-----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, T/bSM4e1hzDzmcKAXbQ1vRjl4p4b4r31iUlOx2K80jHHa4TdzpCvC88F2aun07BL 7M3wZIOmvT45GuqqWdDxBA== 0000897101-99-000280.txt : 19990329 0000897101-99-000280.hdr.sgml : 19990329 ACCESSION NUMBER: 0000897101-99-000280 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990326 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-K SEC ACT: SEC FILE NUMBER: 000-09426 FILM NUMBER: 99574736 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-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K _X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 _____ 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 22, 1999, the aggregate market value of 7,713,410 shares of voting common stock, $1.25 par value, held by non-affiliates of the registrant was approximately $169,695,020 based upon the reported closing price on the NASDAQ Stock Market SM. As of February 22, 1999, 8,781,899 shares of $1.25 par value common stock of the registrant were outstanding. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements Incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of National City Bancorporation's Annual Report to Stockholders for the year ended December 31, 1998 are incorporated by reference into Parts I, II, and IV. (2) Portions of the definitive Proxy Statement of National City Bancorporation for the Annual Meeting of Stockholders to be held on April 21, 1999 are incorporated by reference into Part III. 2 NATIONAL CITY BANCORPORATION FORM 10-K YEAR ENDED DECEMBER 31, 1998 - -------------------------------------------------------------------------------- PART I ITEM 1 - BUSINESS National City Bancorporation (NCBC) was incorporated in 1937 under the laws of the State of Iowa. NCBC is a bank holding company which owns 99.9% of the capital stock of National City Bank of Minneapolis (NCB), which is a commercial bank. NCBC owns 100% of the capital stock of Diversified Business Credit, Inc. (DBCI), a commercial finance company. NCBC also owns 100% of the capital stock of National City Development & Realty, Inc., an inactive subsidiary. NCB has its main banking office in the business district of downtown Minneapolis and also serves customers from two detached facilities. One of these facilities provides a drive-up location in downtown Minneapolis, and the other is a full service branch location in Edina, Minnesota, a suburb of Minneapolis. NCBC provides its subsidiaries advice and specialized services in various fields of financial and banking policy. The responsibility for the management of each subsidiary remains with the Board of Directors and with the officers appointed by the Boards of Directors. NCB provides usual and customary banking services, including without limitation: business, personal and real estate loans; a full range of deposit services; correspondent banking and safe deposit facilities. In addition to the services generally provided by a full-service bank, NCBC's subsidiaries offer specialized services as described below: TRUST SERVICES - NCB offers clients a wide variety of fiduciary services ranging from the management of funds for individuals to the administration of estates and trusts. For corporations, governmental bodies, and public authorities, NCB acts as fiscal and paying agent, registrar, and trustee under corporate indentures and pension and profit sharing agreements. NCB also provides record keeping and reporting for 401-K retirement savings plans. INTERNATIONAL OPERATIONS - NCB provides a wide range of services in the area of international banking including trade service products, such as letters of credit, bankers acceptances, international collections and foreign exchange. ASSET-BASED FINANCING - DBCI specializes in providing working capital loans secured by accounts receivable, inventory, and other marketable assets. All loans are made on a full recourse basis to the borrower. Personal guarantees from the owners of the borrower are normally obtained. Loans are made on a demand basis with no fixed repayment schedule. Compared to equity-based loans made by banks and others, asset-based loans usually require closer monitoring which results in higher loan servicing costs. Typically, interest rates earned on these loans are higher than rates earned on equity-based loans. OTHER SERVICES - NCBC and subsidiaries do not have more than one line of business or class of service. All income is derived from commercial banking and bank-related services. It is not dependent on a single customer or a single industry for any material part of its business. COMPETITION - Banking in Minnesota, as elsewhere, is highly competitive and NCB competes with other banks, both independent and those affiliated with other bank holding companies. Additional competitors are able to enter the Minnesota market following the June, 1997 change in banking regulations (See Supervision & Regulation). In addition, in lending funds and obtaining deposits, NCB competes with other types of institutions, such as savings and loan associations, credit unions, insurance companies, finance companies, and various institutions offering money market and mutual funds. EMPLOYEES - NCBC and its subsidiaries have approximately 278 employees, none of whom are represented by a collective bargaining organization. 3 GOVERNMENT POLICIES - The earnings of NCBC's various operating units, as lenders of money, are affected by state and federal legislative changes and by policies of various regulatory authorities, including those of the State of Minnesota and the United States and, to a lesser extent, by those of foreign governments, and international agencies. These policies include, for example, statutory maximum legal interest rates, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, and capital adequacy and liquidity constraints imposed by bank regulatory agencies. SUPERVISION AND REGULATION - NCBC is a registered bank holding company under the Bank Holding Company Act of 1956 (the Act) and is subject to the supervision of and regulation by the Board of Governors of the Federal Reserve System (the Board). Under the Act, a bank holding company may engage in banking, managing or controlling banks, furnishing and performing services for banks which it controls, and activities which the Board has determined to be closely related to banking. NCBC must obtain approval of the Board before acquiring control of a bank or acquiring more than 5% of the outstanding voting shares of a company engaged in a bank-related business. In general, effective June 1, 1997, federal law permits the merger of insured banks within different home states, 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 29 through 35 of the Annual Report to Stockholders for the year ended December 31, 1998, 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 $2,332,000 in 1998. NCB's banking offices are located at Gaviidae Common at 651 Nicollet Mall. NCB entered into a ten year lease commencing March 16, 1996, to occupy approximately 95,200 square feet at this location. 4 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. The approximate cost per square foot related to real estate taxes and normal operating expenses is $13.85. DBCI is located in Dain Bosworth Plaza, at 60 South Sixth Street. DBCI entered into a five year lease commencing September, 1, 1997, to occupy 14,067 square feet at this 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 $240,000 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. The approximate cost per square foot related to real estate taxes and normal operating expenses is $13.40. ITEM 3 - LEGAL PROCEEDINGS NCBC is party to various legal proceedings incidental to its business. Certain claims, suits, and complaints arising in the ordinary course of business have been filed or are pending against NCBC. In the opinion of management, the resulting liability, if any, arising from all such actions will not have a material impact on NCBC's consolidated financial position, liquidity or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The market for National City Bancorporation's common stock and related stockholder matters is presented on pages 1 and 35 of the Annual Report to Stockholders for the year ended December 31, 1998, and is incorporated herein by reference. 5 PART II ITEM 6 - SELECTED FINANCIAL DATA Selected financial data is presented on page 34 of the Annual Report to Stockholders for the year ended December 31, 1998 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 19 through 28 of the Annual Report to Stockholders for the year ended December 31, 1998 and is incorporated herein by reference. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are presented in pages 22 through 24 of the Annual Report to Stockholders for the year ended December 31, 1998 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 18 and 29 through 35 of the Annual Report to Stockholders for the year ended December 31, 1998 and are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 6 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of National City Bancorporation are presented on pages 3 through 5 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1999, and said presentation is incorporated herein by reference. The executive officers referred to in this Item 10 are as follows: Mr. David L. Andreas has been a director since 1980 and was elected Chief Executive Officer effective November 1, 1987. Mr. Andreas served as Chairman of the Board from 1987 to 1998. Mr. Andreas had been a Vice President and Senior Vice President of NCBC during the five years prior to being elected Chairman. Mr. Andreas was elected President and Chief Executive Officer of NCB in 1994. Mr. Thomas J. Freed was elected Secretary and Controller of NCBC effective January 1, 1982 and Secretary and Chief Financial Officer effective July 16, 1997. Mr. Freed was elected Senior Vice President and Chief Financial Officer of NCB in 1986. Previous to 1986, Mr. Freed served as an officer of NCB for seventeen years. Mr. Robert L. Olson has been President, Chief Executive Officer and director of Diversified Business Credit, Inc. since 1985. ITEM 11 - EXECUTIVE COMPENSATION Executive compensation is set forth on pages 6 through 9 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1999 and is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The security ownership of certain beneficial owners and management is presented on page 2 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1999 and is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain relationships and related transactions are presented on pages 2 through 5 of the Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1999 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, 1998, are incorporated by reference in Item 8: Independent Auditors' Report Consolidated balance sheets - December 31, 1998 and 1997 Consolidated statements of earnings - years ended December 31, 1998, 1997 and 1996 Consolidated statements of stockholders' equity - years ended December 31, 1998, 1997 and 1996 Consolidated statements of comprehensive income - years ended December 31, 1998, 1997 and 1996 Consolidated statements of cash flows - years ended December 31, 1998, 1997 and 1996 Notes to consolidated financial statements 7 (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. [Incorporated herein by reference to Exhibit 10(j) to the 1997 Form 10-K.] 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, 1998. 