tax assets: Loan loss reserves $4,076 $3,444 Salary continuation plan 866 817 Loan fees 60 54 Nondeductible expenses 5 43 Unrealized losses on securities 276 ------ ------ Total deferred tax assets 5,007 4,634 Deferred tax liabilities: Retirement plan 1,143 1,059 Prepaid expenses 101 127 Tax over book depreciation 396 152 Security discounts 2 4 Unrealized gains on securities 288 ------ ------ Total deferred tax liabilities 1,930 1,342 ------ ------ Net deferred tax assets $3,077 $3,292 ====== ====== It is more likely than not that the Company will realize the benefit of the deferred tax assets. Therefore, no valuation allowance has been recorded for any of the periods reported. The total effective tax rate for the years ended December 31, 1997, 1996 and 1995 is different than the federal income tax rate. The reasons for the differences are as follows: 1997 1996 1995 ---- ---- ---- Federal income tax rate 35.0% 35.0% 34.0% Tax exempt income (0.1) (0.2) (0.7) State income taxes, net of federal income tax benefit 5.1 5.2 6.6 Cash value of life insurance (0.6) (0.8) (0.7) Other items (0.2) (0.4) ---- ---- ---- Effective rate 39.4% 39.0% 38.8% ==== ==== ==== ================================================================================ NOTE I. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding in connection with standby letters of credit aggregating approximately $19,164,000 and $24,877,000 at December 31, 1997 and 1996, respectively. Commercial letters of credit were $3,187,000 and $3,373,000 at December 31, 1997 and 1996, respectively. Acceptance participations acquired were $7,214,000 at December 31, 1997 and $9,607,000 at December 31, 1996. 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. Diversified Business Credit, Inc. has entered into a five year lease which commenced September 1, 1997, for its new headquarters in downtown Minneapolis. The annual cost for the five years will be approximately $240,000. The lease provides an option to extend the term for two consecutive five-year periods at the then current fair market rents. The Company was obligated under operating leases for premises and equipment with terms of one year or more at December 31, 1997. The aggregate lease commitments outstanding as of December 31, 1997, were $16,269,000 and for the next five years are payable as follows: (IN THOUSANDS) - --------------------------------------------- 1998 $2,430 1999 2,400 2000 2,218 2001 2,206 2002 2,155 Net rental expense for the years ended December 31, 1997, 1996, and 1995, was $2,478,000, $2,170,000, and $1,637,000, respectively. 11 ================================================================================ NOTE I. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 $9,011,000 of dividends may be paid by the Company's bank subsidiary at December 31, 1997, 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 1997, approximately $6,238,000 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. A summary of the Company's contractual or notional amounts for off-balance-sheet activities at December 31, 1997 and 1996, is as follows: (IN THOUSANDS) 1997 1996 - ---------------------------------------------------------------- Credit activities: Commitments to extend credit $262,007 $292,923 Standby letters of credit 19,164 24,877 Commercial letters of credit 3,187 3,373 Acceptance participations acquired 7,214 9,607 Other financial instrument activities: Interest rate swap agreements $ 87,000 $ 67,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral, obtained if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include cash, marketable securities, accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. 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. 12 ================================================================================ NOTE K. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED) 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, 1997 and 1996, the gain position of these contracts was $2.5 million and $1.9 million, respectively. If the counterparties failed to perform according to the terms of the contracts, the Company could incur a loss in the amount of its current gain position. The Company controls the credit risk associated with swap agreements through credit approvals and monitoring procedures. Under the terms of certain swaps, each party may be required to pledge certain assets if the market value of the swap exceeds an amount set forth in the swap agreement or in the event of a change in their credit rating. At December 31, 1997 and 1996, interest rate swaps totaling $67 million and $47 million, respectively, hedged long-term debt. At December 31, 1997 and 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 $67 million of these swaps and the three month LIBOR on $20 million. The notional balances and yields by maturity date for interest rate swaps at December 31, 1997, are as follows: WEIGHTED WEIGHTED NOTIONAL AVERAGE AVERAGE AMOUNT INTEREST RATE INTEREST RATE MATURITY DATE (IN THOUSANDS) RECEIVED PAID - --------------------------------------------------------------------- 1999 $23,000 7.19% 5.98% 2001 44,000 7.00% 5.91% 2004 5,000 6.45% 5.81% 2007 15,000 6.84% 5.85% ------- Total $87,000 7.06% 5.58% Swaps contributed to the Company's net interest income by reducing interest expense for the years ended December 31, 1997, 1996 and 1995, by $995,000, $799,000 and $564,000, 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. The following table sets forth the plan's funded status and amounts recognized in the Company's financial statements:
