10-K 1 l82864ae10-k.txt NATIONAL CITY CORPORATION 10-K 1 2000 ANNUAL REPORT IN MOTION [NATIONAL CITY LOGO] [PHOTO] 2 WE'RE MOVING FORWARD BY . . . -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------------------------------------------------- (Dollars in Millions, Except Per Share Amounts) 2000 1999 1998(a) ------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR Revenue: Tax-Equivalent Net Interest Income $2,992 $3,037 $2,952 Noninterest Income 2,484 2,381 2,314 ----------- ------------ ----------- Total Revenue $5,476 $5,418 $5,266 ------------------------------------------------------------------------------------------------------------------------- Net Income $1,302 $1,405 $1,333 Net Income Per Common Share: Basic 2.14 2.25 2.04 Diluted 2.13 2.22 2.00 Dividends Paid Per Common Share 1.14 1.06 .94 ------------------------------------------------------------------------------------------------------------------------- Return on Average Common Equity 21.29% 22.64% 19.18% Return on Average Assets 1.52 1.67 1.66 Net Interest Margin 3.85 3.99 4.11 Efficiency Ratio 58.75 56.49 58.42 ------------------------------------------------------------------------------------------------------------------------- Average Shares - Basic 607,378,801 623,623,811 652,011,504 Average Shares - Diluted 612,625,349 632,452,146 665,720,330 ------------------------------------------------------------------------------------------------------------------------- AT YEAR END Assets $88,535 $87,121 $88,246 Loans 65,604 60,204 58,011 Earning Assets 79,623 78,903 78,368 Deposits 55,256 50,066 58,247 Stockholders' Equity 6,770 5,728 7,013 ------------------------------------------------------------------------------------------------------------------------- Book Value Per Common Share $11.06 $9.39 $10.69 Market Value Per Common Share 28.75 23.69 36.25 Equity to Assets Ratio 7.65% 6.57% 7.95% ------------------------------------------------------------------------------------------------------------------------- Common Shares Outstanding 609,188,668 607,058,364 652,654,720 Common Stockholders of Record 68,981 70,545 71,592 Full-Time Equivalent Employees 36,097 38,054 41,218 -------------------------------------------------------------------------------------------------------------------------
(a) Excludes merger charges. See further discussion in Note 3 to the Consolidated Financial Statements. CONTENTS To Our Stockholders......................... 1 National City in Motion..................... 3 Financial Review............................ 6 Consolidated Financial Statements and Notes..................................... 22 Form 10-K................................... 48 Board of Directors and Officers............. 52 Visit our Web site at www.national-city.com.
BUSINESS PROFILE National City Corporation (NYSE: NCC) is an $89 billion financial holding company headquartered in Cleveland, Ohio. The company provides a full range of banking and financial services to individuals and businesses and operates more than 1,200 branch banking offices and over 1,600 ATMs in Ohio, Pennsylvania, Indiana, Kentucky, Illinois and Michigan. 3 FOCUSING AND EXECUTING [PHOTO] (Left to Right) Robert G. Siefers, Vice Chairman David A. Daberko, Chairman & CEO Vincent A. DiGirolamo, Vice Chairman To Our Stockholders: National City's net income for 2000 was $1.3 billion, or $2.13 per share, the second highest per share earnings in the company's history. Return on average equity was also strong at 21.3%. Earnings fell short of our internal targets primarily due to the effects of the rapid rise in market interest rates between June 1999 and May 2000. Following nearly a decade of double-digit annual increases in earnings per share, 2000's financial performance was disappointing. Nonetheless, substantial progress was made on numerous customer-focused initiatives this year. Some of these came at the expense of current earnings but were necessary to address the competitive realities of the financial services industry and to position National City for future growth. BUSINESS MIX IMPROVEMENTS We undertook a number of restructuring actions this year to improve business mix and long-term growth prospects. We sold or securitized several billion dollars of low-yielding assets to reduce reliance on purchased funds, raise capital ratios, and reduce exposure to future interest rate volatility. We closed 69 underperforming Loan Zone consumer finance stores and announced our intention to exit the low-return automobile leasing business. These restructuring actions make room on the balance sheet for higher-return assets, such as the nonconforming mortgage loans generated by our First Franklin subsidiary. These loans are readily saleable to third parties at a premium to origination cost but have greater lifetime value when held on the balance sheet. LOAN AND DEPOSIT GROWTH The company continues to be very successful in originating large volumes of high-quality assets, with average loan growth of 12% for the year, adjusted for loan sales and securitizations. Corporate loan growth was especially strong. Emphasis on syndications and commercial finance, along with initiatives to increase market share in Chicago and Detroit, all contributed to the growth. Our Philadelphia specialized lending office, opened in September 1999 and staffed with experienced professionals with deep knowledge of the market, has surpassed our expectations. In just over a year, outstanding loans have grown to more than $900 million and the operation became profitable six months ahead of plan. Consumer loan results were mixed, with indirect automobile lending, our largest consumer business, under competitive price pressure all year. Mortgage loan production, both conventional and nonconforming, reached a record $28 billion. Our commercial leasing 1 NATIONAL CITY 2000 ANNUAL REPORT 4 and commercial real estate divisions also demonstrated solid growth. Credit quality across all portfolios continues to be good. The weakening economy virtually assures an increase in problem assets and loan losses, but we expect the problems to be manageable and of a lesser scope for National City than for the industry as a whole. Deposit growth, mirroring industry trends, has been less robust. While interest rates have played a part in the outcome, we recognize we can do better and have instituted programs to better support this significant component of our business. SUBSTANTIAL SUCCESSES During 2000, our Internet offerings began to come of age. With the rollout of a new online banking product, participation has risen sharply and we are adding thousands of new customers each month. We also introduced significant new Web-based cash management capabilities for corporate customers and a dedicated small business banking Web site. In addition, several of our fee-based businesses are experiencing rapid growth. National Processing, for example, is enjoying substantial momentum as a leading processor of merchant card transactions as it continues to expand from its strong base of national accounts into mid-sized and smaller merchants. This growth has been the direct result of restructuring efforts that took place at National Processing in 1999. Over the past two years, earnings have doubled at National Processing and our 87% ownership has tripled in value. In Institutional Trust, the successful rollout of interactive Web-based 401(k) products, PlanWorks and Professional PlanWorks, is beginning to drive new business revenue. BRANDING AND CUSTOMER-RETENTION INITIATIVES We are marketing the National City name and brand as never before, but this effort must and will be backed by a superior customer experience for it to pay off. Taking care of the Corporation truly begins with taking care of the customer. Training and incentive programs have been substantially upgraded, improving the ability of frontline staff to serve customers and reduce turnover. A company-wide service quality initiative has led to the creation of hundreds of performance measurement standards and a problem resolution function. This effort is already paying dividends in better customer service and fewer errors. We've also instituted retention programs aimed at long-time deposit customers, offering them incentives to maintain or improve their deposit relationship with National City. SENIOR MANAGEMENT REALIGNMENT In my opinion, one of the most important long-term actions taken this year was the realignment of responsibilities among the senior management team. Jim Bell, who had headed Retail Sales and Distribution, was named head of Capital Markets, a newly created business unit within Corporate Banking. Capital Markets includes equity sponsor, investment banking, large corporate, specialized lending, treasury management and venture capital. Joe Parker moved over from Consumer Finance to head Retail Sales and Distribution, and Peter Raskind was hired to take Joe's place as head of Consumer Finance. Peter joined us after a 17-year career at another leading superregional banking company. Paul Clark, who had been CEO of our Michigan bank, transferred to Cleveland to assume responsibility for three fee-based businesses: National City Mortgage, National Processing and Institutional Trust. Jeff Kelly, who had headed our