8 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 18,1999 /S/David L. Andreas ---------------------------------------------- David L. Andreas, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 18, 1999 /S/David L. Andreas ---------------------------------------------- David L. Andreas, Chief Executive Officer (Principal Executive Officer) Date: March 18, 1999 /S/Thomas J. Freed ---------------------------------------------- Thomas J. Freed, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 18 1999 /S/David C. Malmberg ---------------------------------------------- David C. Malmberg, Chairman of the Board Date: March 18, 1999 /S/Wendell R. Anderson ---------------------------------------------- Wendell R. Anderson, Director Date: March 18, 1999 /S/Terry L. Andreas ---------------------------------------------- Terry L. Andreas, Director Date: March 18, 1999 /S/ Michael J. Boris ---------------------------------------------- Michael J. Boris, Director Date: March 18, 1999 /S/Marvin Borman ---------------------------------------------- Marvin Borman, Director Date: March 18, 1999 ---------------------------------------------- Sharon N. Bredeson, Director Date: March 18, 1999 ---------------------------------------------- Kenneth H. Dahlberg, Director Date: March 18, 1999 /S/John H. Daniels, Jr. ---------------------------------------------- John H. Daniels, Jr., Director Date: March 18, 1999 /S/ James B. Goetz ---------------------------------------------- James B. Goetz, Sr., Director Date: March 18, 1999 /S/ Esperanza Guerrero-Anderson ---------------------------------------------- Esperanza Guerrero-Anderson, Director Date: March 18, 1999 /S/Thomas E. Holloran ---------------------------------------------- Thomas E. Holloran, Director Date: March 18, 1999 /S/ Bernard Jacobs ---------------------------------------------- C. Bernard Jacobs, Director 9 Date: March 18, 1999 /S/ Walter E. Meadley, Jr. ---------------------------------------------- Walter E. Meadley, Jr., Director Date: March 18, 1999 /S/ Robert L. Olson ---------------------------------------------- Robert L. Olson, Director Date: March 18, 1999 /S/Roger H. Scherer ---------------------------------------------- Roger H. Scherer, Director 10 NATIONAL CITY BANCORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS - -------------------------------------------------------------------------------- SUBSEQUENTLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE 11 Computation of Basic Earnings Per Share. 13 Annual Report to Stockholders (only those portions incorporated herein by reference shall be deemed filed with the Commission). 22 Subsidiaries of Registrant are listed and described in PART I, Item 1. 23 Consent of Ernst & Young, LLP. 27 Financial Data Schedule 11 EX-11 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS NATIONAL CITY BANCORPORATION AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF BASIC EARNINGS PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 - -------------------------------------------------------------------------------- 1998 1997 1996 Net earnings applicable to common stock $15,664 $14,964 $12,686 Weighted average common shares outstanding* 8,855,348 8,901,415 8,915,473 Basic earnings per share $1.77 $1.68 $1.42 *Adjusted for stock dividends 12 EX-13 3 1998 ANNUAL REPORT EXHIBIT 13 1998 ANNUAL REPORT NATIONAL CITY BANCORPORATION This year's annual report cover was designed by Minneapolis College of Art and Design's (MCAD) first year graduate student, Viera Hartmannova. She divides her academic program time between design, interactive multimedia and professional practice at MCAD DesignWorks, the college's in-house design studio. A BFA graduate from the Academy of Fine Arts and Design in Bratislava, Slovakia, Viera will gain an MFA from MCAD in 2000. Her work in design includes graphics for television. Her emphasis at MCAD is in interactive multimedia. After graduation Viera hopes to secure an internship at a Twin Cities studio. Regarding her objectives for the concept and design of this annual report cover, says Hartmannova, "I wanted to show the focus and strength of this bank over its competitors, its attention to personalized business relationships with its clients. Also, the integration of a web site into the innovative communication vehicles already established at the bank became a visual idea. The bank itself is a very creative environment, and I thought we could depict its fresh approach to the business of banking with composition and imagery." 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) 1998 1997 - --------------------------------------------------------------- For the Year Net interest income $ 47,602 $ 43,709 Net earnings 15,664 14,964 Basic earnings per share 1.77 1.68 At Year End Total assets $1,025,682 $935,172 Loans 762,747 666,382 Deposits 517,494 478,650 Stockholders' equity 147,288 132,927 Book value per share 16.71 14.97 - ------------------------------------------------------------------------------ TABLE OF CONTENTS Report to Stockholders 2 Consolidated Financial Statements 3 Notes to Consolidated Financial Statements 7 Report of Independent Auditors 18 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Statistical Data 29 Selected Financial Data 34 Selected Ratios and Consolidated Quarterly Financial Data 35 Directors and Officers 36 NATIONAL CITY BANCORPORATION National City Bancorporation (NCBC) 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, President and Chief Executive Officer, National City Bancorporation, 651 Nicollet Mall, Minneapolis, Minnesota 55402-1611. STOCK TRANSFER AGENT AND REGISTRAR National City Bank of Minneapolis, Gaviidae Common, 651 Nicollet Mall, Minneapolis, Minnesota 55402-1611. ANNUAL MEETING The annual meeting of Stockholders will be held in the Company's offices on the fifth floor of Gaviidae Common, 651 Nicollet Mall, Minneapolis, Minnesota, on Wednesday, April 21, 1999, at 11:00 a.m. MARKET FOR COMMON STOCK NCBC's common stock is traded on The NASDAQ Stock Market- under the symbol NCBM. There are currently approximately 2500 registered stockholders. [LOGO] PRINTED WITH SOY INK [LOGO] RECYCLED PAPER This annual report is printed with soy ink on recycled paper. All papers meet or exceed the current E.P.A. guidelines for recycled paper. To help our environment, please recycle this publication. 1 - ------------------------------------------------------------------------------ REPORT TO STOCKHOLDERS To Our Stockholders: As you will read in our financial report, we have increased our performance over the prior year even though 1997 revenues included a non-recurring tax refund from the State of Minnesota. Total assets increased 9.7 percent and were $1.026 billion at year-end. Loans grew by 14.5 percent and were $763 million at year-end. Both subsidiaries accounted for these increases. Net earnings grew by 4.7 percent and equaled $15,664,000, $1.77 per share for 1998, compared with $14,964,000, and $1.68 per share for 1997. [GRAPH] This is our eighth consecutive year of increased earnings and reflects CONSOLIDATED NET EARNINGS the acquisition of Diversified (Thousands $) Business Credit, Inc. in 1985, and our implementation of a Strategic 1985 1,596 Planning process and management at 1986 2,704 National City Bank of Minneapolis in 1987 3,409 1990. 1988 5,032 1989 4,536 Our efficiency ratio, the ratio of 1990 4,319 non-interest expense to net revenue, 1991 5,090 for 1998 improved to 49.34 percent. 1992 6,919 This achievement has been 1993 7,339 instrumental in our continuous 1994 8,949 improvement and compares favorably 1995 11,454 to our peer group banks. 1996 12,686 1997 14,114 The fourth quarter of 1998 was 1998 15,664 affected by the increase in the provision for loan losses to replenish the reserve to 1.37 [GRAPH] percent of total loans at year end. Net earnings were $3,430,000 for the EFFICIENCY RATIO quarter. That equals $.39 per share. 1985 57.94 Total stockholders' equity was $147 1986 56.69 million at year-end and equaled 1987 63.27 $16.71 per share. 1988 64.99 1989 61.5 Non-performing assets were $11.5 1990 65.57 million, and equaled 1.5 percent of 1991 68.58 total loans. 1992 66.41 1993 68.12 We progressed in each of our 1994 62.38 subsidiaries with substantial growth 1995 55.99 in assets, recurring income, and 1996 53.01 process improvement. This growth is 1997 50.55 the result of the commitment of each 1998 49.34 of our employees and their commitment to their customers. Each day we address the concerns of our customers by providing up-to-date systems and services designed to make their lives more productive and more secure. We are excited to continue this unique commitment and valuable relationship with our customers and to provide you a safe return on your investment. /s/ David C. Malmberg /s/ David L. Andreas David C. Malmberg David L. Andreas Chairman of the Board President and Chief Executive Officer 2 - ------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------- (IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 52,271 $ 52,847 Federal funds sold and resale agreements 6,100 3,740 Available-for-sale securities 133,897 141,325 Held-to-maturity securities (market value: 1998-$41,569 and 1997-$37,861) 41,255 37,402 Loans 762,747 666,382 Less allowance for loan losses (10,423) (10,071) ---------- --------- 752,324 656,311 Bank premises and equipment 10,399 11,413 Accrued interest receivable 7,499 7,260 Customer acceptance liability 824 811 Other assets 21,113 24,063 ---------- --------- $1,025,682 $ 935,172 ========== ========= - --------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 165,598 $ 149,624 Interest bearing 351,896 329,026 ---------- --------- 517,494 478,650 Federal funds purchased and repurchase agreements 98,702 104,399 Commercial paper 99,396 119,081 Other short-term borrowed funds 12,663 23,218 Acceptances outstanding 824 811 Other liabilities 10,315 9,086 Long-term debt 139,000 67,000 ---------- --------- Total liabilities 878,394 802,245 Stockholders' equity: Common stock, par value $1.25, Authorized shares: 1998-40,000,000; 1997-20,000,000 Issued: 1998-8,861,944 shares; 1997-8,110,836 shares 11,077 10,139 Additional paid-in capital 121,982 94,756 Unrealized gains net of tax effect 913 424 Retained earnings 14,470 28,464 ---------- --------- 148,442 133,783 Less common stock in treasury at cost: 1998-45,030 shares; 1997-33,553 shares (1,154) (856) ---------- --------- Total stockholders' equity 147,288 132,927 ---------- --------- $1,025,682 $ 935,172 ========== =========
See Notes To Consolidated Financial Statements 3 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, ------------------------------------------ (IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 73,090 $ 66,110 $ 57,992 Interest on federal funds sold and resale agreements 1,092 1,450 804 Interest and dividends on securities: Taxable 11,443 11,440 10,580 Exempt from federal income taxes 20 ---------- ---------- ---------- 11,443 11,440 10,600 ---------- ---------- ---------- Total interest income 85,625 79,000 69,396 - ------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest on deposits 16,393 16,281 14,980 Interest on short-term borrowed funds 15,275 15,069 11,908 Interest on long-term debt 6,355 3,941 3,261 ---------- ---------- ---------- Total interest expense 38,023 35,291 30,149 ---------- ---------- ---------- Net interest income 47,602 43,709 39,247 Provision for loan losses 2,940 2,134 2,345 ---------- ---------- ---------- Net interest income after provision for loan losses 44,662 41,575 36,902 - ------------------------------------------------------------------------------------------------------ NON-INTEREST INCOME Service charges on deposit accounts 2,145 2,195 2,189 Fees for other customer services 1,635 1,698 1,837 Trust fees 4,641 4,801 4,605 State income tax refund 1,369 Gains on sale of securities 133 Other income 821 1,327 1,318 ---------- ---------- ---------- 9,242 11,390 10,082 - ------------------------------------------------------------------------------------------------------ NON-INTEREST EXPENSE Salaries and employee benefits 15,238 15,110 14,965 Net occupancy expense of bank premises 3,062 3,194 2,750 Equipment rentals, depreciation and maintenance 3,512 3,648 2,731 Other expense 6,237 6,313 5,743 ---------- ---------- ---------- 28,049 28,265 26,189 ---------- ---------- ---------- Earnings before income taxes 25,855 24,700 20,795 Income taxes 10,191 9,736 8,109 ---------- ---------- ---------- Net earnings $ 15,664 $ 14,964 $ 12,686 ========== ========== ========== - ------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE $ 1.77 $ 1.68 $ 1.42 ========== ========== ========== Average common and common equivalent shares outstanding 8,855,348 8,901,415 8,915,473
See Notes To Consolidated Financial Statements 4 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK --------------------------- ADDITIONAL NUMBER PAID-IN (IN THOUSANDS EXCEPT NUMBER OF SHARES) OF SHARES AMOUNT CAPITAL - ----------------------------------------------------------------------------------- Balance at January 1, 1996 6,705,808 $8,382 $65,484 Net earnings for the year Ten percent stock dividend 669,352 837 13,721 Unrealized securities (losses) net of tax effect Cancellation of treasury stock (640) (1) (6) Purchase of treasury --------- ------- -------- Balance at December 31, 1996 7,374,520 9,218 79,199 Net earnings for the year Ten percent stock dividend 736,374 921 15,558 Unrealized securities gains net of tax effect Cancellation of treasury stock (58) (1) Purchase of treasury stock --------- ------- -------- Balance at December 31, 1997 8,110,836 10,139 94,756 Net earnings for the year Ten percent stock dividend 804,574 1,005 27,961 Unrealized securities gains net of tax effect Cancellation of treasury stock (53,466) (67) (735) --------- ------- -------- Purchase of treasury stock Balance at December 31, 1998 8,861,944 $11,077 $121,982 ========= ======= ========