DECEMBER 31, ---------------------------------- (IN THOUSANDS) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $9,680 in 1997, $9,040 in 1996 and $8,321 in 1995 $ (9,830) $ (9,222) $ (8,578) ======== ======== ======== Projected benefit obligation for service rendered to date $(10,718) $(10,235) $ (9,473) Plan assets at fair value 14,579 13,204 12,730 -------- -------- -------- Plan assets in excess of projected benefit obligation 3,861 2,969 3,257 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (538) 209 (160) Unrecognized transition asset at January 1, 1986 being recognized over 17 years (323) (385) (446) -------- -------- -------- Prepaid pension cost included in other assets $ 3,000 $ 2,793 $ 2,651 ======== ======== ======== Net pension costs include the following components: Service cost--benefits earned during the period $ 316 $ 344 $ 253 Interest cost on projected benefit obligation 718 716 725 Actual return on plan assets (1,905) (1,472) (2,364) Net amortization and deferral 664 270 1,274 -------- -------- -------- Net periodic pension cost $ (207) $ (142) $ (112) ======== ======== ========
For 1997, the discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.0% and 4.5%, respectively. For 1996, the rates were 7.5% and 4.5%. For 1995, the rates were 7.0% and 4.5%. The expected long-term rate of return on assets was 9.0% for all three years. 13 ================================================================================ NOTE L. EMPLOYEE BENEFIT PLANS (CONTINUED) 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, 1997, 1996 and 1995, were $271,000, $263,000, and $257,000, 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) 1997 1996 - ------------------------------------------------------------------------- ASSETS Cash $ 15,911 $ 4,104 Investment in bank subsidiary 58,980 53,648 Investment in non-bank subsidiary 27,925 21,661 Subordinated note receivable from affiliate 8,000 8,000 Other investments 374 663 Due from affiliates 140,650 127,350 Other assets 337 751 -------- -------- $252,177 $216,177 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper $119,081 $ 98,107 Other liabilities 169 57 Stockholders' equity 132,927 118,013 -------- -------- $252,177 $216,177 ======== ======== STATEMENTS OF EARNINGS YEAR ENDED DECEMBER 31, --------------------------------- (IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------- INCOME Dividends from bank subsidiary $ 3,000 $ 3,120 $ 5,515 Interest income 9,879 7,836 6,917 Other income 239 296 208 ------- ------- ------- 13,118 11,252 12,640 EXPENSES Interest expense 7,507 5,909 5,088 Other expenses 621 628 592 ------- ------- ------- 8,128 6,537 5,680 ------- ------- ------- Earnings before taxes 4,990 4,715 6,960 Income taxes 817 652 595 ------- ------- ------- 4,173 4,063 6,365 Equity in undistributed net earnings of subsidiaries 10,791 8,623 5,089 ------- ------- ------- Net earnings $14,964 $12,686 $11,454 ======= ======= ======= 14 ================================================================================ NOTE M. PARENT ONLY INFORMATION (CONTINUED) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- (IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 14,964 $ 12,686 $ 11,454 Adjustments to reconcile net earnings to net cash from operating activities: Equity in undistributed earnings of subsidiaries (10,791) (8,623) (5,089) (Increase) decrease in other assets 726 550 (279) Increase (decrease) in other liabilities 112 (92) (109) --------- -------- --------- (9,953) (8,165) (5,477) --------- -------- --------- Net cash from operating activities 5,011 4,521 5,977 Cash flows from investing activities: (Advances to) affiliates (13,300) (23,195) (19,592) Decrease in other investments 260 --------- -------- --------- Net cash (used for) investing activities (13,300) (23,195) (19,332) Cash flows from financing activities: Net increase in commercial paper 20,974 18,121 17,563 Payment for fractional shares on stock dividends (22) (26) (20) Purchase of treasury stock (856) (1) (10) Other (34) 29 --------- -------- --------- Net cash from financing activities 20,096 18,060 17,562 --------- ---------- --------- Net increase (decrease) in cash 11,807 (614) 4,207 Cash at beginning of year 4,104 4,718 511 --------- ---------- --------- Cash at end of year $ 15,911 $ 4,104 $ 4,718 ========= ========== ========= Supplemental disclosures Cash paid during the year for: Interest $ 7,504 $ 5,465 $ 5,270 Income taxes 660 690 889
================================================================================ NOTE N. SECURITIES Securities consist of the following: DECEMBER 31, 1997 -------------------------------------------- COST OR APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET (IN THOUSANDS) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $ 24,012 $ 13 $ 28 $ 23,997 U.S. Government agencies 9,816 28 9,844 Federal agency mortgage-backed 101,830 1,052 353 102,529 Other securities 4,955 4,955 -------- -------- -------- -------- $140,613 $ 1,093 $ 381 $141,325 ======== ======== ======== ======== Held-to-maturity Collateralized mortgage obligations $ 37,402 $ 459 $ 37,861 ======== ======== ======== 15 ================================================================================ NOTE N. SECURITIES (CONTINUED) 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 ======== ======== ======== ======== 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, 1997 -------------------------------------------------------------------- AFTER ONE AFTER FIVE WITHIN BUT WITHIN BUT WITHIN AFTER TEN ONE YEAR FIVE YEARS TEN YEARS YEARS ----------------- ---------------- ---------------- ---------------- (IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ----------------------------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $23,997 5.26% U.S. Government agencies $ 4,655 6.05% $ 5,189 6.17% Federal agency mortgage-backed $13,700 5.83% $88,829 7.05% Other securities 4,955 6.85% ------- ------- ------- ------- $28,652 5.39% $ 5,189 6.17% $13,700 5.83% $93,784 7.04% ======= ======= ======= ======= Held-to-maturity Collateralized mortgage obligations $ 4,478 7.21% $32,924 7.10% ======= ======= Approximate market value $ 4,526 $33,335 ======= ======= DECEMBER 31, 1996 -------------------------------------------------------------------- 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 ======== =======