investment funding operation as well as specialized lending, was named CFO, reporting to Bob Siefers, who had held that position since 1991. Each major function within the company is now led by an individual uniquely well-suited to the task. I firmly believe our management team represents a competitive advantage for National City over the next several years. LOOKING AHEAD Our primary goal for 2001 and the coming years is the resumption of positive revenue and earnings momentum. The people and strategies are in place to do just that. Employee retention and customer satisfaction in the branches and in all business lines have improved due to better training and emphasis on service quality. Across every line of business, the focus and strategic plans have never been clearer and the ability to execute never better. Given National City's capital strength, credit quality, and management depth, we are well positioned to capitalize on future opportunities as they arise. Disruptions from bank merger activity within our markets should work in our favor. Economic and credit weakness, while creating some operating challenges, could also create attractive opportunities for investment. As employees and as stockholders, we are excited about the potential the new year holds for this company. Thank you for your support. /s/ David A. Daberko David A. Daberko Chairman & CEO January 24, 2001 2 NATIONAL CITY 2000 ANNUAL REPORT 5 NATIONAL CITY IN MOTION PUTTING CUSTOMERS FIRST During 2000, National City launched significant new branding and service quality initiatives. These efforts are already succeeding in delivering a consistent customer experience across all contact points and improving performance in critical service areas. The resulting National City-brand preference will support revenue growth through the attraction and retention of customers. PROBLEM RESOLUTION CENTERS Our Problem Resolution Centers are one of the ways we're meeting service quality goals. Through the centers, frontline personnel now receive help resolving customer problems from experienced service professionals. The objective is to address issues quickly and efficiently, in a courteous and professional manner. Because better service and reliability leads to a larger share of our customers' business, service quality will be a point of differentiation for National City going forward. QUALITY CONTROL Another ongoing aspect of the service quality initiative is the development of formal performance standards across all business lines. Hundreds of customer-focused standards have been developed to address and measure the speed-to-answer, statement preparation and mailing, and the accuracy and timeliness of information. Service performance will continue to be measured on a monthly basis to ensure that we are meeting customer expectations. [PHOTO] APPLYING ADVANCED TECHNOLOGY [PHOTO] Harnessing the power and the potential of advanced technology has been and will continue to be a focus at National City. In fact, 2000 brought more than a 50 percent increase in discretionary technology spending over 1999, with the majority of dollars invested to enhance the company's Web presence, develop state-of-the-art Web-based products, and upgrade internal processes. WEB SITE CAPABILITIES Throughout 2000, National City strengthened its Internet capabilities and saw a five-fold increase in online banking participation. The revamped and redesigned Web site consolidated over 40 Web sites. Retail customers can now review their account history, transfer funds, and pay bills directly online. Corporate customers are taking advantage of the newly developed Web-based cash management products. Additional functionality for both individuals and businesses is on the way in 2001. This past year National City also teamed with America Online and AOL subsidiary Digital City. Through the partnership, National City became the local financial services sponsor of Digital City's online network in six major markets. The agreement enables National City to reach an estimated six million consumers. exact4web(sm) Enhancements to exact4web, our Internet-based suite of treasury management products, continue to keep National City clients at the forefront of global treasury management. During 2000, we began to significantly expand exact4web's capabilities, offering clients increased functionality and access to a variety of funds transfer, account and information reporting, and transaction initiation services. Notable additions include multi-bank reporting, current-day reporting and foreign exchange services. In 2001, new features will further broaden global trade and treasury management services. PROCESS UPGRADES Several projects were undertaken to upgrade processes, reduce costs and improve performance. For instance, we initiated technology process improvement projects in mutual fund administration and credit decision support for the indirect dealer business. Each project produced cost savings and greatly enhanced the quality of customer service. In our retail branches, we connected each office to a central network infrastructure to facilitate more effective work flow and communication. 3 NATIONAL CITY 2000 ANNUAL REPORT 6 SEIZING OPPORTUNITIES Expansions, new approaches and award-winning service headlined the forward-looking efforts National City made throughout the year. These accomplishments stand among the company's most noteworthy in 2000. [PHOTO] PHILADELPHIA OFFICE National City established the Philadelphia Corporate Banking office in the second half of 1999, hiring over two dozen locally based, experienced bankers. Home to National City's Communications & Media, and Transportation & Equipment Finance Groups, the office has been a winning endeavor. Both groups hit the ground running and moved into the black much faster than planned. FIRST FRANKLIN Acquired in the second half of 1999, First Franklin Financial Companies, Inc. originates "nonconforming" mortgages through a broker network. The loans are then sold to financial institutions and other buyers. The loans are typically in the higher credit tier of nonprime mortgages. Beginning in 2000, National City began to hold a portion of the First Franklin products in the portfolio. In the near term, holding these loans softens earnings because of reduced gain on sale, but over time, the value of holding the loans should greatly exceed the foregone gain. NATIONAL PROCESSING National Processing, Inc. (NYSE: NAP) is a leading provider of merchant processing and customized outsourcing services. The company is the nation's second largest processor of point-of-sale credit card transactions, serving approximately 160,000 merchants in more than 500,000 locations. It processes one of every six Visa(R) and MasterCard(R) transactions in the United States and over $100 billion in transactions annually. National Processing's strong performance in 2000 was the product of a carefully executed strategy. In 1999, National Processing divested noncore businesses to more intensely focus on opportunities within the core business and further broadened its customer base among regional retailers. This strategic shift led to greater diversity and stability in the merchant customer base. National Processing is now better positioned to take advantage of the explosive growth of credit and debit cards in the payment system and the proliferation of the Internet as an additional outlet for commerce. PLANWORKS(R) PlanWorks, our premier 401(k) retirement plan product, underwent some exciting additions in 2000. PlanWorks Interactive offers customers instant electronic access to their plans through the Internet and telephone. It features PlanWorks OnLine, an interactive Web site and PlanLine, an automated voice-response system. Both enable customers to access account information, make transfers, check and change investment elections, and evaluate assets. PlanWorks Interactive also includes SponsorWorks, a Web site that allows plan sponsors to more efficiently administer their plans. In addition, through the recently developed Professional PlanWorks(SM), a truly unique product, plan participants can use the broker of their choice to buy and sell individual securities. STOCK TRANSFER GROUP National City's Stock Transfer Group, part of Institutional Trust, was ranked No. 1 last year in the Group Five, Inc. Shareowner Services Corporate Satisfaction Study for providing outstanding shareowner services. It is the third time in the last four years the Stock Transfer Group has achieved the distinction. More than 1,500 companies participated in the survey, representing over 27 million registered shareowners. National City was also named the best mid-sized stock transfer agent in the SCS/Rutgers University Transfer Agent Comparison Survey and received the prestigious Talon(R) Award. Over 700 U.S. and Canadian companies participated in that survey. [PHOTO] 4 NATIONAL CITY 2000 ANNUAL REPORT 7 PROVIDING LEADERSHIP [PHOTO] Positioning National City for the future requires continuous professional development for our leadership and ongoing career training for employees. These efforts go hand-in-hand with the company's branding and service quality initiatives. DEVELOPING LEADERSHIP A sharper focus has been placed on developing the next generation of