[WIDE TABLE CONTINUED FROM ABOVE]
TREASURY STOCK ------------------------- UNREALIZED RETAINED GAINS NUMBER (IN THOUSANDS EXCEPT NUMBER OF SHARES) EARNINGS (LOSSES) OF SHARES AMOUNT TOTAL - ------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996 $ 31,903 $ 275 562 $ (10) $106,034 Net earnings for the year 12,686 12,686 Ten percent stock dividend (14,584) (26) Unrealized securities (losses) net of tax effect (680) (680) Cancellation of treasury stock (4) (640) 11 Purchase of treasury 94 (1) (1) --------- ------- ------ ------- -------- Balance at December 31, 1996 30,001 (405) 16 0 118,013 Net earnings for the year 14,964 14,964 Ten percent stock dividend (16,500) (21) Unrealized securities gains net of tax effect 829 829 Cancellation of treasury stock (1) (58) 1 (1) Purchase of treasury stock 33,595 (857) (857) --------- ------- ------ ------- -------- Balance at December 31, 1997 28,464 424 33,553 (856) 132,927 Net earnings for the year 15,664 15,664 Ten percent stock dividend (29,006) (40) Unrealized securities gains net of tax effect 489 489 Cancellation of treasury stock (652) (53,466) 1,454 0 Purchase of treasury stock 64,943 (1,752) (1,752) --------- ------- ------ ------- -------- Balance at December 31, 1998 $ 14,470 $ 913 45,030 $(1,154) $147,288 ========= ======= ======= ======= ========
- ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, ------------------------------------ (IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996 - ------------------------------------------------------------------------------------------- Total interest income $85,625 $79,000 $ 69,396 Total interest expense 38,023 35,291 30,149 ------- ------- -------- Net interest income 47,602 43,709 39,247 Provision for loan losses 2,940 2,134 2,345 ------- ------- -------- Net interest income after provision for loan losses 44,662 41,575 36,902 ------- ------- -------- Total noninterest income 9,242 11,390 10,082 Total noninterest expense 28,049 28,265 26,189 ------- ------- -------- Earnings from operations before taxes 25,855 24,700 20,795 Applicable income taxes 10,191 9,736 8,109 ------- ------- -------- Net earnings 15,664 14,964 12,686 Other comprehensive income, before tax: Unrealized gain (loss) on investments in securities 821 1,393 (1,143) Applicable income tax 332 564 (463) ------- ------- -------- Other comprehensive income, net of tax 489 829 (680) ------- ------- -------- Comprehensive income $16,153 $15,793 $ 12,006 ======= ======= ========
See Notes to Consolidated Financial Statements 5 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net earnings $ 15,664 $ 14,964 $ 12,686 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 2,927 3,245 2,169 Amortization of securities premiums and discounts 579 469 426 Provision for loan losses 2,940 2,134 2,345 Deferred income taxes (25) (347) 472 (Gain) on sale of securities (133) (Increase) decrease in accrued interest receivable (239) (954) 29 (Increase) decrease in other assets 2,950 (3,567) (138) Increase (decrease) in other liabilities 1,229 1,421 (1,147) Other (increase) (308) (1,216) (853) --------- --------- -------- Total operating adjustments 10,053 1,185 3,170 --------- --------- -------- Net cash from operating activities 25,717 16,149 15,856 Cash flows from investing activities: Net (increase) in loans (98,953) (69,878) (43,923) Net (increase) decrease in federal funds sold (2,360) 56,380 (35,120) Available-for-sale securities: Proceeds from maturities and principal repayments 64,810 27,274 50,740 Proceeds from sale of securities 4,688 Purchases of securities (57,114) (34,476) (68,114) Held-to-maturity securities: Proceeds from maturities and principal repayments 17,865 9,233 13,581 Purchases of securities (21,743) (15,139) (9,000) Purchase of premises and equipment (1,913) (2,436) (9,365) Payment of prepaid expenses (1,739) --------- --------- -------- Net cash (used in) investing activities (99,408) (29,042) (98,252) --------- --------- -------- Cash flows from financing activities: Net increase in non-interest bearing and savings deposits 31,333 2,151 26,326 Net increase (decrease) in time deposits 7,511 (43,132) 53,320 Net increase (decrease) in federal funds purchased and repurchase agreements (5,697) 7,759 (13,895) Net increase (decrease) in commercial paper (19,685) 20,974 18,121 Net increase (decrease) in other short-term borrowed funds (10,555) 11,852 4,679 Net increase (decrease) in long-term debt 72,000 19,080 (200) Purchase of treasury stock (1,752) (856) (1) Payment for fractional shares on stock dividends (40) (22) (26) --------- --------- -------- Net cash from financing activities 73,115 17,806 88,324 --------- --------- -------- Net increase (decrease) in cash and due from banks (576) 4,913 5,928 Cash and due from banks at beginning of year 52,847 47,934 42,006 --------- --------- -------- Cash and due from banks at end of year $ 52,271 $ 52,847 $ 47,934 ========= ========= ======== Supplemental disclosures Cash paid during the year for: Interest $ 36,306 $ 35,194 $ 30,266 Income taxes 10,618 10,076 7,206 Unrealized securities gains (losses) net of tax 489 829 (680)
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 generally deferred and recognized over the loan or commitment period as a yield adjustment on a straight-line basis. In other circumstances fees are recognized on a cash basis as a yield adjustment due to immateriality. 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 and unpaid 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 Company allocates the allowance for loan losses by identifying specific loans that have a possibility of loss, and by applying a historical loss migration analysis. 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 1998. TREASURY STOCK--The Company's board of directors has authorized the repurchase of shares from stockholders who have 99 or fewer shares. The board also authorized the repurchase of larger blocks of stock, from time to time. INCOME TAXES--Deferred income taxes are provided on all significant temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements at currently enacted tax rates. INTEREST RATE SWAPS--The Company enters into interest rate swap transactions as a tool to manage its interest rate risk. Income or expense on swaps designated as hedges of assets or liabilities is recorded as an adjustment to interest income or expense. If the hedged instrument is terminated prior to maturity, the swap agreement is marked to 7 - -------------------------------------------------------------------------------- NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 1998 and at December 31, 1998. There was no impact on the Company's financial condition or results of operation due to the adoption of SFAS No. 128. 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. COMPREHENSIVE INCOME--SFAS No. 130, "Reporting Comprehensive Income" was issued in June, 1997. SFAS 130 established standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company adopted SFAS 130 in 1998. BUSINESS SEGMENTS--SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", was issued in June, 1997, and is effective for annual financial statements issued for fiscal years beginning after December 15, 1997. This statement establishes new standards for the way that public business enterprises report information about operating segments. The Company adopted SFAS 131 in 1998. PENSIONS AND OTHER POSTRETIREMENT BENEFITS--SFAS No. 132, "Pensions and Other Postretirement Benefits", was issued by the Financial Accounting Standards Board in February, 1998. The Company adopted SFAS 132 in 1998. The statement does not change the recognition or measurement of pension or postretirement benefit plans, but standardizes disclosure requirements for pensions and other postretirement benefits. ACCOUNTING FOR DERIVATIVES--The Financial Accounting Standards Board issued in June, 1998 Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for years beginning after June 15, 1999. No. 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The Company intends to adopt Statement No. 133 in year 2000 and is not expected to have a material impact. - -------------------------------------------------------------------------------- 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, 1998 ------------------------ CARRYING ESTIMATED (IN THOUSANDS) AMOUNT FAIR VALUE - --------------------------------- ---------- ----------- ASSETS: Cash and due from banks $52,271 $52,271 Federal funds sold and resale agreements 6,100 6,100 Available-for-sale securities 133,897 133,897 Held-to-maturity securities 41,255 41,569 Loans-net of allowance for loan losses 752,324 756,573 LIABILITIES: Deposits 517,494 518,331 Federal funds purchased and repurchase agreements 98,702 98,702 Commercial paper and other short-term funds 112,059 112,495 Long-term debt 139,000 144,581 OFF-BALANCE SHEET UNREALIZED GAINS: Interest rate swap agreements 5,071 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 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 8 - -------------------------------------------------------------------------------- NOTE B. ESTIMATED FAIR VALUE (CONTINUED) estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. CASH AND DUE FROM BANKS--The carrying value of cash and due from banks approximates estimated fair value. FEDERAL FUNDS SOLD, RESALE AGREEMENTS, FEDERAL FUNDS PURCHASED, AND REPURCHASE AGREEMENTS--The carrying value of these instruments approximates estimated fair value. SECURITIES--Estimated fair values of securities are based primarily on quoted market prices or dealer quotes. If quoted market price is not available, fair value is estimated using quoted market prices for securities with similar characteristics. LOANS--Approximately 83% 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 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. - -------------------------------------------------------------------------------- NOTE C. LOANS The following loans were outstanding: DECEMBER 31, ------------------------- (IN THOUSANDS) 1998 1997 - ----------------------------- ----------- ----------- Commercial & Industrial $517,310 $438,116 Real estate: Construction 24,196 10,405 Residential mortgage 40,074 43,295 Non-residential mortgage 92,769 88,448 Loans to individuals for personal expenditures 46,800 54,987 Other 41,598 31,131 -------- -------- $762,747 $666,382 ======== ======== At December 31, 1998 and 1997, receivables from and standby letters of credit issued on behalf of commercial real estate developers and investors were approximately $95 million and $93 million, respectively. The credit risk associated with these loans is subject to changes in real estate market values. The properties held as collateral are primarily in the state of Minnesota. An analysis of the allowance for loan losses is presented below: YEAR ENDED DECEMBER 31, -------------------------------------- (IN THOUSANDS) 1998 1997 1996 - -------------------------- ---------- ----------- ----------- Balance at beginning of period $10,071 $ 8,511 $8,602 Provision charged to operating expense 2,940 2,134 2,345 Charge-offs (2,644) (1,106) (2,552) Recoveries 56 532 116 ------- ------- ------ Balance at end of period $10,423 $10,071 $8,511 ======= ======= ====== In the opinion of management, the allowance for loan losses is adequate to provide for known and estimated exposures in the loan portfolio. At December 31, 1998, the Company had three impaired commercial loans totaling $1,533,000 compared with two loans totaling $171,000 at December 31, 1997. Management has allocated $825,000 and $171,000 for 1998 and 1997, respectively, of the Allowance for Loan Losses to these loans. Impaired loans averaged $201,000 and $209,000 during 1998 and 1997, 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 $11,497,000 and $1,194,000 at December 31, 1998 and 1997, respectively. Gross interest income would have been increased by approximately $636,000, $95,000, and $426,000 for the years ended December 31, 1998, 1997 and 1996, 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 $8,266,000, $8,552,000, and 8,822,000 at December 31, 1998, 1997, and 1996, respectively. New loans and repayments during 1998 were $8,180,000 and $8,466,000, 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) 1998 1997 - --------------------------- ---------- --------- Assets, at cost: Land $ 183 $ 183 Buildings 1,229 1,222 Leasehold improvements 2,622 2,613 Equipment 17,280 16,419 ------- ------- 21,314 20,437 Accumulated depreciation: Buildings 585 528 Leasehold improvements 1,060 829 Equipment 9,270 7,667 ------- ------- 10,915 9,024 ------- ------- $10,399 $11,413 ======= ======= - -------------------------------------------------------------------------------- NOTE E. DEPOSITS Approximately $112,897,000 and $93,975,000 of interest bearing time deposits were in denominations of $100,000 or more at December 31, 1998 and 1997, respectively. The scheduled maturities of time deposits at December 31, 1998 are summarized as follows: LESS THAN $100,000 (IN THOUSANDS) $100,000 OR MORE - ------------------ ----------- ----------- 3 months or less $18,350 $ 63,699 3 - 6 months 20,868 25,096 6 - 12 months 21,791 5,140 1 - 2 years 11,081 16,526 2 - 3 years 7,121 846 3 - 5 years 9,842 1,590 over 5 years 91 ------- -------- $89,144 $112,897 ======= ======== - -------------------------------------------------------------------------------- NOTE F. SHORT-TERM BORROWINGS Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, treasury tax and loan deposits, Federal Home Loan Bank advances and commercial paper. Federal funds purchased generally mature the day following the date of purchase, while securities sold under agreements to repurchase generally mature within 30 days from the various dates of sale. The Company had unsecured lines of credit available in the amount of $140,000,000 at December 31, 1998, 1997 and 1996. 