Securities carried at $137,547,000 and $115,925,000 at December 31, 1997 and 1996, 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. 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 4.2 years for agency mortgage-backed securities and 2.6 years for collateralized mortgage obligations. 16 ================================================================================ REPORT OF INDEPENDENT AUDITORS ================================================================================ Board of Directors and Shareholders National City Bancorporation Minneapolis, Minnesota We have audited the accompanying consolidated balance sheets of National City Bancorporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota January 16, 1998 17 ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ SUMMARY RESULTS Net earnings for 1997 were $14,964,000 compared with $12,686,000 in 1996, up 18 percent. Basic earnings per share increased to $1.85 in 1997 compared with $1.56 in 1996. Major factors contributing to the earnings increase in 1997 were higher net interest income resulting from growth in loans and investments and an increase in non-interest income, which included a state income tax refund of $1,369,000. We accomplished this growth while holding non-interest expenses to an increase of less than eight percent. 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 $43.8 million up from $39.3 million in 1996 and $37.4 million in 1995. 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 increased to 8.44 percent from 8.28 percent in 1996. Approximately 82 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 5.18 percent compared with 5.26 percent in 1996. Average earning assets grew to $845 million in 1997, an increase of $98 million or 13 percent. Average loans increased to $647 million in 1997 from $571 million in 1996, an increase of 13 percent. Loans were 76.5 percent of total earning assets in 1997, compared with 76.4 percent in 1996. The general increase in interest rates during 1997 increased the cost of interest bearing deposits and borrowed funds to 5.33 percent from 5.18 percent in 1996, an increase of 15 basis points. While the average base rate increased 16 basis points, the average yield on earning assets, including fixed rate securities, increased 6 basis points. As a result, interest rate spread declined to 4.03 percent from 4.12 percent in 1996. Interest bearing time deposits of $100,000 or more increased and averaged $113.2 million in 1997 compared with $103.8 million in 1996. Other interest bearing deposit accounts increased compared with last year and comprise approximately 34 percent of interest bearing sources. Brokered deposits averaged $66.9 million in 1997 compared with $64.8 million in 1996. While the Company's emphasis remains on increasing funding from direct deposits, the brokered deposit market is an important funding option. Commercial paper proceeds are used to fund the loans of the Company's commercial finance subsidiary, Diversified Business Credit, Inc. (DBCI). Long-term debt is issued by DBCI, and National City Bank (Bank) borrows from the Federal Home Loan Bank. At December 31, 1997, long-term debt totaled $67 million. Non-interest bearing deposits increased from 1996 and averaged $118 million in 1997. 18 The following table summarizes the changes in funding sources since 1995:
1997 1996 ------------------------- ------------------------ % CHANGE % CHANGE (DAILY AVERAGES IN THOUSANDS) AMOUNT FROM 1996 AMOUNT FROM 1995 - ----------------------------------------------------------------------------------------------------------- Interest bearing time deposits of $100,000 or more $113,212 9.1% $103,797 56.6% Other interest bearing deposits 222,492 5.8 210,329 5.2 Commercial paper 119,192 24.2 95,950 23.9 Other short-term borrowed funds 149,375 20.5 123,940 1.9 Long-term debt 57,509 19.7 48,054 (5.9) -------- -------- Total interest bearing 661,780 13.7 582,070 12.7 Non-interest bearing deposits 117,605 6.7 110,222 6.0 Other liabilities 9,069 6.3 8,533 3.4 Stockholders' equity 124,323 12.4 110,595 12.5 -------- -------- $912,777 12.5% $811,420 11.6% ======== ========
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 credit weaknesses that are revealed. The Bank has established a risk management function that is responsible for assessing credit risk associated with new loans and lines of credit as well as monitoring credit risk factors on an ongoing basis. The 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 $390 million in 1996 to $440 million in 1997, an increase of 13 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 1997. 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 $55.2 million and $40.3 million at December 31, 1997, and 1996, respectively. Loans secured by commercial real estate were approximately $97 million as of December 31, 1997 and $86 million as of the previous year end. 