management for the company, with the creation of the Leadership Development group. Leadership Development focuses on attracting, retaining, and developing the future leaders of the company. During 2000, National City initiated the first significant realignment of senior management since the company moved to a functional organizational structure in 1998. The realignment was effectively accomplished by a combination of transferring responsibilities and establishing new positions. One of the most talented management teams in the organization's history is now in place. NATIONAL CITY INSTITUTE To improve the retention and performance of employees, the National City Institute was established in 2000. The Institute's training and development programs are designed to improve customer service, reduce new-hire turnover and enhance morale. Additionally, the Institute has been effective in establishing guidelines and incorporating "best practices" in new-hire training across National City's service area. INVESTING IN THE COMMUNITIES WE SERVE [PHOTO] From affordable housing, to help for minority businesses, to education assistance, to support for the arts, to health and human services, National City's support has made a real difference. Investing in the communities we serve is part of a 155-year tradition. That commitment runs deep within our corporate culture and manifests itself even further through the tremendous amount of volunteer work our employees perform. That work is not about to end. Each year, our investments continue and the results are more widespread. - In October 2000, National City received the Corporate Hispanic Business Advocate of the Year Award from the U.S. Hispanic Chamber of Commerce's Region IV for making significant contributions to local Hispanic businesses. - In October, PCI Corporation, an Inc. Magazine 500 software and data analysis company, named National City as the leading mortgage lender in the United States to African-Americans for 1999. - Over the past decade, National City Community Development Corporation has invested nearly $180 million in both inner city and rural community development projects throughout National City's service area. - National City is the eighth largest Small Business Administration lender in the country and for the second consecutive year was ranked as the No. 1 Small Business Administration lender in our six-state footprint. 5 NATIONAL CITY 2000 ANNUAL REPORT 8 FINANCIAL REVIEW The Financial Review section discusses the financial condition and results of operations of National City Corporation ("the Corporation" or "National City") for each of the past three years and should be read in conjunction with the accompanying Consolidated Financial Statements and Notes presented on pages 22 through 47. This annual report contains certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995), which reflect management's beliefs and expectations based on information currently available. These forward-looking statements are inherently subject to significant risks and uncertainties, including changes in general economic and financial market conditions, the Corporation's ability to effectively carry out its business plans and changes in regulatory or legislative requirements. Other factors that could cause or contribute to such differences are changes in competitive conditions, continuing consolidation in the financial services industry and pending or threatened litigation. Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. EARNINGS SUMMARY National City reported net income of $1,302.4 million, or $2.13 per diluted share, in 2000, compared to $1,405.5 million, or $2.22 per diluted share in 1999, and $1,070.7 million, or $1.61 per diluted share in 1998. Included in reported net income for 1998 were after-tax merger charges of $261.9 million, or $.39 per diluted share. Returns on average common equity and average assets for 2000 were 21.3% and 1.52%, respectively, compared to returns of 22.6% and 1.67%, respectively, in 1999 and, excluding merger charges, returns of 19.2% and 1.66%, respectively, in 1998. Several strategic initiatives were undertaken in 2000 and 1999 to more favorably position the Corporation to achieve positive revenue and earnings momentum. Some of the more critical steps taken included the restructuring of the balance sheet to improve capital efficiency and reduce exposure to interest rate volatility, the realignment and divestiture of certain business units to focus on higher-growth-oriented and more profitable businesses, and the upgrade of technological processes and training to enhance service quality. Further discussion of these initiatives, along with their corresponding impact on the Corporation's financial results, is contained throughout this Financial Review section and in Notes 4 and 5 to the Consolidated Financial Statements. NET INTEREST INCOME The table beginning on page 8 presents net interest income, interest spread and net interest margin for the five years 1996 through 2000, comparing daily average outstanding balances of earning assets and interest bearing liabilities with the associated interest income and expense and the corresponding average rates earned and paid. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pretax equivalents based on the marginal corporate Federal tax rate of 35%. The tax-equivalent adjustments to net interest income for 2000, 1999 and 1998 were $33.7 million, $36.9 million and $40.2 million, respectively. Average outstanding loan balances include nonperforming loans and loans held for sale or securitization. Average outstanding securities balances are computed based on amortized cost and exclude unrealized gains and losses on securities available for sale. In order to manage exposure to changes in interest rates, the Corporation enters into various types of derivative instruments. The cash flows generated by derivative instruments used to manage risk associated with earning assets and interest bearing liabilities are recorded along with the interest of the hedged item and consequently impact the yields on those assets and liabilities. Information regarding the derivative instruments used and how they are accounted for is presented in Notes 1 and 22 to the Consolidated Financial Statements. A discussion of the effects of changing interest rates is included in the Market Risk Management section beginning on page 18. The primary source of the Corporation's traditional banking revenue is net interest income. Net interest income is the difference between interest income on earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, including interest bearing deposits and other borrowings. The amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of earning assets and interest bearing liabilities. Changes in net interest income are most often measured through two statistics - interest spread and net interest margin. The difference between the yields on earning assets and the rates paid for interest bearing liabilities represents the interest spread. The net interest margin is expressed as the percentage of net interest income to average earning assets. Both the interest spread and net interest margin are presented on a tax-equivalent basis. Because noninterest bearing sources of funds, or free funding, principally demand deposits and stockholders' equity, also support earning assets, the net interest margin exceeds the interest spread. 6 NATIONAL CITY 2000 ANNUAL REPORT 9 Tax-equivalent net interest income in 2000 was $2,992.1 million, compared to $3,037.0 million in 1999 and $2,951.9 million in 1998. The net interest margin was 3.85% in 2000, down from 3.99% last year and 4.11% in 1998. Higher-cost funding in a rising rate environment, combined with a liability sensitive interest rate risk position through 1999 and early 2000 and highly competitive lending markets were the primary factors behind the decline in net interest income and the lower net interest margin in 2000. During 2000, 1999 and 1998, National City repurchased 2.5 million, 52.6 million and 10.0 million shares, respectively, of its common stock. These repurchases resulted in estimated additional funding costs of $147 million in 2000 and $98 million in 1999, which reduced the net interest margin by 19 basis points in 2000 and 13 basis points in 1999. While the cost to fund these repurchases reduced net interest income and the net interest margin, the lower average outstanding share base increased earnings per share by an estimated $.06 in 2000 and an estimated $.05 in 1999. Compared to 1998, a higher level of earning assets, partially offset by a lower net interest margin, primarily reflecting the cost of funding the Corporation's share repurchase program, led to the increase in 1999's net interest income. During 2000, steps were taken to enrich the net interest margin and reduce exposure to interest rate volatility. The steps included the sales of $2.0 billion of thin-spread student loans, $3.7 billion of fixed-rate debt securities, and $1.0 billion of low-spread adjustable-rate mortgages. Through the sale of these less capital-efficient assets, the Corporation's reliance on purchased funding was reduced and the balance sheet was freed up for more profitable investment. To diversify its funding