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) 1998 1997 1996 - ------------------------------- ------------- ------------- ------------- Maximum amount out- standing at any month end: Federal funds & repurchase $163,128 $156,104 $137,883 Commercial paper 138,323 137,714 109,079 Other 27,388 26,332 20,391 Daily average amount outstanding: Federal funds & repurchase 145,095 133,366 116,973 Commercial paper 115,197 118,154 95,950 Other 17,488 17,047 6,967 Weighted average interest rate for full year: Federal funds & repurchase 4.91% 4.99% 4.83% Commercial paper 6.26% 6.28% 6.09% Other 5.40% 5.82% 5.37% Outstanding at year-end: Federal funds & repurchase 98,702 104,399 96,640 Commercial paper 99,396 119,081 98,107 Other 12,663 23,218 11,366 Weighted average interest rate on debt outstanding as of December 31: Federal funds & repurchase 4.03% 5.43% 5.36% Commercial paper 5.75% 6.04% 6.11% Other 5.11% 5.33% 5.11% - -------------------------------------------------------------------------------- NOTE G. LONG-TERM DEBT DECEMBER 31, ----------------------- (IN THOUSANDS) 1998 1997 - --------------------------------------- ---------- ---------- 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 10,000 Series D, 7.15% due 2004 5,000 5,000 Series E, 7.22% due 2007 5,000 5,000 Series F, 6.68% due 2003 51,000 Series G, 6.79% due 2005 11,000 Federal Home Loan Bank Advance, 5.81%, due 2000 10,000 -------- Total $139,000 $67,000 ======== ======= The Company has entered into interest rate swap agreements to effectively convert the Senior Notes to floating rate instruments. At December 31, 1998, 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 6.08%. The weighted average effective interest rate for the Senior Notes Series C, D, E, F, and G including the effects of the related swap agreements, is the three month LIBOR rate plus 80 basis points or 5.86%. The Senior Notes are unsecured and are unconditionally guaranteed by the parent company. 10 - -------------------------------------------------------------------------------- NOTE G. LONG-TERM DEBT (CONTINUED) The Senior Notes include covenants which require Diversified Business Credit, Inc. and the parent company to maintain certain levels of capitalization and maintain debt to capitalization ratios within prescribed limits. - -------------------------------------------------------------------------------- NOTE H. NOTE H. INCOME TAXES The components of income tax expense were: (IN THOUSANDS) 1998 1997 1996 - ---------------- ------------ --------- --------- Current: Federal $ 8,133 $8,074 $6,080 State 2,083 2,009 1,557 ------- ------ ------ 10,216 10,083 7,637 Deferred: Federal (19) (263) 357 State (6) (84) 115 ------- ------ ------ (25) (347) 472 ------- ------ ------ $10,191 $9,736 $8,109 ======== ====== ====== 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) 1998 1997 - ------------------------------------- --------- --------- Deferred tax assets: Loan loss reserves $4,218 $4,076 Salary continuation plan 994 866 Loan fees 21 60 Nondeductible expenses 20 5 ------ ------ Total deferred tax assets 5,253 5,007 Deferred tax liabilities: Retirement plan 1,256 1,143 Prepaid expenses 111 101 Tax over book depreciation 482 396 Security discounts 14 2 Unrealized gains on securities 620 288 ------ ------ Total deferred tax liabilities 2,483 1,930 ------ ------ Net deferred tax assets $2,770 $3,077 ====== ====== 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, 1998, 1997 and 1996 is different than the federal income tax rate. The reasons for the differences are as follows: 1998 1997 1996 ---------- ---------- ---------- Federal income tax rate 35.0% 35.0% 35.0% Tax exempt income (0.2) (0.1) (0.2) State income taxes, net of federal income tax benefit 5.2 5.1 5.2 Cash value of life insurance (0.5) (0.6) (0.8) Other items (0.1) (0.2) ---- ---- Effective rate 39.4% 39.4% 39.0% ==== ==== ==== - -------------------------------------------------------------------------------- NOTE I. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding in connection with standby letters of credit aggregating approximately $21,714,000 and $19,164,000 at December 31, 1998 and 1997, respectively. Commercial letters of credit were $2,980,000 and $3,187,000 at December 31, 1998 and 1997, respectively. Acceptance participations acquired were $11,419,000 at December 31, 1998 and $7,214,000 at December 31, 1997. National City Bank has entered into a ten year lease which commenced March 16, 1996, for its headquarters in downtown Minneapolis. The annual cost for the first five years will be approximately $1.7 million per year and for the last five years will be approximately $1.8 million per year. The lease provides an option to extend the term for two consecutive five-year periods at the then current fair market rents. The Bank will have the right to terminate the lease or give back substantial portions of the leased premises on the sixth anniversary of the lease term. In addition, the Bank paid for all of its leasehold improvements, which approximated $2.0 million. Diversified Business Credit, Inc. has entered into a five year lease which commenced September 1, 1997, for its headquarters in downtown Minneapolis. The annual cost for the five years will be approximately $240,000. The lease provides an option to extend the term for two consecutive five-year periods at the then current fair market rents. The Company was obligated under operating leases for premises and equipment with terms of one year or more at December 31, 1998. The aggregate lease commitments outstanding as of December 31, 1998 were $13,874,000 and for the next five years are payable as follows: (IN THOUSANDS) - ---------------- 1999 $2,410 2000 2,225 2001 2,210 2002 2,159 2003 1,998 Net rental expense for the years ended December 31, 1998, 1997, and 1996, was $2,332,000, $2,478,000, and $2,170,000, 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 $12,957,000 of dividends may be paid by the Company's bank subsidiary at December 31, 1998, 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 1998, approximately $4,640,000 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, 1998 and 1997, is as follows: (IN THOUSANDS) 1998 1997 - --------------------------------------- ----------- ----------- Credit activities: Commitments to extend credit $315,391 $262,007 Standby letters of credit 21,714 19,164 Commercial letters of credit 2,980 3,187 Acceptance participations acquired 11,419 7,214 Other financial instrument activities: Interest rate swap agreements $129,000 $ 87,000 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, 1998 and 1997, the gain position of these contracts was $5.1 million and $2.0 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, 1998 and 1997, interest rate swaps totaling $129 million and $67 million, respectively, hedged long-term debt. At December 31, 1997, 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 $47 million of these swaps and the three month LIBOR on $82 million. The notional balances and yields by maturity date for interest rate swaps at December 31, 1998, are as follows: WEIGHTED WEIGHTED NOTIONAL AVERAGE AVERAGE AMOUNT INTEREST RATE INTEREST RATE MATURITY DATE (IN THOUSANDS) RECEIVED PAID - --------------- ---------------- --------------- -------------- 1999 $ 23,000 7.19% 5.75% 2001 24,000 7.41% 5.75% 2003 51,000 5.89% 5.73% 2004 5,000 6.45% 5.71% 2005 11,000 5.93% 5.73% 2007 15,000 6.84% 5.76% -------- Total $129,000 6.54% 5.74% Swaps contributed to the Company's net interest income by reducing interest expense for the years ended December 31, 1998, 1997 and 1996, by $971,000, $995,000 and $799,000, 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) 1998 1997 1996 - ------------------------------------------------------- ------------- ---------- ---------- Projected benefit obligation: Balance at beginning of period $10,541 $ 9,457 $10,051 Service cost 379 316 344 Interest cost 745 718 716 Actuarial (gain) or loss (7) 758 10 Benefits paid during period (523) (531) (886) ------ ------- ------- Projected benefit obligation at end of period 11,135 10,718 10,235 Plan assets at fair value: Balance at beginning of period 14,579 13,204 12,730 Actual return on plan assets during period 1,635 1,906 1,360 Benefits paid during period (523) (531) (886) ------ ------- ------- Fair value of plan assets at end of period 15,691 14,579 13,204 ------ ------- ------- Plan assets in excess of projected benefit obligation 4,556 3,861 2,969 Unrecognized prior service cost (98) (107) (116) Unrecognized net loss or (gain) (961) (431) 325 Unrecognized transition asset (261) (323) (385) ------ ------- ------- Prepaid pension cost at end of period $3,236 $ 3,000 $ 2,793 ====== ======= ======= Prepaid pension cost at beginning of period $3,000 $ 2,793 $ 2,651 Pension cost (credit) for the period (236) (207) (142) ------ ------- ------- Prepaid pension cost at end of period $3,236 $ 3,000 $ 2,793 ====== ======= =======
13 - -------------------------------------------------------------------------------- NOTE L. EMPLOYEE BENEFIT PLANS (CONTINUED) For 1998, the discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 4.5%, respectively. For 1997, the rates were 7.0% and 4.5%. For 1996, the rates were 7.5% and 4.5%. The expected long-term rate of return on assets was 9.0% for all three years. The Company maintains a retirement savings 401(k) plan. All employees of the Company and its subsidiaries are eligible to participate in the plan after completing twelve months of service during which they have worked at least one thousand hours. Matching contributions are made at the discretion of management. Company contributions charged to operations for the years ended December 31, 1998, 1997 and 1996, were $276,000, $271,000, and $263,000, 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) 1998 1997 - ---------------------------------------------- ----------- ---------- ASSETS Cash $ 4,396 $ 15,911 Investment in bank subsidiary 64,371 58,980 Investment in non-bank subsidiary 34,256 27,925 Subordinated note receivable from affiliate 8,000 8,000 Other investments 183 374 Due from affiliates 135,200 140,650 Other assets 355 337 -------- -------- $246,761 $252,177 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper $ 99,396 $119,081 Other liabilities 77 169 Stockholders' equity 147,288 132,927 -------- -------- $246,761 $252,177 ======== ======== STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, --------------------------------- (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------ --------- --------- --------- INCOME Dividends from bank subsidiary $ 3,000 $ 3,000 $ 3,120 Interest income 10,321 9,879 7,836 Other income 80 239 296 ------- ------- ------- 13,401 13,118 11,252 EXPENSES Interest expense 7,290 7,507 5,909 Other expenses 738 621 628 ------- ------- ------- 8,028 8,128 6,537 ------- ------- ------- Earnings before taxes 5,373 4,990 4,715 Income taxes 967 817 652 ------- ------- ------- 4,406 4,173 4,063 Equity in undistributed net earnings of subsidiaries 11,258 10,791 8,623 ------- ------- ------- Net earnings $15,664 $14,964 $12,686 ======= ======= =======