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 19 portfolio with apartment buildings being the largest category at 22 percent. Commercial real estate lending activities are guided by Credit Policies, Underwriting Guidelines, Operating Procedures, Collateral Standards and Environmental Risk Procedures. Loans secured by residential mortgages totaled $43 million at December 31, 1997, up from $40 million last year. This category includes $20 million secured by first liens on 1-4 family housing, $14 million secured by junior liens on 1-4 family housing and $9 million revolving Executive Line loans that are secured by either first or second mortgages. The comparable 1996 amounts are $20 million first liens, $10 million junior liens and $10 million revolving Executive Lines. Collateral standards for residential real estate lending generally call for a maximum 80 percent loan-to-value ratio for properties up to $300,000 and lesser advance rates for properties above $300,000. Loans to individuals were $55 million at December 31, 1997, compared with $57 million in 1996. These loans are from a variety of sources including loans to higher net-worth individuals in which smaller loan amounts are typically unsecured and where larger amounts are normally secured by marketable securities or home equity. The Company has experienced a low level of loss in the residential mortgage and loans to individuals categories. This resulted from a combination of favorable economic conditions in the Twin Cities over the past several years and the effective performance of credit risk management functions. Other loans were $31 million on December 31, 1997, compared with $23 million in 1996. These loans are comprised primarily of loans to owners of community banks and bank holding companies to finance the purchase and expansion of those banks. The management of risks related to bank stock loans includes specific underwriting guidelines, periodic reviews performed by experienced consultants or bank staff, receipt and analysis of quarterly financial data and frequent calls with bank ownership and management. PROVISION FOR LOAN LOSSES The provision for loan losses was $2.1 million in 1997 compared with $2.3 million in 1996. 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 increased to $10.1 million as a result of the lower net losses in 1997. At December 31, 1997, the reserve was 1.51 percent of loans compared with 1.43 percent in 1996. Actual net loan losses in 1997 were $574,000 compared with $2.4 million in 1996. Charge-offs were $1.1 million in 1997, and recoveries were $532,000. During the same period, the Company reduced non-performing assets from $3.2 million to $1.2 million. The reserve coverage of these assets increased from 265 percent to 843 percent. The Company's receivables from and letters of credit issued for customers in the real estate industry were approximately $92 million at December 31, 1997, compared with $77 million at December 31, 1996. 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 $1.2 million at December 31, 1997, compared with $3.2 million in 1996 and $3.9 million in 1995. At the current year-end, non-performing assets consisted of loans on non-accrual status and loans past due 90 days or more. 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 20 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. These loans are well secured and in the process of collection. The Company had no other real estate owned at December 31, 1997 or 1996. 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 $19 million outstanding at December 31, 1997, 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 two percent shift in the absolute level of interest rates would change the market value of equity by less than four 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 $ 531 $38 $ 72 $ 25 Securities 21 44 77 37 Other assets 40 50 ----- --- ----- ----- 592 82 149 112 Non-interest bearing deposits 81 35 34 Interest bearing deposits 134 100 94 Short-term borrowings 220 27 Long-term debt 47 20 Interest rate swaps 87 (67) (20) Other liabilities and stockholders' equity 143 ----- --- ----- ----- 522 162 108 143 ----- --- ----- ----- Repricing gap $ 70 $(80) $ 41 $ (31) Cumulative gap 70 (10) 31 0 Cumulative gap as a percent of assets 8% (1)% 3% 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 21 a declining rate environment. A lower interest rate environment is preferable for the Company from a credit perspective, however, as there is less pressure on customers to meet variable rate debt servicing obligations. The following table provides information about the Company's derivative financial instruments and other financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For loans, securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the Company's historical experience of the impact of interest rate fluctuations on the prepayment of residential and home equity loans and mortgage-backed securities. For core deposits (e.g., non-interest bearing checking, interest bearing checking and savings, savings and money market deposits) that have no contractual maturity, the table presents principal cash flows and, as applicable, related weighted-average interest rates based on the Company's historical experience, management's judgment, and statistical analysis, as applicable, concerning their most likely withdrawal behaviors.
FAIR VALUE AS OF (IN MILLIONS) 1998 1999 2000 2001 2002 THEREAFTER TOTAL 12/31/97 - --------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS: Fixed interest rate loans $ 40 $ 15 $ 9 $ 21 $ 13 $ 25 $ 123 $126 Average interest rate 7.89% 8.66% 8.99% 9.09% 8.83% 9.08% 8.61% Variable interest rate loans 501 5 5 4 4 13 533 535 Average interest rate 10.19% 8.81% 8.99% 9.00% 9.14% 8.97% 10.09% Fixed interest rate securities 55 25 18 16 15 37 166 167 Average interest rate 6.17% 6.82% 6.98% 6.98% 6.97% 6.93% 6.67% Variable interest rate securities 2 1 1 1 1 7 13 13 Average interest rate 6.78% 6.73% 6.73% 6.73% 6.73% 6.81% 6.78% Other interest bearing assets 4 4 4 Average interest rate 5.80% 5.80% RATE SENSITIVE LIABILITIES: Non-interest bearing checking 116 9 9 9 9 150 150 Interest bearing checking & savings 100 9 8 8 8 134 134 Average interest rate 4.15% 1.50% 1.35% 1.35% 1.35% 3.45% Time deposits 134 23 7 24 5 195 195 Average interest rate 5.87% 6.06% 6.09% 6.45% 6.34% 5.99% Fixed interest rate borrowings 247 23 24 20 314 316 Average interest rate 5.42% 8.18% 8.45% 7.51% 5.99% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swaps 23 44 20 87 2 Average pay rate 5.87% 5.97% 6.06% Average receive rate 6.99% 6.92% 6.74%