sources and provide for greater capital efficiency, the Corporation also securitized $600 million of credit card receivables in 2000. Asset securitization involves the sale of a pool of loan receivables to a trust, which sells undivided interests to investors through the public or private issuance of asset-backed securities. As loan receivables are securitized, the Corporation's on-balance-sheet funding needs are reduced by the amount of receivables securitized. No receivables were securitized in 1999 or 1998. During 2000, $470 million of previously securitized credit card receivables amortized back into the Corporation's on-balance-sheet loan portfolio or matured, compared to $270 million in 1999. These actions, along with an improved contribution from free funds and a shift in mix toward higher- yielding loans, primarily nonconforming residential mortgages, stabilized the net interest margin in the second half of 2000. Average earning assets were $77.8 billion in 2000, up from $76.1 billion in 1999 and $71.7 billion in 1998. Strong loan growth, mostly offset by the effect of asset sales, led to the increase in average earning assets over 1999. Loan growth also served as the primary contributor to the increase in average earning assets from 1998 to 1999. Average loans in 2000 were $65.3 billion. Excluding the effects of loans sold and securitized in conjunction with the balance sheet restructuring initiatives, average loans in 2000 grew 11.5% over 1999. Despite the loan sales and securitization, higher commercial and residential loan production and growth in home equity loans bolstered overall loan balances in 2000. Average residential real estate loans include both conforming and nonconforming mortgages held in portfolio and mortgages held for sale. The main driver of growth in average residential real estate loans occurred in the nonconforming category as a result of management's decision to retain in portfolio a majority of the production generated by the Corporation's subsidiary, First Franklin Financial Corporation ("First Franklin"). First Franklin, which was acquired in the second half of 1999, is a wholesale originator of nonconforming residential mortgage loans. The retention of these loans supports the overall strategy begun in 1999 to shift the mix in earning assets into higher-yielding loans and away from thinner-spread assets. Average securities, at amortized cost, were $12.0 billion in 2000, compared to $15.0 billion in 1999 and $13.9 billion in 1998. The decline in average securities from 1999 was due to the previously mentioned sales of fixed-rate debt securities. Average interest bearing liabilities were $67.3 billion in 2000, up from $65.5 billion in 1999 and $61.9 billion in 1998. Funding needed to support loan growth and share repurchases led to the increase in interest bearing liabilities in both 2000 and 1999, with the mix shifting from lower-cost noninterest bearing deposits and short-term borrowings to more expensive purchased deposits and long-term debt. 7 NATIONAL CITY 2000 ANNUAL REPORT 10 FINANCIAL REVIEW CONTINUED --------------------------------------------------------------------------------
DAILY AVERAGE BALANCE ------------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------- ASSETS Earning assets: Loans: Commercial $24,830 $22,359 $20,135 $16,837 $14,899 Real estate - commercial 6,222 6,239 6,407 6,562 7,230 Real estate - residential 14,423 12,427 12,756 12,195 12,405 Consumer 13,215 13,831 12,589 11,257 11,406 Credit card 2,431 2,025 1,860 2,070 2,244 Home equity 4,204 3,312 3,102 2,702 2,258 ------------------------------------------------------------------------------------------------------------- Total loans 65,325 60,193 56,849 51,623 50,442 Securities available for sale: Taxable 11,195 14,139 12,967 12,298 12,705 Tax-exempt 793 866 941 781 662 ------------------------------------------------------------------------------------------------------------- Total securities available for sale 11,988 15,005 13,908 13,079 13,367 Federal funds sold, security resale agreements and other investments 469 923 990 557 726 ------------------------------------------------------------------------------------------------------------- Total earning assets/total interest income/rates 77,782 76,121 71,747 65,259 64,535 Allowance for loan losses (987) (987) (983) (969) (958) Fair value (depreciation) appreciation of securities available for sale (310) 129 530 316 170 Cash and demand balances due from banks 3,087 3,562 3,645 3,347 3,366 Properties and equipment, accrued income and other assets 5,978 5,466 5,114 3,989 3,811 ------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $85,550 $84,291 $80,053 $71,942 $70,924 ------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: NOW and money market accounts $16,549 $16,804 $17,472 $15,467 $15,689 Savings accounts 3,207 3,818 4,158 5,037 5,190 Time deposits of individuals 15,457 14,898 16,619 17,802 19,454 Other deposits 2,936 3,053 4,009 3,161 2,799 Foreign deposits 3,128 2,679 1,715 1,052 859 Federal funds borrowed 3,043 3,258 3,124 2,044 1,351 Security repurchase agreements 3,846 4,821 4,118 2,975 3,252 Borrowed funds 2,687 2,879 3,005 2,771 2,309 Long-term debt and capital securities 16,454 13,316 7,698 4,972 3,611 ------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities/total interest expense/rates 67,307 65,526 61,918 55,281 54,514 Noninterest bearing deposits 10,792 11,473 9,945 9,230 9,188 Accrued expenses and other liabilities 1,311 1,061 1,225 1,265 1,239 ------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 79,410 78,060 73,088 65,776 64,941 Preferred stock 30 31 28 -- 56 Common stock 6,110 6,200 6,937 6,166 5,927 ------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 6,140 6,231 6,965 6,166 5,983 ------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $85,550 $84,291 $80,053 $71,942 $70,924 ------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME ------------------------------------------------------------------------------------------------------------- INTEREST SPREAD Contribution of noninterest bearing sources of funds ------------------------------------------------------------------------------------------------------------- NET INTEREST MARGIN -------------------------------------------------------------------------------------------------------------
8 NATIONAL CITY 2000 ANNUAL REPORT 11 --------------------------------------------------------------------------------
INTEREST AVERAGE RATE ---------------------------------------------------- ------------------------------------------ 2000 1999 1998 1997 1996 2000 1999 1998 1997 1996 ---------------------------------------------------- ------------------------------------------ $2,194.8 $1,749.9 $1,641.1 $1,441.7 $1,265.3 8.84% 7.83% 8.15% 8.56% 8.49% 549.6 537.6 576.8 587.5 622.3 8.83 8.62 9.00 8.95 8.61 1,198.6 962.7 982.0 960.8 1,015.3 8.31 7.75 7.70 7.88 8.18 1,126.7 1,147.6 1,086.4 984.9 975.3 8.53 8.30 8.63 8.75 8.55 338.3 267.1 258.5 282.2 359.7 13.92 13.19 13.90 13.63 16.03 393.2 285.2 280.3 247.6 206.2 9.35 8.61 9.04 9.16 9.13 ------------------------------------------------------------------------------------------------- 5,801.2 4,950.1 4,825.1 4,504.7 4,444.1 8.88 8.22 8.49 8.73 8.81 697.9 876.1 836.4 795.2 813.7 6.23 6.20 6.45 6.47 6.40 64.4 71.4 75.8 69.9 59.9 8.12 8.24 8.04 8.95 9.05 ------------------------------------------------------------------------------------------------- 762.3 947.5 912.2 865.1 873.6 6.36 6.32 6.56 6.61 6.54 36.8 52.0 59.6 35.7 39.6 7.85 5.63 6.03 6.41 5.45 ------------------------------------------------------------------------------------------------- $6,600.3 $5,949.6 $5,796.9 $5,405.5 $5,357.3 8.49% 7.82% 8.08% 8.28% 8.30% $ 621.3 $ 519.6 $ 542.0 $ 497.6 $ 459.5 3.76% 3.09% 3.10% 3.22% 2.93% 53.4 64.6 82.9 102.6 123.8 1.67 1.69 1.99 2.04 2.39 884.7 761.6 914.0 986.2 1,079.5 5.72 5.11 5.50 5.54 5.55 183.9 155.3 218.0 171.8 154.7 6.26 5.09 5.44 5.43 5.53 193.7 134.4 89.3 54.9 44.6 6.19 5.02 5.21 5.22 5.19 195.5 166.2 167.8 91.6 84.1 6.43 5.10 5.37 4.48 6.23 200.4 201.9 186.1 144.3 164.4 5.21 4.19 4.52 4.85 5.06 164.7 144.2 168.5 180.1 130.8 6.13 5.01 5.61 6.50 5.66 1,110.6 764.8 476.4 323.1 232.4 6.75 5.74 6.19 6.50 6.44 ------------------------------------------------------------------------------------------------- $3,608.2 $2,912.6 $2,845.0 $2,552.2 $2,473.8 5.36% 4.45% 4.59% 4.62% 4.54% ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- $2,992.1 $3,037.0 $2,951.9 $2,853.3 $2,883.5 ------------------------------------------------------------------------------------------------- 3.13% 3.37% 3.49% 3.66% 3.76% .72 .62 .62 .71 .71 ------------------------------------------------------------------------------------------------- 3.85% 3.99% 4.11% 4.37% 4.47% -------------------------------------------------------------------------------------------------
9 NATIONAL CITY 2000 ANNUAL REPORT 12 FINANCIAL REVIEW CONTINUED The following table shows changes in tax-equivalent interest income, interest expense and net interest income due to volume and rate variances for major categories of earning assets and interest bearing liabilities. The change in interest not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amounts of the change in each.