14 - -------------------------------------------------------------------------------- NOTE M. PARENT ONLY INFORMATION (CONTINUED) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------- ---------- ---------- --------- Cash flows from operating activities: Net earnings $ 15,664 $ 14,964 $ 12,686 Adjustments to reconcile net earnings to net cash from operating activities: Equity in undistributed earnings of subsidiaries (11,258) (10,791) (8,623) Decrease in other assets 198 726 550 Increase (decrease) in other liabilities (92) 112 (92) --------- --------- -------- (11,152) (9,953) (8,165) --------- --------- -------- Net cash from operating activities 4,512 5,011 4,521 Cash flows from investing activities: (Advances to) payments from affiliates 5,450 (13,300) (23,195) --------- --------- -------- Net cash from (used for) investing activities 5,450 (13,300) (23,195) Cash flows from financing activities: Net increase(decrease) in commercial paper (19,685) 20,974 18,121 Payment for fractional shares on stock dividends (40) (22) (26) Purchase of treasury stock (1,752) (856) (1) Other (34) --------- --------- -------- Net cash from financing activities (21,477) 20,096 18,060 --------- --------- -------- Net increase (decrease) in cash (11,515) 11,807 (614) Cash at beginning of year 15,911 4,104 4,718 --------- --------- -------- Cash at end of year $ 4,396 $ 15,911 $ 4,104 ========= ========= ======== Supplemental disclosures Cash paid during the year for: Interest $ 7,290 $ 7,504 $ 5,465 Income taxes 1,058 660 690
- -------------------------------------------------------------------------------- NOTE N. SECURITIES Securities consist of the following:
DECEMBER 31, 1998 -------------------------------------------------------- COST OR APPROXIMATE AMORTIZED UNREALIZED UNREALIZED MARKET (IN THOUSANDS) COST GAINS LOSSES VALUE - -------------------------------------- ----------- ------------ ------------ ------------ Available-for-sale U.S. Treasury $ 4,969 $ 108 $ 5,077 U.S. Government agencies 17,057 84 $52 17,089 Federal agency mortgage-backed 107,537 1,436 43 108,930 Other securities 2,801 2,801 -------- ------ --- -------- $132,364 $1,628 $95 $133,897 ======== ====== === ======== Held-to-maturity Collateralized mortgage obligations $ 41,255 $ 314 $ 41,569 ======== ====== ========
15 - -------------------------------------------------------------------------------- NOTE N. SECURITIES (CONTINUED)
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 ======== ====== ========
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, 1998 --------------------------------------------------------------------------------------- AFTER ONE AFTER FIVE WITHIN BUT WITHIN BUT WITHIN AFTER TEN ONE YEAR FIVE YEARS TEN YEARS YEARS --------------------- --------------------- --------------------- --------------------- (IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - -------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Available-for-sale U.S. Treasury $ 5,077 5.69% U.S. Government agencies $ 5,077 6.17% 12,012 5.25% Federal agency mortgage-backed 4,368 5.82% $10,129 6.28% $94,433 6.71% Other securities 2,801 6.56% ------- ------- ------- ------- $ 5,077 6.17% $21,457 5.47% $10,129 6.28% $97,234 6.71% ======= ======= ======= ======= Held-to-maturity Collateralized mortgage obligations $ 2,271 7.25% $38,984 6.60% ======= ======= Approximate market value $ 2,288 $39,281 ======= =======
DECEMBER 31, 1997 --------------------------------------------------------------------------------------- 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 ======= =======
Securities carried at $124,468,000 and $137,547,000 at December 31, 1998 and 1997, respectively, were pledged to secure government, public and trust deposits, borrowings in the form of repurchase agreements and FHLB advances and for other purposes as required by law. Average yields on available-for-sale securities is based on amortized cost. 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 3.2 years for agency mortgage-backed securities and 2.8 years for collateralized mortgage obligations. 16 - -------------------------------------------------------------------------------- NOTE O. BUSINESS SEGMENTS The Company provides a wide range of banking and financial services and products through its subsidiaries. The business segments are managed with a focus on various performance objectives including net income, return on average equity, and operating efficiency. The Company has two business segments: National City Bank of Minneapolis (Bank) and Diversified Business Credit, Inc. (DBCI). The Bank offers a full range of banking services to businesses and individuals including loans, deposit services, trust services, cash management services, and investment sales. DBCI is a commercial finance company offering asset-based lending to businesses. The revenues, expenses, and assets of the business segments are summarized below:
DECEMBER 31, 1998 ---------------------------------------------------------- COMMERCIAL COMMERCIAL CONSOLIDATED (IN THOUSANDS) BANKING FINANCE OTHER* COMPANY - --------------------------------------- ------------ ------------ ------------ ------------- Interest income $ 52,737 $ 32,982 $ (94) $ 85,625 Interest expense 24,967 16,203 (3,147) 38,023 -------- -------- -------- ---------- Net interest income 27,770 16,779 3,053 47,602 Non-interest income 9,002 599 (359) 9,242 -------- -------- -------- ---------- Total revenue 36,772 17,378 2,694 56,844 Loan loss provision 640 2,300 2,940 Depreciation and amortization expense 2,792 129 6 2,927 Other non-interest expense 20,383 4,330 409 25,122 Income taxes 5,031 4,287 873 10,191 -------- -------- -------- ---------- Net income $ 7,926 $ 6,332 $ 1,406 $ 15,664 ======== ======== ======== ========== Total loans $461,324 $301,423 $ 762,747 Total assets 721,570 310,638 $ (6,526) 1,025,682
DECEMBER 31, 1997 ---------------------------------------------------------- COMMERCIAL COMMERCIAL CONSOLIDATED (IN THOUSANDS) BANKING FINANCE OTHER* COMPANY - --------------------------------------- ------------ ------------ ------------ ------------- Interest income $ 51,167 $ 27,892 $ (59) $ 79,000 Interest expense 24,182 13,600 (2,491) 35,291 -------- -------- -------- -------- Net interest income 26,985 14,292 2,432 43,709 Non-interest income 10,729 749 (88) 11,390 -------- -------- -------- -------- Total revenue 37,714 15,041 2,344 55,099 Loan loss provision 1,607 527 2,134 Depreciation and amortization expense 3,159 82 4 3,245 Other non-interest expense 20,683 3,928 409 25,020 Income taxes 4,738 4,240 758 9,736 -------- -------- -------- -------- Net income $ 7,527 $ 6,264 $ 1,173 $ 14,964 ======== ======== ======== ======== Total loans $426,495 $239,887 $666,382 Total assets 693,065 246,584 $ (4,477) 935,172
DECEMBER 31, 1996 --------------------------------------------------------- COMMERCIAL COMMERCIAL CONSOLIDATED (IN THOUSANDS) BANKING FINANCE OTHER* COMPANY - --------------------------------------- ------------ ------------ ----------- ------------- Interest income $ 46,857 $ 22,616 $ (77) $ 69,396 Interest expense 21,363 10,809 (2,023) 30,149 -------- -------- -------- -------- Net interest income 25,494 11,807 1,946 39,247 Non-interest income 9,630 533 (81) 10,082 -------- -------- -------- -------- Total revenue 35,124 12,340 1,865 49,329 Loan loss provision 1,820 525 2,345 Depreciation and amortization expense 2,084 78 7 2,169 Other non-interest expense 20,502 3,177 341 24,020 Income taxes 4,094 3,441 574 8,109 -------- -------- -------- -------- Net income $ 6,624 $ 5,119 $ 943 $ 12,686 ======== ======== ======== ======== Total loans $397,934 $198,570 $596,504 Total assets 699,515 206,811 $ (6,197) 900,129
*Other includes parent only and consolidating eliminations 17 - -------------------------------------------------------------------------------- NOTE O. BUSINESS SEGMENTS (CONTINUED) The Bank has experienced increased net interest income related primarily to a growth in loans, while containing growth in non-interest expense. The Bank received a state tax refund in 1997 of $1,369,000 which was included in non-interest income. DBCI has also experienced higher net interest income related to loan growth. DBCI had a higher loan loss provision in 1998 due to charge-offs on two nonaccrual loans which are expected to be liquidated in 1999. - ------------------------------------------------------------------------------ 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, 1998 and 1997, and the related consolidated statements of earnings, shareholders' equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Minneapolis, Minnesota January 15, 1999 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY RESULTS Net earnings for 1998 were $15,664,000 compared with $14,964,000 in 1997, up 5 percent. Basic earnings per share increased to $1.77 in 1998 compared with $1.68 in 1997. The net earnings for 1997 include a state income tax refund, related to taxes paid in prior years, of $1,369,000 with a net earnings effect of approximately $850,000. Without regard for the 1997 tax refund, earnings for 1998 increased 11 percent. The major factor contributing to the earnings increase in 1998 was higher net interest income resulting from growth in loans. We accomplished this growth while decreasing non-interest expenses. 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 $47.7 million up from $43.8 million in 1997 and $39.3 million in 1996. Fluctuations in net interest income can result from changes in the volume of assets and liabilities as well as changes in interest rates. These changes are presented in the analysis on page 29. The average base rate decreased to 8.35 percent from 8.44 percent in 1998. Approximately 83 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 5.17 percent compared with 5.18 percent in 1997. Average earning assets grew to $922 million in 1998, an increase of $77 million or 9 percent. Average loans increased to $721 million in 1998 from $647 million in 1997, an increase of 11 percent. Loans were 78.1 percent of total earning assets in 1998, compared with 76.5 percent in 1997. The general decrease in interest rates during 1998 had no effect on the cost of interest bearing deposits and borrowed funds which remained constant at 5.33 percent. The lower cost of short-term funds was offset by a higher volume and cost of long-term debt. Time deposits are slower to reprice because of their longer maturities. While the average base rate decreased 9 basis points, the average yield on earning assets, including fixed rate securities, decreased 6 basis points. As a result, interest rate spread declined to 3.97 percent from 4.03 percent in 1997. Interest bearing time deposits of $100,000 or more decreased and averaged $59.5 million in 1998 compared with $51.8 million in 1997. Other interest bearing deposit accounts increased $4.8 million compared with last year and comprise approximately 31 percent of interest bearing sources. Brokered deposits averaged $59 million in 1998 compared with $66.9 million in 1997. 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, 1998, long-term debt totaled $139 million. Detail information about long-term debt is presented in Note G to the financial statements. Non-interest bearing deposits increased from 1997 and averaged $130.8 million in 1998. 19 The following table summarizes the changes in funding sources since 1996:
1998 1997 ------------------------ -------------------------- % CHANGE % CHANGE (DAILY AVERAGES IN THOUSANDS) AMOUNT FROM 1997 AMOUNT FROM 1996 - ---------------------------------------------------- ---------- ----------- ---------- ------------- Interest bearing time deposits of $100,000 or more $ 59,528 14.9% $ 51,811 (19.7)% Brokered deposits 58,987 (11.8) 66,865 (28.5) Other interest bearing deposits 221,779 2.2 217,028 39.0 Commercial paper 115,197 ( 3.4) 119,192 24.2 Other short-term borrowed funds 162,583 8.8 149,375 20.5 Long-term debt 94,994 65.2 57,509 19.7 -------- -------- Total interest bearing 713,068 7.8 661,780 13.7 Non-interest bearing deposits 130,761 11.2 117,605 6.7 Other liabilities 10,118 11.6 9,069 6.3 Stockholders' equity 139,725 12.4 124,323 12.4 -------- -------- $993,672 8.9% $912,777 12.5% ======== ========