NON-INTEREST INCOME Total non-interest income was $11.4 million, up from $10.1 million in 1996, and $9.2 million in 1995. Increases resulted primarily from trust fees and a state income tax refund. The Bank realized no gains or losses on the sale of investment securities in 1997 compared with gains of $133,000 in 1996, and losses of $122,000 in 1995. The table below summarizes the major components of non-interest income: (IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------------------------- Trust income $4,801 $4,605 $4,839 Service charges on deposit accounts 2,195 2,189 1,862 Mortgage banking fees 204 514 399 Sale of financial services and investment products 292 383 291 State income tax refund 1,369 Securities gains (losses) 133 (122) Letter of credit commissions 558 374 389 Other 1,971 1,884 1,519 ------- ------- ------ $11,390 $10,082 $9,177 ======= ======= ====== 22 NON-INTEREST EXPENSE Non-interest expense totaled $28.3 million in 1997, compared with $26.2 million in 1996 and $26.1 million in 1995. Higher net occupancy expenses resulted from increased costs related to the relocation of the Company and its subsidiaries. Equipment cost increases are a result of continued investment in technology and equipment by the Company. Fees and assessments were higher in 1997 resulting primarily from an increase in attorney fees of $150,000 and consulting fees of $117,000. The table below summarizes the major components of non-interest expense: (IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------- Salaries and employee benefits $15,110 $14,965 $15,156 Net occupancy 3,194 2,750 2,272 Equipment 3,648 2,731 2,481 Fees and assessments 1,539 1,102 1,771 Advertising and marketing 909 844 511 Other 3,865 3,797 3,862 ------- ------- ------- $28,265 $26,189 $26,053 ======= ======= ======= The Company's noninterest expense for 1997 includes charges incurred in connection with making its computer systems year 2000 compliant. The Company expects to continue incurring charges related to this project through the year 2000, however, none of these costs are expected to materially impact its results of operations in any one year. In addition, a significant portion of these costs are not expected to be incremental to the Company but instead will constitute a reassignment of existing internal systems technology resources. The Company believes that its plans for dealing with the year 2000 issue will result in timely and adequate modifications of its systems and technology. Ultimately, the potential impact of the year 2000 issue will depend not only on the corrective measures the Company undertakes, but also on the way in which the year 2000 issue is addressed by governmental agencies, businesses, and other entities who provide data to, or receive data from, the Company, or whose financial condition or operational capability is important to the Company as borrowers, suppliers, or customers. Therefore, the Company is communicating with these parties to ensure they are aware of the year 2000 issue, to learn how they are addressing it, and to evaluate any likely impact on the Company. CAPITAL AND LIQUIDITY Stockholders' equity was $133 million or 14.2 percent of total assets at December 31, 1997, compared with $118 million and 13.1 percent in 1996. 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: DECEMBER 31, ------------------------- 1997 1996 - --------------------------------------------------------- RISK CAPITAL RATIOS Tier I Capital 16.61% 15.97% Total Capital 17.86% 17.12% LEVERAGE RATIO 14.15% 13.11% 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, seven, and ten-year term notes in the amount of $67 million with an investment grade rating. Available-for-sale securities provide liquidity through scheduled maturities and the cash convertibility of these assets at market value. At December 31, 1997, the market value of available-for-sale securities exceeded amortized cost by $712,000. At December 31, 1996, the market value was less than amortized cost by $682,000. 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 52 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, 1997. In 1997, net cash provided from operating activities increased to $16.1 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 1997, net cash used in investing activities decreased by $69.2 million. The reduction reflects lower fed funds sold and investment portfolio purchases as compared with the prior year. Cash provided from financing activities decreased by $70.5 million in 1997 reflecting reduced brokered deposits. Increased funding sources included commercial paper, federal funds purchased and repurchase agreements, other short-term borrowings, and long-term debt. 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. 1996 VERSUS 1995 The major factors contributing to the earnings increase were higher net interest income and non-interest income, partially offset by higher non-interest expense. Net interest income increased to $39.3 million, up six percent. The increase resulted from a higher volume of earning assets despite a decrease in net interest margin. Excluding gains and losses on sale of securities, non-interest income increased $650,000 resulting from increased service charge income on deposit accounts, and mortgage financing activity. Non-interest expense increased $136,000 from 1995 reflecting higher occupancy, equipment, and advertising and marketing expenses related to the relocation of the Company to new quarters in 1996, offset by a reduction in attorney fees and FDIC insurance premiums. 24 ================================================================================ CHANGE IN INTEREST INCOME AND EXPENSE ================================================================================