--------------------------------------------------------------------------------------------------------------------------- 2000 VS 1999 1999 VS 1998 ------------------------------ ------------------------------ DUE TO CHANGE IN DUE TO CHANGE IN ------------------ NET ------------------ NET (IN MILLIONS) VOLUME RATE CHANGE VOLUME RATE CHANGE --------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN TAX-EQUIVALENT INTEREST INCOME - Loans: Commercial $193.8 $ 251.1 $444.9 $179.6 $ (70.8) $108.8 Real estate - commercial (1.6) 13.6 12.0 (15.3) (23.9) (39.2) Real estate - residential 155.0 80.9 235.9 (25.6) 6.3 (19.3) Consumer (51.6) 30.7 (20.9) 106.5 (45.3) 61.2 Credit card 53.5 17.7 71.2 23.2 (14.6) 8.6 Home equity 76.9 31.1 108.0 19.4 (14.5) 4.9 Securities (190.0) 4.8 (185.2) 70.6 (35.3) 35.3 Federal funds sold, security resale agreements and other investments (25.6) 10.4 (15.2) (3.9) (3.7) (7.6) --------------------------------------------------------------------------------------------------------------------------- TOTAL $210.4 $ 440.3 $650.7 $354.5 $(201.8) $152.7 --------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN INTEREST EXPENSE - Deposits: NOW and money market accounts $(7.8) $ 109.5 $101.7 $(20.7) $ (1.7) $(22.4) Savings accounts (10.6) (.6) (11.2) (6.8) (11.5) (18.3) Time deposits of individuals 28.6 94.5 123.1 (94.5) (57.9) (152.4) Purchased deposits 16.7 71.2 87.9 .4 (18.0) (17.6) Federal funds borrowed, security repurchase agreements and borrowed funds (64.2) 112.5 48.3 33.9 (44.0) (10.1) Long-term debt and capital securities 179.8 166.0 345.8 348.4 (60.0) 288.4 --------------------------------------------------------------------------------------------------------------------------- TOTAL $142.5 $ 553.1 $695.6 $260.7 $(193.1) $ 67.6 --------------------------------------------------------------------------------------------------------------------------- (DECREASE) INCREASE IN TAX-EQUIVALENT NET INTEREST INCOME $(44.9) $ 85.1 ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME Details of noninterest income follow:
----------------------------------------------------------------- (IN THOUSANDS) 2000 1999 1998 ----------------------------------------------------------------- Mortgage banking revenue $ 478,954 $ 389,292 $ 327,247 Deposit service charges 442,753 420,448 384,938 Item processing revenue 412,444 416,782 484,503 Trust and investment management fees 334,627 325,856 311,050 Card-related fees 188,024 191,677 201,168 Other service fees 103,453 90,421 91,869 Brokerage revenue 98,157 104,031 90,477 Other 368,970 303,902 288,431 ----------------------------------------------------------------- TOTAL FEES AND OTHER INCOME 2,427,382 2,242,409 2,179,683 Net securities gains 56,852 138,360 134,459 ----------------------------------------------------------------- TOTAL NONINTEREST INCOME $2,484,234 $2,380,769 $2,314,142 -----------------------------------------------------------------
Fees and other income for 2000 reached $2,427.4 million, up 8.2% from $2,242.4 million in 1999 with solid growth in mortgage banking revenue, deposit service charges, trust and investment management fees and other service fees. Item processing revenue in 2000, generated by National Processing, Inc. ("National Processing"), National City's 87%-owned item processing subsidiary, also improved significantly due to new and expanded customer relationships, but this growth was masked by a decline in revenue related to business units divested in 1999, which had contributed $56.7 million to 1999 revenue. A higher level of other income, driven mainly by gains on asset sales, also contributed to the overall increase in fees and other income in 2000. The increase in fees and other income in 1999 was supported by growth in most fee income categories other than item processing revenue, which was unfavorably affected by business line divestitures. Card-related fees also declined in 1999 as lower service fees were earned on securitized credit card receivables, which had begun to amortize. Mortgage banking revenue climbed 23.0% to $479.0 million in 2000, following a 19.0% increase to $389.3 million in 1999. Higher origination volumes and servicing income drove the increases in both 2000 and 1999, due largely to purchase acquisitions in the second half of 1999 of First Franklin Financial Companies, Inc. and the conforming mortgage production units of Accubanc Mortgage Corporation. Revenue in 2000 also benefited from gains of $13.6 million and $10.6 million related to the sales of mortgage servicing rights and certain low-spread adjustable-rate mortgage loans, respectively. Mortgage banking loan originations were strong in 2000, totaling $22.0 billion, up from $17.9 billion in 1999 and from $19.5 billion in 1998. The residential loan servicing portfolio advanced to $57.4 billion at December 31, 2000, up from $46.7 billion at December 31, 1999 and $35.3 billion at December 31, 1998. Gains on conforming loans sold to the secondary market totaled $154.1 million in 2000, compared to $170.0 million in 1999 and $165.5 million in 1998. Gains on nonconforming loans sold to third parties by First Franklin were $52.4 million 10 NATIONAL CITY 2000 ANNUAL REPORT 13 in 2000, up slightly from $42.7 million in the four months following acquisition in 1999, due to the Corporation's decision in 2000 to retain a substantial portion of First Franklin's loan production. Although retaining this production caused mortgage banking revenue to rise less than if the loans had been sold outright at a premium, the Corporation expects to derive greater lifetime value from holding these loans on the balance sheet. Deposit service charges rose to $442.8 million in 2000, up from $420.4 million in 1999 and $384.9 million in 1998. Higher cash management activity, increased customer debit card usage and fewer waived fees led to the increase in deposit service charges in 2000. Revenue in 1999 also benefited from an increase in transaction volume and improved deposit fee management along with a more standardized fee structure implemented following the Corporation's reorganization along functional lines. Item processing revenue was $412.4 million in 2000, compared to $416.8 million in 1999 and $484.5 million in 1998. The totals for 1999 and 1998 include revenues of $56.7 million and $153.5 million generated by the business units National Processing divested in the first half of 1999. Excluding the effects of the divested units, item processing revenue in 2000 grew 14.5% over 1999 core revenue of $360.1 million, which had improved from core revenue in 1998 of $331.0 million. National Processing's focus on winning new customers in both the national and regional markets, the accelerating growth in debit card acceptance and usage and the increasing preference for credit and debit cards as the payment of choice over checks and cash have driven the increases in core revenue during the past two years. Trust and investment management fees, which includes both institutional trust and personal wealth management, grew to $334.6 million in 2000, up from $325.9 million in 1999 and $311.1 million in 1998. A higher level of assets under management supported the revenue increases in both 2000 and 1999. At December 31, 2000, National City had total assets under administration of $145.9 billion, compared to $142.1 billion at the end of 1999. Assets under administration at year-end 2000 included $68.0 billion of assets under management, which despite a difficult year for the equity markets, were up 6.9% from $63.6 billion at the end of 1999. Included in assets under management at December 31, 2000 were proprietary Armada()(R) mutual fund balances of $16.9 billion. Card-related fees declined in both 2000 and 1999 despite new business volume due to reduced servicing income from certain credit card securitizations, which began to wind down in 1998. As a credit card securitization winds down, receivable balances are transferred back into the on-balance-sheet loan portfolio and interest-related revenue streams shift from fee income to net interest income. During 2000, the Corporation sold through securitization an additional $600 million of credit card receivables. Fees for servicing these receivables were included in card-related fee income. Other service fees increased 14.4% to $103.5 million in 2000, following a modest decline in service fees in 1999, due primarily to growth in fees from syndicated lending activities. Brokerage revenue, which decreased to $98.2 million in 2000 from $104.0 million in 1999, was hampered in 2000 by weaker stock market conditions, which resulted in reduced retail and investment banking activity. In contrast, revenue in 1999 benefited from growth in retail sales and investment banking transactions brought about by strength in the equity markets. Other income in 2000 included gains of $74.2 million on the sale of $2.0 billion of low-spread student loans and $27.2 million on the securitization of credit card receivables. In 1999, other income included gains of $101.8 million related to the sales of certain equity interests partially offset by a $60.8 million loss, net of minority interest, recognized in conjunction with the National Processing business line divestitures. Also included in other income are gains from venture capital investments, which increased to $37.1 million in 2000 from $16.6 million in 1999. In comparison to 1998, the 1999 loss on business line divestitures and reduced branch sale gains offset a large portion of the increase in income attributable to the sales of equity interests. Net realized securities gains and losses are summarized as follows:
----------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998 ----------------------------------------------------------------- Net realized gains (losses): Debt securities $(55,958) $ 12,187 $ 24,553 Equity securities 112,810 126,173 109,906 ----------------------------------------------------------------- Net pretax gains 56,852 138,360 134,459 Tax expense 19,898 48,426 47,061 ----------------------------------------------------------------- EFFECT ON NET INCOME $ 36,954 $ 89,934 $ 87,398 ----------------------------------------------------------------- EFFECT ON NET INCOME PER DILUTED SHARE $.06 $.14 $.13 -----------------------------------------------------------------
Gains and losses on debt securities are generated mainly from the investment portfolio maintained for interest rate risk and liquidity management purposes, while equity securities gains are generated primarily from the Corporation's internally-managed equity portfolio of bank and thrift common stock investments. In conjunction with the Corporation's balance sheet restructuring efforts in 2000, the Corporation sold $3.7 billion of lower-yielding, fixed-rate debt securities and recognized pretax losses of $56.3 million. The losses on an after-tax basis were $36.6 million, or $.06 per diluted share. In addition to gains from bank and thrift common stock investments, equity securities gains in 1999 included a pretax gain of $32.1 million from the sale of Concord EFS, Inc. common stock. Further discussion on both transactions is discussed in Note 4 to the Consolidated Financial Statements. 11 NATIONAL CITY 2000 ANNUAL REPORT 14 FINANCIAL REVIEW CONTINUED NONINTEREST EXPENSE Details of noninterest expense follow:
--------------------------------------------------------------------- (IN THOUSANDS) 2000 1999 1998 --------------------------------------------------------------------- Salaries $1,375,177 $1,281,524 $1,309,820 Benefits and other personnel 252,083 276,879 284,937 Equipment 229,476 209,774 212,871 Net occupancy 209,229 202,077 202,664 Third-party services 197,485 193,148 226,262 Card-related fees 167,657 149,260 139,416 Postage and supplies 121,453 125,880 141,525 Intangibles amortization 87,961 75,351 65,186 Marketing and public relations 83,747 64,548 63,608 Telephone 81,301 73,973 74,963 Travel and entertainment 59,505 51,847 52,621 State and local taxes 39,136 52,724 45,687 Merger charges -- -- 379,376 Other 279,699 225,519 178,177 --------------------------------------------------------------------- TOTAL NONINTEREST EXPENSE $3,183,909 $2,982,504 $3,377,113 ---------------------------------------------------------------------
Noninterest expense was $3,183.9 million in 2000, $2,982.5 million in 1999 and $3,377.1 million in 1998. Noninterest expense in 2000 increased $201.4 million over 1999 due to increased expenses and intangibles amortization from purchase acquisitions in the second half of 1999, charges incurred in connection with realignment of the consumer finance business line, expenditures related to upgrading technology processes and product offerings, along with customer quality and branding initiatives, and volume-driven expense increases related to item processing activities. Somewhat offsetting these increases were reductions in employee benefits and state and local tax expense, lower expenses stemming from the 1999 business line divestitures at National Processing and charges taken in 1999 pursuant to a plan to improve the cost-efficiency of branch office facilities, along with certain unrelated executive contract obligations. Merger charges of $379.4 million incurred in 1998 in connection with the acquisitions of First of America Bank Corporation ("First of America") and Fort Wayne National Corporation ("Fort Wayne") were the primary factor behind the decline in noninterest expense from 1998 to 1999. Salaries expense fell in 1999 due to merger-related synergies but were driven up in 2000 by the effects of the purchase acquisitions in the second half of 1999. These factors similarly affected benefits and other personnel costs with the increase from purchase acquisitions being overshadowed in 2000 by expense reductions related to benefit plans and the capitalization of internal software development costs. Salaries expense in 1999 also included the aforementioned executive contract obligations. Volume increases in credit and debit card processing activity due to an expanded customer base at National Processing resulted in the card-related fee increases in both 2000 and 1999. Marketing and public relations expense rose in 2000 as the Corporation stepped up efforts to increase market awareness of the National City brand name and to promote new and expanded product offerings. State and local taxes declined in 2000 due to refunds received. Other noninterest expense in 2000 was unfavorably affected by $44.0 million of charges related to the fourth quarter realignment of the consumer finance business line, a $7.1 million charge for goodwill and fixed-asset impairment associated with divesting a small operating unit at National Processing, a $2.5 million charge for branch closings and consolidations at National City Mortgage Company and a higher level of fraud and other operational losses. The $44.0 million of consumer finance charges included write-downs to automobile lease residual values totaling $26.0 million and losses associated with the decision to cease originating automobile leases and close certain nonconforming loan production channels, including $9.0 million for goodwill impairment, $3.7 million for severance costs, $2.9 million for facilities closures and lease obligations and $2.4 million for fixed-asset impairment and other costs. The consumer finance realignment is discussed further in Note 4 to the Consolidated Financial Statements. Other noninterest expense also includes an additional $15.0 million write-down of automobile lease residual values in the second quarter of 2000. Other noninterest expense in 1999 included a $28.6 million charge pursuant to a plan to improve the cost efficiency of branch office facilities. Fluctuations in the remaining expense categories from 1999 to 2000 were primarily due to purchase acquisitions in the second half of 1999 and from merger synergies in comparing 1999 to 1998. The efficiency ratio, which expresses expense as a percentage of tax-equivalent net interest income and total fees and other income, was 58.8% in 2000, 56.5% in 1999 and, excluding merger charges, 58.4% in 1998. While the ratio showed improvement from 1998 to 1999, a moderate decline in net interest income and a higher level of expenses, including the consumer finance realignment charges, caused modest slippage in the ratio in 2000. 12 NATIONAL CITY 2000 ANNUAL REPORT 15 LINE OF BUSINESS RESULTS During 2000, National City's operations were managed along the following six major lines of business: retail sales and distribution, corporate banking, consumer finance, asset management, National City Mortgage and National Processing. A description of each business, selected financial information and the methodologies used to measure financial performance are presented in Note 23 to the Consolidated Financial Statements. During the third quarter of 2000, National City announced several organizational changes, which, once operationally complete, may result in changes to the presentation of the line of business results in future periods. Net income (loss) by line of business follows:
---------------------------------------------------------------- (IN MILLIONS) 2000 1999 1998 ---------------------------------------------------------------- Retail sales and distribution $ 521.5 $ 519.3 $ 508.6 Corporate banking 429.7 390.5 419.4 Consumer finance 150.4 151.5 117.5 Asset management 144.8 146.6 126.7 National City Mortgage 61.4 77.7 69.5 National Processing 43.4 (37.4) 13.4 Parent and other (48.8) 157.3 (184.4) ---------------------------------------------------------------- CONSOLIDATED NET INCOME $1,302.4 $1,405.5 $1,070.7 ----------------------------------------------------------------
Net income for retail sales and distribution was $521.5 million in 2000, a modest increase over $519.3 million in 1999 and $508.6 million in 1998. Results for retail sales and distribution in 2000 were dampened by lower net interest income, a higher loan loss provision and a decline in noninterest income, offset by lower noninterest expense. A reduced level of earning assets, due in part to the sale of $1.0 billion of low-spread adjustable-rate mortgages, along with a lower level of core deposits, held down net interest income growth in 2000, while a higher level of net charge-offs drove the increased provision for loan losses. Branch sale gains of $9.5 million and gains from a higher level of intercompany servicing sales boosted 1999 noninterest income. Noninterest expense has benefited over the past year from cost efficiencies achieved through branch reconfiguration and ongoing functional centralization efforts. These cost efficiencies, combined with merger integration savings related to National City's merger with First of America, also led to the increase in net income over 1998. Corporate banking net income in 2000 of $429.7 million improved over net income of $390.5 million in 1999 and $419.4 million in 1998. Strong growth in commercial loans and leases and improved spreads drove the increase, offset to some extent by a higher loan loss provision. Expansion in the Detroit, Philadelphia and Chicago markets and a focus on specialized lending products, including syndications, were valuable contributors to the growth in loans. The