CREDIT RISK MANAGEMENT The responsibility for credit administration rests with the credit committees of each subsidiary. 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. Additionally, DBCI monitors collateral values and related credit risks through its staff of field auditors. The largest loan category is commercial and industrial loans, which grew from $438 million in 1997 to $517 million in 1998, an increase of 18 percent. Management monitors loan concentrations by industry segment to develop a diverse mix of credits. Industry Credit Exposure Guidelines are established and managed based on the current and anticipated economic conditions and the perceived risk profile of an industry. The Company's ability to manage the credit risk within an industry is also considered. A high percentage of the commercial and industrial loans originate from the Minneapolis/St. Paul metropolitan area. Those industry sectors showing signs of weakness are targeted by management for slow or no growth in credit facilities. Underwriting Guidelines including profitability, cash flow, leverage, collateral, guarantee and monitoring standards are applicable for the bulk of the commercial and industrial loans. The Bank also purchases loans from correspondent banks. Purchased loans were $66.5 million and $55.2 million at December 31, 1998, and 1997, respectively. Loans secured by commercial real estate were approximately $117 million as of December 31, 1998 and $99 million as of the previous year end. Included in this total is approximately $24.2 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 20 portfolio with apartment buildings being the largest category at 19 percent. Commercial real estate lending activities are guided by Credit Policies, Underwriting Guidelines, Operating Procedures, Collateral Standards and Environmental Risk Procedures. Loans secured by residential mortgages totaled $40 million at December 31, 1998, compared with $43 million last year. This category includes $16 million secured by first liens on 1-4 family housing, $16 million secured by junior liens on 1-4 family housing and $8 million revolving Executive Line loans that are secured by either first or second mortgages. The comparable 1997 amounts are $20 million first liens, $14 million junior liens and $9 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 $47 million at December 31, 1998, compared with $55 million in 1997. 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 $42 million on December 31, 1998, compared with $31 million in 1997. 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 $2.9 million in 1998 compared with $2.1 million in 1997. Management determines an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, including estimates and appraisals of collateral values, prior loss experience, and current economic conditions. Changes in these estimates, appraisals and evaluations might be required quickly in the event of changing economic conditions and the economic prospects of borrowers. Management engages in a detailed review of loans showing weakness based on established criteria. A system of risk grading is used to establish monthly assessments of the portfolio and such assessments are the basis for a quarterly review of the allowance for loan losses. During the five-year period beginning in 1994, the allowance for loan losses has declined as a percent of loans outstanding. The Summary of Loan Loss Experience presented on page 33 shows the decline in the percentage from 1.70 percent in 1994 to 1.37 percent in 1998. The allowance for loan losses increased to $10.4 million in 1998. At December 31, 1998, the reserve was 1.37 percent of loans compared with 1.51 percent in 1997. Actual net loan losses in 1998 were $2.6 million compared with $574,000 in 1997. Charge-offs were $2.6 million in 1998, and recoveries were $56,000. The method used and assumptions made in the determination of the provision and allowance for loan losses is consistent for all periods presented in the Company's financial statements. The Company experienced a higher level of loss in 1998 than in the previous four years as presented in the Summary of Loan Loss Experience on page 33. The losses occurred in the commercial lending portfolio of DBCI and, accordingly, increased the Company's percent of net loan charge-offs to average loans to .36 percent compared with .09 percent in 1997. The remaining balance of the loans continues to have a negative affect on income and are included in non-accrual loans. The loans involved are being reduced through a process of collateral liquidation. The allocation of the allowance for loan losses for 1998 presented on page 33 reflects a greater amount for commercial and industrial loans than in the previous years presented. The increased allocation is in the portfolio of DBCI and represents three loans totaling $2.5 million. 21 NON-PERFORMING ASSETS Non-performing assets were $11.5 million at December 31, 1998, compared with $1.2 million in 1997 and $3.2 million in 1996. At the current year-end, non-performing assets consisted of loans on non-accrual status, restructured loans, and loans past due 90 days or more. In addition to non-accrual loans and accruing loans 90 days or more past due, there were loans with an aggregate principal balance of $13.7 million outstanding at December 31, 1998, to borrowers who are currently experiencing financial difficulties. This compares with $19 million at December 31, 1997. Although these loans are adequately secured by commercial real estate or other 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. Non-accrual loans are loans on which the accrual of interest ceases when the collection of principal or interest is determined to be doubtful by management. It is the Company's policy to cease the accrual of interest when principal or interest payments are delinquent 90 days or more. Any unpaid amounts previously accrued in the current year are reversed from income, and thereafter interest is recognized only when payments are received. Restructured loans are loans on which the Company, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. 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 acquired in foreclosure at December 31, 1998 or 1997. 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. 22 The following table summarizes the Company's repricing gap for various time intervals at December 31, 1998:
WITHIN 3 MONTHS 1 YEAR MORE THAN (IN MILLIONS) 3 MONTHS TO 1 YEAR TO 5 YEARS 5 YEARS - -------------------------------------------- ---------- ----------- ------------ ---------- Loans $ 575 $57 $ 84 $ 36 Securities 9 32 94 40 Other assets 9 90 ----- ---- ----- ------ 593 89 178 166 Non-interest bearing deposits 39 44 36 47 Interest bearing deposits 187 88 77 Short-term borrowings 197 14 Long-term debt 47 21 71 Interest rate swaps 82 (11) (71) Other liabilities and stockholders' equity 158 ----- ---- ----- ------ 552 146 123 205 ----- ---- ----- ------ Repricing gap $ 41 $(57) $ 55 $ (39) ----- ---- ----- ------ Cumulative gap 41 (16) 39 0 Cumulative gap as a percent of assets 4% (2)% 4% 0%
As indicated by the Gap table, assets reprice slightly faster than liabilities as of the reporting date. With this balance sheet position, which is typical for the Company, interest margins are projected to increase slightly in an environment of rising short-term rates and decline slightly in a declining rate environment. A lower interest rate environment is preferable for the Company from a credit perspective, however, as there is less pressure on customers to meet variable rate debt servicing obligations. The following table provides information about the Company's derivative financial instruments and other financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For loans, securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as well as the Company's historical experience of the impact of interest rate fluctuations on the prepayment of residential and home equity loans and mortgage-backed securities. For 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. 23
FAIR VALUE AS OF (IN MILLIONS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98 - -------------------------------------- ---------- ---------- ---------- ---------- ---------- ------------ ---------- ----------- RATE SENSITIVE ASSETS: Fixed interest rate loans $ 23 $ 15 $ 20 $ 16 $ 16 $ 42 $ 132 $135 Average interest rate 7.81% 8.36% 8.87% 8.48% 8.48% 8.36% 8.37% Variable interest rate loans 547 20 7 14 14 29 631 633 Average interest rate 9.54% 7.50% 8.70% 7.68% 7.68% 8.15% 9.32% Fixed interest rate securities 33 32 26 20 18 40 169 170 Average interest rate 6.49% 6.36% 6.02% 6.55% 6.55% 6.53% 6.41% Variable interest rate securities 1 1 1 1 1 1 6 6 Average interest rate 5.74% 6.14% 6.74% 5.93% 5.93% 6.69% 6.27% Other interest bearing assets 6 6 6 Average interest rate 5.00% 5.00% RATE SENSITIVE LIABILITIES: Non-interest bearing checking 82 9 9 9 9 47 165 165 Interest bearing checking & savings 120 9 8 8 8 153 153 Average interest rate 3.90% 1.22% 1.01% 1.01% 1.01% 3.29% Time deposits 151 28 8 6 6 199 200 Average interest rate 5.36% 5.91% 5.85% 5.87% 5.87% 5.48% Fixed interest rate borrowings 248 10 11 10 71 350 356 Average interest rate 5.07% 5.81% 5.64% 5.64% 6.04% 5.32% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swaps 23 24 51 31 129 5 Average pay rate 5.75% 5.75% 5.73% 5.74% Average receive rate 7.19% 7.41% 5.89% 6.45%
NON-INTEREST INCOME Total non-interest income was $9.2 million, compared with $11.4 million in 1997, and $10.1 million in 1996. 1997 included a state income tax refund related to taxes paid in prior years and interest earned to the date of the refund. In 1997, the bank discontinued origination of mortgage loans from its own mortgage banking unit, and instead, accommodates customers through a referral arrangement with another lender. The decline in mortgage fee income is offset by a decline in corresponding salary and other expense. The Bank realized no gains or losses on the sale of investment securities in 1998 or 1997 compared with gains of $133,000 in 1996. The table below summarizes the major components of non-interest income:
(IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------- --------- --------- --------- Trust income $4,641 $ 4,801 $ 4,605 Service charges on deposit accounts 2,145 2,195 2,189 Mortgage banking fees 50 204 514 Sale of financial services and investment products 306 292 383 State income tax refund 1,369 Securities gains 133 Letter of credit commissions 609 558 374 Other 1,491 1,971 1,884 ------ ------- ------- $9,242 $11,390 $10,082 ====== ======= =======