YEAR-ENDED DECEMBER 31, ------------------------------------------------------------------------- 1997 OVER 1996 1996 OVER 1995 ----------------------------------- ----------------------------------- CHANGES CHANGES RESULTING FROM RESULTING FROM ----------------------- ----------------------- (IN THOUSANDS ON A FULLY TAXABLE EQUIVALENT BASIS) TOTAL RATES VOLUME TOTAL RATES VOLUME - -------------------------------------------------------------------------------------------------------------------------------- Earned on: Funds sold $ 646 $ 646 $ 77 $ (68) $ 145 Taxable securities 860 $ 172 688 1,211 395 816 Tax-exempt securities (27) (27) (440) 4 (444) Loans 8,107 425 7,682 3,001 (3,614) 6,615 ------ ------ ------ ------ -------- ------ Total earning assets 9,586 597 8,989 3,849 (3,283) 7,132 Interest Paid on: Savings deposits 364 66 298 756 145 611 Time deposits 909 230 679 1,254 (577) 1,831 Other deposits 28 3 25 20 7 13 Short-term funds borrowed 3,161 525 2,636 228 (997) 1,225 Long-term debt 680 38 642 (377) (163) (214) ------ ------ ------ ------ -------- ------ Total interest bearing liabilities 5,142 862 4,280 1,881 (1,585) 3,466 ------ ------ ------ ------ -------- ------ Increase (decrease) in net interest income $4,444 $ (265) $4,709 $1,968 $ (1,698) $3,666 ====== ====== ====== ====== ======== ======
In the above analysis, rate differences were computed as the change in the rate between the current and prior period times the volume of the current year, while the volume differences were computed as the change in volume between the current and prior period times the prior year's rate. ================================================================================ SECURITIES ================================================================================ DECEMBER 31, CARRYING VALUE OF SECURITIES --------------------------- (IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------- Available-for-sale U.S. Treasury $ 23,997 $ 23,903 $ 21,963 U.S. Government agencies 9,844 9,661 12,017 Federal agency mortgage-backed 102,529 94,671 83,192 Other securities 4,955 4,955 4,871 -------- -------- -------- $141,325 $133,190 $122,043 ======== ======== ======== Held-to-maturity Collateralized mortgage obligations $ 37,402 $ 31,254 $ 35,109 Obligations of states and political subdivisions 642 Other securities 251 375 -------- -------- -------- $ 37,402 $ 31,505 $ 36,126 ======== ======== ======== 25 ================================================================================ DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY ================================================================================ 1997 -------------------------------- INTEREST (DAILY AVERAGES IN THOUSANDS AND ON A FULLY AVERAGE INCOME/ AVERAGE TAXABLE EQUIVALENT BASIS) BALANCE EXPENSE RATE - -------------------------------------------------------------------------------- ASSETS Federal funds sold and resale agreements $ 26,268 $ 1,450 5.52% Securities: Taxable 171,981 11,440 6.65 Tax-exempt -------- ------- Total securities 171,981 11,440 6.65 Loans 646,734 66,169 10.23 -------- ------- Total earning assets 844,983 79,059 9.36 Cash and due from banks 39,733 Other assets 28,061 -------- $912,777 ======== - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing deposits: Savings $ 92,338 $ 3,710 4.02% Time 209,737 12,163 5.80 Other 33,629 408 1.21 -------- ------- Total 335,704 16,281 4.85 Short-term borrowed funds 268,567 15,069 5.61 Long-term debt 57,509 3,941 6.85 -------- ------- Total interest bearing liabilities 661,780 35,291 5.33 Non-interest bearing deposits 117,605 Other liabilities 9,069 Stockholders' equity 124,323 -------- $912,777 ======== ------- Net interest income and interest rate spread $43,768 4.03 ======= Net interest margin 5.18 Fees on loans included above $ 2,408 ======= 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 1996 1995 ------------------------------------ ------------------------------------ INTEREST INTEREST AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE BALANCE EXPENSE RATE BALANCE EXPENSE RATE - -------------------------------------------------------------------------------- $ 14,561 $ 804 5.52% $ 12,134 $ 727 5.99% 161,473 10,580 6.55 148,543 9,369 6.31 170 27 15.88 3,428 467 13.62 -------- ------- -------- ------- 161,643 10,607 6.56 151,971 9,836 6.47 571,159 58,062 10.17 509,899 55,061 10.80 -------- ------- -------- ------- 747,363 69,473 9.30 674,004 65,624 9.74 37,245 34,412 26,812 18,459 -------- -------- $811,420 $726,875 ======== ======== - -------------------------------------------------------------------------------- $ 84,778 $ 3,346 3.95% $ 68,598 $ 2,590 3.78% 197,808 11,254 5.69 167,200 10,000 5.98 31,540 380 1.20 30,459 360 1.18 -------- ------- -------- ------- 314,126 14,980 4.77 266,257 12,950 4.86 219,890 11,908 5.42 199,021 11,680 5.87 48,054 3,261 6.79 51,052 3,638 7.13 -------- ------- -------- ------- 582,070 30,149 5.18 516,330 28,268 5.47 110,222 103,945 8,533 8,250 110,595 98,350 -------- -------- $811,420 $726,875 ======== ======== ------- ------- $39,324 4.12 $37,356 4.27 ======= ======= 5.26 5.54 $ 2,326 $ 2,135 ======= ======= 27 ================================================================================ LOAN PORTFOLIO ANALYSIS ================================================================================
DECEMBER 31, TYPES OF LOANS --------------------------------------------- (IN THOUSANDS) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Commercial and industrial $439,802 $389,718 $379,290 $304,913 $286,359 Real estate: Construction 10,405 10,444 16,089 16,582 23,651 Residential mortgage 43,295 40,323 32,125 25,828 32,421 Non-residential mortgage 86,762 76,086 68,504 62,731 13,079 Loans to individuals for personal expenditures 54,987 56,973 33,966 27,272 25,474 Other loans 31,131 22,960 22,607 29,727 25,236 -------- -------- -------- -------- -------- $666,382 $596,504 $552,581 $467,053 $406,220 ======== ======== ======== ======== ========