increase in the provision for loan losses resulted from a higher level of net charge-offs. Syndicated lending activities also contributed to the increase in noninterest income in 2000, along with growth in cash management fees. Noninterest expense rose due to an increase in personnel-related costs. Results in 1999 declined from 1998 principally due to an increase in the loan loss provision and a reduction in net interest income caused by lower loan spreads. Consumer finance net income was $150.4 million in 2000, compared to $151.5 million in 1999 and $117.5 million in 1998. Results for consumer finance in 2000 included the $74.2 million gain from the sale of student loans, write-downs to automobile lease residual values totaling $41.0 million and other charges totaling $18.0 million recorded in connection with management's decision to close certain nonconforming loan production channels and exit the automobile leasing business. Excluding these items, net income for 2000 was down compared to 1999 due to tighter margins in the dealer finance business, the loss of spread income as a result of the sale of the student loans and net overhead attributable to the acquisition of First Franklin in the third quarter of 1999. Compared to 1998, results in 1999 were boosted by record loan origination volumes. Asset management, which includes institutional trust, brokerage and personal wealth management, reported net income of $144.8 million in 2000, essentially flat with 1999 net income of $146.6 million, but up from net income in 1998 of $126.7 million. Despite an increase in assets under management and loan growth, results for asset management in 2000 were constrained primarily by reduced fee income from brokerage activities. New business and the strength of the equity markets drove the increase in net income in 1999. Net income for National City Mortgage was $61.4 million in 2000, compared to $77.7 million in 1999 and $69.5 million in 1998. Results for this business unit in 2000 were affected by the higher level of interest rates prevalent throughout most of the year. Net income for National Processing was up significantly in 2000. Results for 1999 included a $69.9 million loss from the divestiture of four business lines. Excluding this loss from last year's earnings, net income in 2000 increased over 1999 on the strength of revenue growth in the merchant card processing business. 13 NATIONAL CITY 2000 ANNUAL REPORT 16 FINANCIAL REVIEW CONTINUED FINANCIAL CONDITION Average earning assets increased in 2000 to $77.8 billion from $76.1 billion in 1999 and $71.7 billion in 1998. Solid growth in commercial, residential real estate and home equity loans, offset in part by the sales or securitization of loans and securities, fueled the year-over-year increase. Strong loan originations and an increase in the securities portfolio contributed most prominently to the increase in average earning assets during 1999. LOANS: Loan balances by portfolio type at December 31 follow:
--------------------------------------------------------------------- (IN MILLIONS) 2000 1999 1998 1997 1996 --------------------------------------------------------------------- Commercial $26,704 $23,403 $22,243 $18,218 $15,739 Real estate - commercial 6,511 6,012 6,252 6,411 6,817 Real estate - residential 13,357 10,396 10,777 10,812 11,823 Consumer 12,101 14,367 13,710 11,532 11,350 Credit card 2,152 2,340 1,852 2,048 2,240 Home equity 4,779 3,686 3,177 2,973 2,473 --------------------------------------------------------------------- TOTAL LOANS $65,604 $60,204 $58,011 $51,994 $50,442 ---------------------------------------------------------------------
The percentage of loans in each category to total loans at year end follows:
---------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------------------- Commercial 40.7% 38.9% 38.2% 35.1% 31.3% Real estate - commercial 9.9 10.0 10.8 12.3 13.5 Real estate - residential 20.4 17.3 18.6 20.8 23.4 Consumer 18.4 23.8 23.7 22.2 22.5 Credit card 3.3 3.9 3.2 3.9 4.4 Home equity 7.3 6.1 5.5 5.7 4.9 ---------------------------------------------------------------- TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% ----------------------------------------------------------------
Commercial: Commercial loans grew 14.1% in 2000 due to continued strong demand in local markets, successful expansion in the Detroit, Chicago and Philadelphia markets and a greater emphasis on specialized lending, including syndications. The commercial lease portfolio, included in commercial loans, grew to $1.8 billion at December 31, 2000, up from $1.2 billion at December 31, 1999. A maturity distribution and interest rate information for commercial loans at December 31, 2000 follows:
---------------------------------------------------------------------- ONE YEAR ONE TO OVER (IN MILLIONS) OR LESS FIVE YEARS FIVE YEARS TOTAL ---------------------------------------------------------------------- Variable-rate $ 8,552 $10,551 $2,495 $21,598 Fixed-rate 1,507 2,711 888 5,106 ---------------------------------------------------------------------- TOTAL $10,059 $13,262 $3,383 $26,704 ----------------------------------------------------------------------
Commercial Real Estate: At December 31, 2000, commercial real estate loans totaled $6.5 billion, compared to $6.0 billion at year-end 1999. Profitable lending opportunities, primarily in Ohio, prompted the growth in commercial real estate in 2000. During 1999, the Corporation deliberately pared back this portfolio to reduce exposure to certain markets and property types. Activities in commercial real estate are based primarily on relationships with developers who are active in National City's local markets, with more than 90% of outstandings in National City's six-state banking market. Residential Real Estate: The residential real estate category includes both conforming and nonconforming mortgage loans. Nonconforming mortgages are primarily generated by the Corporation's First Franklin and Altegra Credit Company subsidiaries and represent loans that are not saleable in the secondary market for conforming loans due to the characteristics of the borrower, the underlying documentation, the loan-to-value ratio, or some combination thereof, among other factors. As of December 31, 2000, nonconforming mortgage loans generated by these subsidiaries comprised approximately 50% of the residential real estate portfolio, compared to approximately 16% at the end of 1999. During 2000, as part of a focused effort to retain higher-value assets, $2.7 billion of First Franklin's production was retained in the residential real estate portfolio. The retention of these loans accounted for the majority of the increase in the residential real estate portfolio from 1999 to 2000. Conforming mortgage loans are originated primarily by National City Mortgage through a network of retail offices and wholesale/broker branches, and by the retail line of business through traditional banking channels. Substantially all conforming loan originations are sold in the secondary market. The right to service the loans and receive servicing fee income is generally retained by the Corporation. The off-balance-sheet portfolio of loans serviced for other investors grew to $57.4 billion at December 31, 2000, up 22.8% from $46.7 billion at December 31, 1999, due to strong conforming loan originations. Consumer: Consumer loans were $12.1 billion at year- end 2000, down from $14.4 billion at year-end 1999 due principally to the sale of $2.0 billion of lower-yielding student loans in 2000. At December 31, 2000, the consumer loan portfolio consisted of 58% indirect installment loans, including auto, marine and RV loans, 23% direct installment loans, 15% retail automobile leases and 4% student loans. Exclusive of student loans, the mix of the portfolio was comparable to 1999. In December 2000, National City announced its intention to exit the automobile leasing business and ceased origination of new leases. Credit Card: Credit card balances, including unsecured personal and business lines of credit, declined in 2000 due to the securitization of $600 million of credit card receivables during the year and the transfer of $425 million of loans out of portfolio and into the held-for-securitization category at year end, offset in part by loans being transferred back onto the balance sheet as other securitizations unwound. Off-balance-sheet securitized credit card receivables totaled $630 million at December 31, 2000, compared to $500 million at December 31, 1999. Home Equity: Home equity loans consist primarily of revolving lines of credit and totaled $4.8 billion at December 31, 2000, up 29.7% from $3.7 billion at December 31, 1999. Aggressive marketing campaigns and a heightened focus on cross-selling these loans to mortgage customers led to the sharp growth in balances. Growth in 1999 compared to 1998 was driven by the expansion of this product offering through national distribution channels. 14 NATIONAL CITY 2000 ANNUAL REPORT 17 SECURITIES: Securities balances at December 31 follow:
--------------------------------------------------------------------- (IN MILLIONS) 2000 1999 1998 1997 1996 --------------------------------------------------------------------- U.S. Treasury and Federal agency debentures $1,125 $ 1,171 $ 1,212 $ 2,074 $ 3,171 Mortgage-backed securities 5,515 9,629 9,719 8,224 7,420 Asset-backed and corporate debt securities 1,440 2,633 3,044 1,625 991 States and political subdivisions 767 826 917 824 723 Other securities 964 921 809 519 1,015 --------------------------------------------------------------------- TOTAL AMORTIZED COST $9,811 $15,180 $15,701 $13,266 $13,320 --------------------------------------------------------------------- TOTAL FAIR VALUE $9,904 $14,904 $16,119 $13,798 $13,412 ---------------------------------------------------------------------