NON-INTEREST EXPENSE Non-interest expense totaled $28.0 million in 1998, compared with $28.3 million in 1997 and $26.2 million in 1996. Several categories reflect decreases which were offset by increases in other expense which includes various items such as supplies, travel and entertainment, and delivery expense. 24 The table below summarizes the major components of non-interest expense: (IN THOUSANDS) 1998 1997 1996 - -------------------------------- ---------- ---------- ---------- Salaries and employee benefits $15,238 $15,110 $14,965 Net occupancy 3,062 3,194 2,750 Equipment 3,512 3,648 2,731 Fees and assessments 1,374 1,539 1,102 Advertising and marketing 742 909 844 Other 4,121 3,865 3,797 ------- ------- ------- $28,049 $28,265 $26,189 ======= ======= ======= YEAR 2000 In 1997 the Company formed a project team, and with assistance of an outside consulting firm, assessed the impact of Year 2000 on the Company's critical hardware and software, on the embedded technology in its physical facilities and automated equipment. The assessment also considered the potential impact on customers, business partners and vendors. A Year 2000 plan was developed, which included prioritized tasks, implementation, testing schedules, and contingency plans. The Company has replaced or modified certain systems to ensure Year 2000 compliance. The Company has substantially completed the testing of remediated systems related to Year 2000 compliance. The Company anticipates that the testing of all critical systems will be completed and implementation will be substantially completed by the end of the second quarter 1999. Any critical application that does not test successfully by the end of the second quarter of 1999 will have an approved contingency plan implemented. The Company estimates that the cost of its Year 2000 compliance program will approximate $1.1 million of which the Company has incurred approximately $800,000 to date. Costs incurred to modify internal use software will be expensed. A significant amount of the total estimated cost represents enhancements and improvements, which will be amortized over the estimated useful life of the enhancement or improvement. The Company will fund the expenditures from operating earnings. 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. The Company continues to monitor the actions of these third parties to appropriately address their own Year 2000 issues and to evaluate any likely effect on the Company. There is no guarantee that the systems of other companies or entities on which the Company relies will be remediated on a timely basis, or that a remediation or conversion will be compatible with the Company's systems. If these issues are not adequately resolved, the Company's future business operations and, in turn, its financial position and results of operations, could be negatively impacted. In addition, the Company's credit risk associated with its borrowers may increase as a result of their individual Year 2000 issues. Individual contingency plans have been established for mission critical business systems to mitigate potential delays or other problems associated with new system replacements, system remediation, or established vendor delivery dates. The plans were developed using a standard methodology that includes trigger dates, steps to follow, expected life of the plan and resources required. Business continuation plans will be developed for critical business processes to assure that service to customers will not be impaired. Federal banking regulators have conducted special examinations of banks to determine whether they are taking the necessary steps to prepare for Year 2000. They are closely monitoring the progress being made by the banks to ensure that key steps are fully completed as required by the individual bank plans. 25 CAPITAL AND LIQUIDITY Stockholders' equity was $147 million or 14.3 percent of total assets at December 31, 1998, compared with $133 million and 14.2 percent in 1997. 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 for 1998 and 1997. 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, ------------------------- 1998 1997 ----------- ----------- RISK CAPITAL RATIOS Tier I Capital 16.39% 16.61% Total Capital 17.56% 17.86% LEVERAGE RATIO 14.27% 14.15% 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 $129 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, 1998, the market value of available-for-sale securities exceeded amortized cost by $1.5 million. At December 31, 1997, the market value exceeded amortized cost by $712,000. Held-to-maturity securities provide liquidity through scheduled maturities. The majority of the securities are readily marketable. Management has structured the loan portfolio to provide additional liquidity with at least 55 percent of total loans having scheduled maturities within one year. Cash flows from operations and changes in the balance sheet also affect liquidity. The Consolidated Statement of Cash Flows on page 6 shows the component changes in the Company's cash position for the three years ending December 31, 1998. In 1998, net cash provided from operating activities increased to $26 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 1998, net cash used in investing activities increased by $70 million. The increase reflects increased loan originations as compared with the prior year. Cash provided from financing activities increased by $55 million in 1998. Increased funding sources included non-interest bearing and savings deposits and long term debt, offset 26 by decreased commercial paper, federal funds purchased and repurchase agreements, and other short-term borrowings. 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. 1997 VERSUS 1996 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 $43.8 million, up 11 percent. The increase resulted from a higher volume of earning assets offset by a decrease in net interest margin. Excluding gains and losses on sale of securities, non-interest income increased $1.3 million resulting from a state income tax refund. Non-interest expense increased $2.1 million from 1996 reflecting higher occupancy costs related to the relocation of the Company and its subsidiaries, continued investment in technology and equipment by the Company, and increased attorney and consulting fees. BUSINESS SEGMENTS The Company has two business segments, National City Bank of Minneapolis (commercial bank) and Diversified Business Credit, Inc. (commercial finance). The main offices of each segment are located in the business district of downtown Minneapolis. In addition to the main office, the commercial bank has a drive-up location in downtown Minneapolis and a full service bank in Edina, Minnesota. The commercial finance segment has an office in Milwaukee, Wisconsin. The commercial bank offers the usual banking services including business, consumer, and real estate loans, deposit and cash management services, correspondent banking, and safe deposit. In addition, the commercial bank also offers trust services including management of funds for individuals, the administration of estates and trusts, and for corporations, governmental bodies, and public authorities, paying agent services, trustee under corporate indenture, pension and profit sharing agreements, and record keeping and reporting for 401-K savings plans. The commercial bank originates the majority of its business in the Minneapolis/St. Paul area. The net income of the commercial bank increased to $7.9 million in 1998 from $7.5 million in 1997 and $6.6 million in 1996. The net earnings of 1997 included a state income tax refund of $1,369,000 which increased net earnings approximately $850,000. The bank has increased its net earnings through the growth of its loan portfolio and the use of low-cost funding sources, primarily deposits. The following table summarizes the commercial bank's performance measures: (IN THOUSANDS) 1998 1997 1996 - -------------------------- ------------ ------------ ------------ Net interest income $ 27,770 $ 26,985 $ 25,494 Net earnings 7,926 7,527 6,624 Average assets 720,504 684,609 606,265 Average loans 446,950 418,270 386,501 Average deposits 486,590 470,206 442,101 Return on average equity 13.19% 13.16% 12.51% Efficiency ratio 63.03% 63.22% 64.55% The commercial finance segment specializes in providing working capital loans secured by accounts receivable, inventory, and other marketable assets. Loans are made on a demand basis with no fixed repayment schedule. Compared to equity-based loans made by commercial banks and others, asset-based loans require closer monitoring and typically interest rates earned on these loans are higher. The commercial finance segment funds its loans through the issuance of long-term debt in the form of Senior Notes and borrowings from the parent company. The commercial finance segment originates the majority of its loans in Minnesota with approximately 15 percent originated in its Wisconsin office. 27 The net earnings of the commercial finance segment were $6.3 million in 1998 compared with $6.3 million in 1997 and $5.1 million in 1996. In 1998, this segment experienced an increase in non-performing loans which resulted in a loss of interest income and increased loan loss provision expense. The following table summarizes the commercial finance segment's performance measures: (IN THOUSANDS) 1998 1997 1996 - -------------------------- ------------ ------------ ------------ Net interest income $ 16,779 $ 14,292 $ 11,807 Net earnings 6,332 6,264 5,119 Average assets 278,737 233,260 188,825 Average loans 273,653 228,464 184,658 Return on average equity 20.59% 25.90% 27.44% Efficiency ratio 25.66% 26.66% 26.38% PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this annual report to stockholders and other material filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities as well as other capital spending, financing sources and the effects of regulation and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results in the future and, accordingly, such results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, changes in federal or state tax laws or the administration of such laws, litigation or claims, as well as all other risks and uncertainties described in the Company's filings. 28 - ------------------------------------------------------------------------------ CHANGE IN INTEREST INCOME AND EXPENSE
YEAR-ENDED DECEMBER 31, ------------------------------------------------------------------ 1998 OVER 1997 1997 OVER 1996 ---------------------------------- ------------------------------- CHANGES CHANGES RESULTING FROM RESULTING FROM --------------------- --------------------- (IN THOUSANDS ON A FULLY TAXABLE EQUIVALENT BASIS) TOTAL RATES VOLUME TOTAL RATES VOLUME - ---------------------------------------------------- ------------ ---------- ---------- --------- ----------- --------- Earned on: Funds sold $(358) $ (59) $ (299) $ 646 $ 646 Taxable securities 3 (577) 580 860 $ 172 688 Tax-exempt securities (27) (27) Loans 7,015 (543) 7,558 8,107 425 7,682 ------ -------- ------ ------ ------- ------ Total earning assets 6,660 (1,179) 7,839 9,586 597 8,989 Interest Paid on: Savings deposits 573 186 387 364 66 298 Time deposits (1) (143) 142 (436) 172 (608) Brokered deposits (468) (14) (454) 1,345 63 1,282 Other deposits 8 3 5 28 3 25 Short-term funds borrowed (309) (826) 517 3,161 525 2,636 Long-term debt 2,929 360 2,569 680 38 642 ------ -------- ------ ------ ------- ------ Total interest bearing liabilities 2,732 (434) 3,166 5,142 867 4,275 ------ -------- ------ ------ ------- ------ Increase (decrease) in net interest income $3,928 $ (745) $4,673 $4,444 $ (270) $4,714 ====== ======== ====== ====== ======= ======
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) 1998 1997 1996 - -------------------------------------- ----------- ---------- ---------- Available-for-sale U.S. Treasury $ 5,077 $ 23,997 $ 23,903 U.S. Government agencies 17,089 9,844 9,661 Federal agency mortgage-backed 108,930 102,529 94,671 Other securities 2,801 4,955 4,955 -------- -------- -------- $133,897 $141,325 $133,190 ======== ======== ======== Held-to-maturity Collateralized mortgage obligations $ 41,255 $ 37,402 $ 31,254 Other securities 251 -------- -------- -------- $ 41,255 $ 37,402 $ 31,505 ======== ======== ======== 29 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
1998 ------------------------------------ INTEREST AVERAGE INCOME/ AVERAGE (DAILY AVERAGES IN THOUSANDS AND ON A FULLY TAXABLE EQUIVALENT BASIS) BALANCE EXPENSE RATE - ----------------------------------------------------------------------- ----------- --------- ---------- ASSETS Federal funds sold and resale agreements $ 20,844 $ 1,092 5.24% Securities: Taxable 180,705 11,443 6.33 Tax-exempt -------- ------- Total securities 180,705 11,443 6.33 Loans 720,603 73,184 10.16 -------- ------- Total earning assets 922,152 85,719 9.30 Cash and due from banks 44,819 Other assets 26,701 -------- $993,672 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing deposits: Savings $101,964 $ 4,283 4.20% Time 204,296 11,694 5.72 Other 34,034 416 1.22 -------- ------- ----- Total 340,294 16,393 4.82 Short-term borrowed funds 277,780 15,275 5.50 Long-term debt 94,994 6,355 6.69 -------- ------- ----- Total interest bearing liabilities 713,068 38,023 5.33 Non-interest bearing deposits 130,761 Other liabilities 10,118 Stockholders' equity 139,725 -------- $993,672 ======== ======= Net interest income and interest rate spread $47,696 3.97 ======= Net interest margin 5.17 Fees on loans included above $ 3,281 =======
Average balance of non-accruing loans is included in the above analysis. Interest income attributable to non-accruing loans has not been included in the above analysis except as collected. 30