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, 1997: AFTER ONE AFTER WITHIN BUT WITHIN FIVE ONE YEAR FIVE YEARS YEARS TOTAL - -------------------------------------------------------------------------------- Commercial and industrial $348,617 $ 84,612 $ 6,573 $439,802 Real estate construction 72 3,799 6,534 10,405 -------- -------- -------- -------- $348,689 $ 88,411 $ 13,107 $450,207 ======== ======== ======== ======== Loans with predetermined interest rates $ 3,246 $ 28,533 $ 7,494 $ 39,273 Loans with floating interest rates 345,443 59,878 5,613 410,934 -------- -------- -------- -------- $348,689 $ 88,411 $ 13,107 $450,207 ======== ======== ======== ======== The following table summarizes nonperforming assets:
DECEMBER 31, ------------------------------------------------------------------- (IN THOUSANDS) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- Non-accrual loans $ 320 $ 1,329 $ 1,314 $ 6,193 $ 9,175 Impaired non-accrual loans 171 1,017 2,409 Loans past due 90 days or more as to interest or principal 703 871 135 8 ------- ------- ------- ------- ------- Nonperforming loans $ 1,194 $ 3,217 $ 3,858 $ 6,201 $ 9,175 ======= ======= ======= ======= ======= Percent of total loans 0.2% 0.5% 0.7% 1.3% 2.3%
The gross interest income that would have been recorded in 1997 had nonperforming assets remained current and in accordance with original terms, is approximately $97,000. The amount of interest included in income was $2,000. 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. 28 ================================================================================ SUMMARY OF LOAN LOSS EXPERIENCE ================================================================================
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- (IN THOUSANDS) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- Beginning balance of allowance for losses $ 8,511 $ 8,602 $ 7,946 $ 8,006 $ 7,657 Provision charged to operating expense 2,134 2,345 1,502 1,150 1,050 Charge-offs: Commercial and industrial 825 2,059 907 850 805 Real estate (includes construction and real estate) 125 195 153 Individuals for personal expenditures 156 298 44 172 257 Other 350 --------- --------- --------- --------- --------- 1,106 2,552 951 1,372 1,215 Recoveries: Commercial and industrial 267 29 45 41 286 Real estate (includes construction and real estate) 12 31 36 32 114 Individuals for personal expenditures 47 17 24 89 114 Foreign 8 Other 198 39 --------- --------- --------- --------- --------- 532 116 105 162 514 --------- --------- --------- --------- --------- Charge-offs net of recoveries 574 2,436 846 1,210 701 --------- --------- --------- --------- --------- Ending balance of allowance for losses $ 10,071 $ 8,511 $ 8,602 $ 7,946 $ 8,006 ========= ========= ========= ========= ========= Average gross loans outstanding $ 646,734 $ 571,159 $ 509,899 $ 435,684 $ 384,685 Percent of net loan charge-offs to average loans 0.09% 0.43% 0.17% 0.28% 0.18% Percent of allowance for losses to loans outstanding at end of period 1.51% 1.43% 1.56% 1.70% 1.97%
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 - -------------------------------------------------------------------------------------------------------------- 1997 Amount allocated $ 1,245 $ 200 $ 300 $8,326 $10,071 Outstandings to total loans 66.00% 21.08% 8.25% 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%
29 ================================================================================ SELECTED FINANCIAL DATA ================================================================================ 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- BALANCE SHEET ITEMS (IN MILLIONS) Securities $ 179 $ 165 $ 158 $ 139 $ 141 Loans 666 597 553 467 406 All other assets 90 138 90 67 67 Total assets 935 900 801 673 614 Total deposits 479 520 440 368 298 Short-term borrowed funds 246 206 198 156 216 Long-term debt 67 48 48 53 6 All other liabilities 10 8 9 5 8 Total liabilities 802 782 695 582 528 Stockholders' equity 133 118 106 91 86 INCOME AND EXPENSE ITEMS (IN THOUSANDS) Interest and fees on loans 66,110 57,992 54,952 41,046 31,584 All other interest income 12,890 11,404 10,417 9,179 8,997 Total interest income 79,000 69,396 65,369 50,225 40,581 Interest expense on deposits 16,281 14,980 12,950 8,490 6,780 Interest expense on short-term borrowed funds 15,069 11,908 11,680 8,933 6,572 Interest expense on long-term debt 3,941 3,261 3,638 1,015 101 Total interest expense 35,291 30,149 28,268 18,438 13,453 Net interest income 43,709 39,247 37,101 31,787 27,128 Provision for loan losses 2,134 2,345 1,502 1,150 1,050 Trust fees 4,801 4,605 4,839 4,683 4,544 State income tax refund 1,369 Gains (losses) on sale of securities 133 (122) (32) 343 All other income 5,220 5,344 4,460 5,290 7,325 All other expenses 28,265 26,189 26,053 26,284 27,151 Earnings before cumulative effect of change in accounting principle 14,964 12,686 11,454 8,946 7,135 Cumulative effect of change in accounting principle 204 Net earnings 14,964 12,686 11,454 8,946 7,339 BASIC EARNINGS PER SHARE Earnings before cumulative effect of change in accounting principle 1.85 1.56 1.41 1.10 0.83 Cumulative effect of change in accounting principle 0.03 Net earnings 1.85 1.56 1.41 1.10 0.86
30 ================================================================================ SELECTED RATIOS ================================================================================ YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Net earnings to average assets 1.63% 1.56% 1.57% Net earnings to average stockholders' equity 12.01 11.40 11.52 Average stockholders' equity to average total assets 13.61 13.71 13.66 Regulatory Capital Ratios: Tier 1 risk capital 16.61 15.97 16.04 Total risk capital 17.86 17.12 17.34 Leverage 14.15 13.11 13.23 (ratios calculated before unrealized gains or losses) ================================================================================ SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA ================================================================================ 1997 ----------------------------------------------- (UNAUDITED) (IN THOUSANDS EXCEPT PER FIRST SECOND THIRD FOURTH SHARE DATA) QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------- Interest income $ 18,407 $ 19,508 $ 20,563 $ 20,522 Interest expense 8,028 8,776 9,320 9,167 Net interest income 10,379 10,732 11,243 11,355 Provision for loan losses 790 567 502 275 Other non-interest income 2,980 2,480 3,489 2,441 Non-interest expense 7,126 6,900 7,149 7,090 Income tax expense 2,150 2,274 2,770 2,542 Net earnings 3,293 3,471 4,311 3,889 Basic earnings per share** 0.41 0.42 0.54 0.48 1996 ----------------------------------------------- (UNAUDITED) (IN THOUSANDS EXCEPT PER FIRST SECOND THIRD FOURTH 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 Basic earnings per share** 0.35 0.36 0.43 0.42 1997 1996 ------------------ ------------------ LOW HIGH LOW HIGH ---------------------------------------- Stock Price Range** First quarter $18 1/4 $23 $16 1/8 $18 1/4 Second quarter 19 3/4 23 7/8 17 3/4 20 1/4 Third quarter 21 1/4 28 7/8 16 18 1/4 Fourth quarter 26 1/2 30 16 3/8 18 7/8 December 31 (Closing Price) $29 7/2 $18 7/8 - ----------------- **Adjusted for stock dividends 31 ================================================================================ DIRECTORS ================================================================================
NATIONAL CITY BANCORPORATION David L. Andreas Terry L. Andreas John H. Daniels, Jr.* David C. Malmberg Chairman of the Board Chairman of the Board Partner Non-executive Chairman and Chief Executive Officer School for Field Studies Willeke & Daniels of the Board National City Bancorporation Beverly, Massachusetts National City Bank Thomas E. Holloran* Wendell R. Anderson* Marvin Borman* Professor, Graduate Programs Walter E. Meadley, Jr. Of Counsel Partner in Management Retired Vice Chairman Larkin, Hoffman, Maslon, Edelman, University of St. Thomas of the Board Daly & Lindgren Ltd. Borman & Brand National City Bank C. Bernard Jacobs L.W. Andreas Kenneth H. Dahlberg Retired President and Roger H. Scherer* Retired Chairman of the Board Chairman of the Board Chief Executive Officer Chairman of the Board and Chief Executive Officer Dahlberg, Inc. National City Bancorporation Scherer Bros. Lumber Company National City Bancorporation Retired Chairman of the Board National City Bank *Members of the Audit Committee NATIONAL CITY BANK OF MINNEAPOLIS David C. Malmberg Michael J. Boris James B. Goetz Thomas E. Holloran Non-executive Chairman Consultant President Professor, Graduate Programs of the Board Goetz Associates in Management National City Bank University of St. Thomas Sharon N. Bredeson Esperanza Guerrero-Anderson David L. Andreas President and Chief President and Chief Walter E. Meadley, Jr. President and Executive Officer Executive Officer Retired Vice Chairman Chief Executive Officer STAFF-PLUS Inc. Milestone Growth Fund of the Board National City Bank National City Bank Chairman of the Board John H. Daniels, Jr. and Chief Executive Officer Partner National City Bancorporation Willeke & Daniels ================================================================================ PRINCIPAL OFFICERS ================================================================================ NATIONAL CITY BANCORPORATION David L. Andreas Thomas J. Freed Chairman of the Board Secretary and Chief Financial Officer and Chief Executive Officer NATIONAL CITY BANK OF MINNEAPOLIS David L. Andreas Timothy M. Murphy BANK OPERATIONS DIVISION FINANCIAL MANAGEMENT President and Vice President DIVISION Chief Executive Officer Donald W. Kjonaas Senior Vice President Thomas J. Freed David M. Nash and Security Officer Senior Vice President CLIENT SERVICES DIVISION Senior Vice President and Chief Financial Officer William J. Klein Laura J. Carlson Executive Vice President Margrette A. Newhouse Vice President Robert A. Kramer Vice President Vice President and Controller Donna M. DeMatteo DeWayne A. Hoium Vice President Daniel D. Schroeder Vice President Robert A. Steuck Vice President Vice President Linda M. Fifield Sherri L. Kelly Vice President Scott D. Thorson Vice President COMPLIANCE COUNSEL Vice President Connie G. Weinman Ann H. Hengel James R. Kitchen Vice President Senior Vice President Vice President Susan E. Martenson Vice President Lisa A. Ruhl Vice President DIVERSIFIED BUSINESS CREDIT, INC. David L. Andreas Anthony R. Bassett Robert L. Johnson Christopher J. Schaaf Chairman of the Board Vice President Vice President and Treasurer Vice President Robert L. Olson William D. Farrar Bridget A. Manahan Mark W. Schwieters President and Chief Vice President Vice President Vice President Executive Officer Jeffrey S. Holland Allen J. Olson Walter D. Tomaszek Janet L. Pomeroy Vice President Vice President Vice President Senior Vice President
32 NATIONAL CITY BANCORPORATION SIXTH ON THE MALL 651 NICOLLET MALL, MINNEAPOLIS, MN 55402-1611 (612) 904-8500 EX-23 5 CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS 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 16, 1998, with respect to the consolidated financial statements of National City Bancorporation incorporatied by reference in its Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP Minneapolis, Minnesota March 23, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 52,847 0 3,740 0 141,325 37,402 37,861 666,382 10,071 935,172 478,650 246,698 9,897 67,000 0 0 10,139 122,788 935,172 66,110 11,440 1,450 79,000 16,281 35,291 43,709 2,134 0 28,265 24,700 14,964 0 0 14,964 1.85 1.85 5.18 491 703 0 19,164 8,511 1,106 532 10,071 1,650 95 8,326
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