1997 1996 ------------------------------------ ------------------------------------ INTEREST INTEREST AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE BALANCE EXPENSE RATE BALANCE EXPENSE RATE - ---------------------------------------------------------------------------------- $ 26,268 $ 1,450 5.52% $ 14,561 $ 804 5.52% 171,981 11,440 6.65 161,473 10,580 6.55 170 27 15.88 -------- ------- -------- ------- 171,981 11,440 6.65 161,643 10,607 6.56 646,734 66,169 10.23 571,159 58,062 10.17 -------- ------- -------- ------- 844,983 79,059 9.36 747,363 69,473 9.30 39,733 37,245 28,061 26,812 -------- -------- $912,777 $811,420 ======== ======== - ---------------------------------------------------------------------------------- $ 92,338 $ 3,710 4.02% $ 84,778 $ 3,346 3.95% 209,737 12,163 5.80 197,808 11,254 5.69 33,629 408 1.21 31,540 380 1.20 -------- ------- -------- ------- 335,704 16,281 4.85 314,126 14,980 4.77 268,567 15,069 5.61 219,890 11,908 5.42 57,509 3,941 6.85 48,054 3,261 6.79 -------- ------- -------- ------- 661,780 35,291 5.33 582,070 30,149 5.18 117,605 110,222 9,069 8,533 124,323 110,595 -------- -------- $912,777 $811,420 ======== ======== ------- ------- $43,768 4.03 $39,324 4.12 ======= ======= 5.18 5.26 $ 2,408 $ 2,326 ======= =======
31 - ------------------------------------------------------------------------------ LOAN PORTFOLIO ANALYSIS
DECEMBER 31, TYPES OF LOANS ------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------------ ----------- ----------- ----------- ----------- ----------- Commercial and industrial $517,310 $438,116 $389,718 $379,290 $304,913 Real estate: Construction 24,196 10,405 10,444 16,089 16,582 Residential mortgage 40,074 43,295 40,323 32,125 25,828 Non-residential mortgage 92,769 88,448 76,086 68,504 62,731 Loans to individuals for personal expenditures 46,800 54,987 56,973 33,966 27,272 Other loans 41,598 31,131 22,960 22,607 29,727 -------- -------- -------- -------- -------- $762,747 $666,382 $596,504 $552,581 $467,053 ======== ======== ======== ======== ========
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, 1998:
AFTER ONE AFTER WITHIN BUT WITHIN FIVE ONE YEAR FIVE YEARS YEARS TOTAL ---------- ------------ ---------- ----------- Commercial and industrial $412,364 $92,957 $11,989 $517,310 Real estate construction 6,509 1,338 16,349 24,196 -------- ------- ------- -------- $418,873 $94,295 $28,338 $541,506 ======== ======= ======= ======== Loans with predetermined interest rates $ 12,354 $45,495 $13,068 $ 70,917 Loans with floating interest rates 406,519 48,800 15,270 470,589 -------- ------- ------- -------- $418,873 $94,295 $28,338 $541,506 ======== ======= ======= ========
The following table summarizes nonperforming assets:
DECEMBER 31, -------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------- ------------ ----------- ----------- ----------- ----------- Non-accrual loans $ 9,725 $ 320 $ 1,329 $ 1,314 $ 6,193 Impaired non-accrual loans 1,533 171 1,017 2,409 Restructured loans 235 Loans past due 90 days or more as to interest or principal 4 703 871 135 8 -------- ------- ------- ------- ------- Nonperforming loans $ 11,497 $ 1,194 $ 3,217 $ 3,858 $ 6,201 ======== ======= ======= ======= ======= Percent of total loans 1.5% 0.2% 0.5% 0.7% 1.3%
The gross interest income that would have been recorded in 1998 had nonperforming assets remained current and in accordance with original terms, is approximately $667,000. The amount of interest included in income was $31,000. It is the Company's policy to consider loans for non-accrual when they are past due 90 days or more, unless such loans are well secured and in the process of collection. All such loans have been reviewed by management, and where so determined are included in the non-accrual totals above. 32 - ------------------------------------------------------------------------------ SUMMARY OF LOAN LOSS EXPERIENCE
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------- ------------- ------------- ------------- ------------- ------------- Beginning balance of allowance for losses $ 10,071 $ 8,511 $ 8,602 $ 7,946 $ 8,006 Provision charged to operating expense 2,940 2,134 2,345 1,502 1,150 Charge-offs: Commercial and industrial 2,452 825 2,059 907 850 Real estate (includes construction and real estate) 155 125 195 Individuals for personal expenditures 37 156 298 44 172 Other 350 --------- --------- --------- --------- --------- 2,644 1,106 2,552 951 1,372 Recoveries: Commercial and industrial 37 267 29 45 41 Real estate (includes construction and real estate) 1 12 31 36 32 Individuals for personal expenditures 4 47 17 24 89 Foreign 8 Other 14 198 39 --------- --------- --------- --------- --------- 56 532 116 105 162 --------- --------- --------- --------- --------- Charge-offs net of recoveries 2,588 574 2,436 846 1,210 --------- --------- --------- --------- --------- Ending balance of allowance for losses $ 10,423 $ 10,071 $ 8,511 $ 8,602 $ 7,946 ========= ========= ========= ========= ========= Average gross loans outstanding $ 720,603 $ 646,734 $ 571,159 $ 509,899 $ 435,684 Percent of net loan charge-offs to average loans 0.36% 0.09% 0.43% 0.17% 0.28% Percent of allowance for losses to loans outstanding at end of period 1.37% 1.51% 1.43% 1.56% 1.70%
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 allowance for loan losses:
INDIVIDUALS COMMERCIAL FOR PERSONAL YEAR ENDED DECEMBER 31 AND INDUSTRIAL REAL ESTATE EXPENDITURES UNALLOCATED TOTAL - ------------------------------ ---------------- ------------- -------------- ------------- ---------- 1998 Amount allocated $ 3,767 $ 100 $ 300 $6,256 $10,423 Outstandings to total loans 67.82% 20.59% 6.14% 1997 Amount allocated 1,245 200 300 8,326 10,071 Outstandings to total loans 65.75% 21.33% 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%
33 - ------------------------------------------------------------------------------ SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 ----------- ----------- ----------- ---------- ---------- BALANCE SHEET ITEMS (IN MILLIONS) Securities $ 175 $ 179 $ 165 $ 158 $ 139 Loans 763 666 597 553 467 All other assets 88 90 138 90 67 Total assets 1,026 935 900 801 673 Total deposits 517 479 520 440 368 Short-term borrowed funds 211 246 206 198 156 Long-term debt 139 67 48 48 53 All other liabilities 12 10 8 9 5 Total liabilities 879 802 782 695 582 Stockholders' equity 147 133 118 106 91 INCOME AND EXPENSE ITEMS (IN THOUSANDS) Interest and fees on loans 73,090 66,110 57,992 54,952 41,046 All other interest income 12,535 12,890 11,404 10,417 9,179 Total interest income 85,625 79,000 69,396 65,369 50,225 Interest expense on deposits 16,393 16,281 14,980 12,950 8,490 Interest expense on short-term borrowed funds 15,275 15,069 11,908 11,680 8,933 Interest expense on long-term debt 6,355 3,941 3,261 3,638 1,015 Total interest expense 38,023 35,291 30,149 28,268 18,438 Net interest income 47,602 43,709 39,247 37,101 31,787 Provision for loan losses 2,940 2,134 2,345 1,502 1,150 Trust fees 4,641 4,801 4,605 4,839 4,683 State income tax refund 1,369 Gains (losses) on sale of securities 133 (122) (32) All other income 4,601 5,220 5,344 4,460 5,290 All other expenses 28,049 28,265 26,189 26,053 26,284 Net earnings 15,664 14,964 12,686 11,454 8,946 BASIC EARNINGS PER SHARE Net earnings 1.77 1.68 1.42 1.28 1.01
34 - ------------------------------------------------------------------------------ SELECTED RATIOS
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Net earnings to average assets 1.58% 1.63% 1.56% Net earnings to average stockholders' equity 11.26 12.01 11.40 Average stockholders' equity to average total assets 14.00 13.61 13.71 Regulatory Capital Ratios: Tier 1 risk capital 16.39 16.61 15.97 Total risk capital 17.56 17.86 17.12 Leverage 14.27 14.15 13.11 (ratios calculated before unrealized gains or losses)
- -------------------------------------------------------------------------------- SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
1998 --------------------------------------------------------- (UNAUDITED) FIRST SECOND THIRD FOURTH (IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER - -------------------------------------- ------------ ------------ ------------ ------------ Interest income $ 20,326 $ 21,084 $ 22,600 $ 21,615 Interest expense 8,875 9,127 9,959 10,062 Net interest income 11,451 11,957 12,641 11,553 Provision for loan losses 480 260 650 1,550 Other non-interest income 2,409 2,678 2,177 1,978 Non-interest expense 7,350 7,219 7,146 6,334 Income tax expense 2,379 2,836 2,759 2,217 Net earnings 3,651 4,320 4,263 3,430 Basic earnings per share** 0.41 0.49 0.48 0.39
1997 --------------------------------------------------------- (UNAUDITED) FIRST SECOND THIRD FOURTH (IN THOUSANDS EXCEPT PER 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** 0.37 0.38 0.49 0.44
1998 1997 --------------------- --------------------- LOW HIGH LOW HIGH --------- --------- --------- --------- Stock Price Range** First quarter $23 3/8 $29 1/2 $16 5/8 $20 7/8 Second quarter 30 35 1/4 18 21 3/4 Third quarter 24 34 1/2 19 3/8 26 1/4 Fourth quarter 23 1/2 28 24 1/8 27 3/8 December 31 (Closing Price) $26 1/4 $27 - ----------------- **Adjusted for stock dividends 35 - ------------------------------------------------------------------------------ DIRECTORS NATIONAL CITY BANCORPORATION David C. Malmberg Michael J. Boris* James B. Goetz , Sr. Walter E. Meadley, Jr. Chairman of the Board Private investor and President and Chief Retired Vice Chairman National City Bancorporation Consultant Executive Officer of the Board Goetz Companies National City Bank Wendell R. Anderson* Marvin Borman* Of Counsel Partner Esperanza Guerrero-Anderson* Robert L. Olson Larkin, Hoffman, Maslon, Edelman, President and Chief President and Chief Daly & Lindgren Ltd Borman & Brand Executive Officer Executive Officer Milestone Growth Fund, Inc. Diversified Business Credit, Inc. David L. Andreas Sharon N. Bredeson President and President and Chief Thomas E. Holloran* Roger H. Scherer* Chief Executive Officer Executive Officer Professor, Graduate Programs Chairman of the Board National City Bancorporation STAFF-PLUS, Inc. in Management Scherer Bros Lumber Company President and University of St. Thomas Chief Executive Officer Kenneth H. Dahlberg National City Bank Chairman of the Board C. Bernard Jacobs Dahlberg, Inc. Retired President and Chief Executive Officer Terry L. Andreas John H. Daniels, Jr.* National City Bancorporation Chairman of the Board Partner Retired Chairman of the Board School for Field Studies Willeke & Daniels National City Bank Beverly, Massachusetts *Members of the Audit Committee
- ------------------------------------------------------------------------------ PRINCIPAL OFFICERS NATIONAL CITY BANCORPORATION David L. Andreas Thomas J. Freed President and Secretary and Chief Financial Officer Chief Executive Officer NATIONAL CITY BANK OF MINNEAPOLIS David L. Andreas Ann H. Hengel BANK OPERATIONS DIVISION FINANCIAL MANAGEMENT DIVISION President and Senior Vice President Donald W. Kjonaas Thomas J. Freed Chief Executive Officer Senior Vice President Senior Vice President Timothy M. Murphy and Security Officer and Chief Financial Officer Vice President CLIENT SERVICES DIVISION William J. Klein David M. Nash Laura J. Carlson Robert A. Duncan Executive Vice President Senior Vice President Vice President Vice President Brad Byers Margrette A. Newhouse DeWayne A. Hoium Michael G. Jensen Vice President Vice President Vice President Vice President Donna M. DeMatteo Scott D. Thorson Sherri L. Kelly Robert A. Kramer Vice President Vice President Vice President Vice President and Controller Karen A. Dunifon James R. Kitchen Robert A. Steuck Vice President Vice President Vice President and Auditor Linda M. Fifield Susan E. Martenson COMPLIANCE COUNSEL Vice President Vice President Connie G. Weinman Lisa A. Ruhl Vice President DIVERSIFIED BUSINESS CREDIT, INC. Robert L. Olson William D. Farrar Bridget A. Manahan Kevin D. Schrader President and Chief Vice President Vice President Vice President Executive Officer Jeffrey S. Holland Allen J. Olson Mark W. Schwieters Janet L. Pomeroy Vice President Vice President Vice President Senior Vice President Robert L. Johnson Christopher J. Schaaf Walter D. Tomaszek Anthony R. Bassett Vice President and Treasurer Vice President Vice President Vice President
36 EX-23 4 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 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 15, 1999, with respect to the consolidated financial statements of National City Bancorporation incorporated by reference in its Annual Report (Form 10-K) for the year ended December 31, 1998. /S/ ERNST & YOUNG LLP Minneapolis, Minnesota March 26, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1998 DEC-31-1998 52,271 0 6,100 0 133,897 41,255 41,569 762,747 10,423 1,025,682 517,494 210,761 10,315 139,000 11,077 0 0 136,211 1,025,682 73,090 11,443 1,092 85,625 16,393 38,023 47,602 2,940 0 28,049 25,855 25,855 0 0 15,664 1.77 1.77 5.17 11,258 4 235 13,741 10,071 2,644 56 10,423 3,920 247 6,256
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