The Corporation uses securities to generate interest and dividend revenue, to manage interest rate risk and to provide liquidity to meet operating cash needs. Securities balances declined in 2000 as a result of the sale of $3.7 billion of primarily lower-yielding, fixed-rate debt securities and runoff due to normal paydown and maturity activity. At December 31, 2000, the securities balance included a net unrealized gain, representing the difference between the fair value of the securities and their amortized cost, of $93.2 million, compared to a net unrealized loss of $275.9 million at December 31, 1999. Unrealized gains and losses in the securities portfolio are included in stockholders' equity, net of tax. The sale of the lower-yielding, fixed-rate debt securities and a decline in year-over-year long-term interest rates led to the appreciation in the fair value of the securities in 2000. The weighted-average yield on debt securities included in the portfolio at December 31, 2000 was 6.41%, compared to 6.44% at December 31, 1999. FUNDING: Core deposits, the most significant source of funding, include noninterest bearing deposits, NOW and money market accounts, savings accounts and time deposits of individuals. Core deposit balances in 2000 were relatively stable compared to 1999. During 2000, the Corporation introduced several branding and customer-retention initiatives aimed at growing the core deposit base, which had declined in previous years as competition and shifting customer preferences made it more difficult to retain this typically lower-cost source of funding. Short-term borrowings are comprised primarily of Federal funds purchased, securities sold under agreements to repurchase, U.S. Treasury demand notes and commercial paper. Short-term borrowings generally fund short-term, rate-sensitive earning asset growth. Long-term debt and capital securities include senior and subordinated debt issued by the Corporation and its bank subsidiaries. During 2000 and 1999, the Corporation increased its reliance on long-term debt, through the issuance of senior bank notes and subordinated debt, to fund loan growth and its share repurchase program. Average funding sources follow:
---------------------------------------------------------------------- (IN MILLIONS) 2000 1999 1998 1997 1996 ---------------------------------------------------------------------- Core deposits $46,005 $46,993 $48,194 $47,536 $49,521 Purchased deposits 6,064 5,732 5,724 4,213 3,658 Short-term borrowings 9,576 10,958 10,247 7,790 6,912 Long-term debt and capital securities 16,454 13,316 7,698 4,972 3,611 Stockholders' equity 6,140 6,231 6,965 6,166 5,983 ---------------------------------------------------------------------- TOTAL FUNDING $84,239 $83,230 $78,828 $70,677 $69,685 ----------------------------------------------------------------------
The percentage of each funding source to total funding follows:
---------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------------------- Core deposits 54.6% 56.4% 61.1% 67.3% 71.1% Purchased deposits 7.2 6.9 7.3 6.0 5.2 Short-term borrowings 11.4 13.2 13.0 11.0 9.9 Long-term debt and capital securities 19.5 16.0 9.8 7.0 5.2 Stockholders' equity 7.3 7.5 8.8 8.7 8.6 ---------------------------------------------------------------- TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% ----------------------------------------------------------------
Further detail of average deposits follows:
---------------------------------------------------------------------- (IN MILLIONS) 2000 1999 1998 1997 1996 ---------------------------------------------------------------------- Noninterest bearing deposits $10,792 $11,473 $ 9,945 $ 9,230 $ 9,188 NOW and money market accounts 16,549 16,804 17,472 15,467 15,689 Savings accounts 3,207 3,818 4,158 5,037 5,190 Time deposits of individuals 15,457 14,898 16,619 17,802 19,454 ---------------------------------------------------------------------- Core deposits 46,005 46,993 48,194 47,536 49,521 ---------------------------------------------------------------------- Other deposits 2,936 3,053 4,009 3,161 2,799 Foreign deposits 3,128 2,679 1,715 1,052 859 ---------------------------------------------------------------------- Purchased deposits 6,064 5,732 5,724 4,213 3,658 ---------------------------------------------------------------------- TOTAL DEPOSITS $52,069 $52,725 $53,918 $51,749 $53,179 ----------------------------------------------------------------------
Certificates of deposit of $100,000 or more totaled $6.2 billion at December 31, 2000, of which $1.3 billion mature within three months, $.5 billion mature within three to six months, $2.0 billion mature within six months to one year and $2.4 billion mature beyond one year. 15 NATIONAL CITY 2000 ANNUAL REPORT 18 FINANCIAL REVIEW CONTINUED ASSET QUALITY The Corporation's loan portfolios are subject to varying degrees of credit risk. Credit risk is mitigated through portfolio diversification, limiting exposure to any single industry or customer, requiring collateral and employing standard lending policies and underwriting criteria across the Corporation. The following tables provide information and statistics on the overall quality of National City's loan portfolio. Note 1 to the Consolidated Financial Statements describes the Corporation's accounting policies related to nonperforming loans and charge-offs and describes the methodologies used to develop the allowance, including both the allocated and unallocated components. The Corporation's policies governing nonperforming loans and charge-offs are consistent with regulatory standards. NONPERFORMING ASSETS: Nonaccrual and restructured loans and other nonperforming assets at December 31 follow:
------------------------------------------------------------------ (DOLLARS IN MILLIONS) 2000 1999 1998 1997 1996 ------------------------------------------------------------------ Commercial: Nonaccrual $183.1 $130.2 $ 95.4 $108.9 $119.6 Restructured .1 .2 .4 1.1 3.5 ------------------------------------------------------------------ Total commercial 183.2 130.4 95.8 110.0 123.1 ------------------------------------------------------------------ Real estate mortgage: Nonaccrual 185.6 137.0 120.2 123.4 104.5 Restructured .2 1.8 2.6 4.4 6.1 ------------------------------------------------------------------ Total real estate mortgage 185.8 138.8 122.8 127.8 110.6 ------------------------------------------------------------------ TOTAL NONPERFORMING LOANS 369.0 269.2 218.6 237.8 233.7 Other real estate owned (OREO) 33.3 19.9 29.9 35.5 48.7 ------------------------------------------------------------------ TOTAL NONPERFORMING ASSETS $402.3 $289.1 $248.5 $273.3 $282.4 ------------------------------------------------------------------ LOANS 90 DAYS PAST DUE ACCRUING INTEREST $341.8 $230.0 $209.5 $136.1 $133.8 ------------------------------------------------------------------ NONPERFORMING LOANS AND OREO AS A PERCENT OF: Loans and OREO .61% .48% .43% .53% .56% Assets .45 .33 .28 .36 .39 Equity 5.94 5.05 3.54 4.44 4.54 ------------------------------------------------------------------
At December 31, 2000, nonperforming assets totaled $402.3 million, compared with $289.1 million at year-end 1999 and $248.5 million at year-end 1998. Nonperforming assets increased in both 2000 and 1999 due to weakness in the healthcare sector and higher delinquencies in residential real estate loans, primarily due to growth in nonconforming mortgages. Growth in the nonconforming mortgage portfolio also led to the increase in loans 90 days past due accruing interest in both 2000 and 1999. ALLOWANCE FOR LOAN LOSSES: A reconciliation of the allowance for loan losses follows:
---------------------------------------------------------------------- (DOLLARS IN MILLIONS) 2000 1999 1998 1997 1996 ---------------------------------------------------------------------- BALANCE AT BEGINNING OF YEAR $ 970.5 $ 970.2 $ 941.9 $ 958.7 $ 947.0 Provision 286.8 249.7 201.4 225.4 239.9 Allowance related to loans acquired (sold or securitized) (42.4) .1 27.4 (19.5) .1 Charge-offs: Commercial 96.4 81.4 43.7 63.7 67.0 Real estate - commercial 6.9 6.9 9.3 8.1 6.1 Real estate - residential 24.5 16.8 17.2 14.6 18.9 Consumer 167.4 174.8 146.7 157.9 168.5 Credit card 105.6 101.0 95.7 111.8 115.3 Home equity 7.2 6.9 8.8 4.7 4.9 ---------------------------------------------------------------------- Total charge-offs 408.0 387.8 321.4 360.8 380.7 ---------------------------------------------------------------------- Recoveries: Commercial 17.9 19.7 25.4 28.1 40.0 Real estate - commercial 4.0 8.7 7.3 7.2 4.0 Real estate - residential .9 1.8 1.2 2.3 7.1 Consumer 73.0 82.7 63.8 77.6 79.5 Credit card 22.2 21.4 19.8 21.2 20.5 Home equity 3.7 4.0 3.4 1.7 1.3 ---------------------------------------------------------------------- Total recoveries 121.7 138.3 120.9 138.1 152.4 ---------------------------------------------------------------------- NET CHARGE-OFFS 286.3 249.5 200.5 222.7 228.3 ---------------------------------------------------------------------- BALANCE AT END OF YEAR $ 928.6 $ 970.5 $ 970.2 $ 941.9 $ 958.7 ---------------------------------------------------------------------- LOANS OUTSTANDING AT DECEMBER 31 $65,604 $60,204 $58,011 $51,944 $50,442 ---------------------------------------------------------------------- ALLOWANCE AS A PERCENTAGE OF: Loans 1.42% 1.61% 1.67% 1.81% 1.90% Nonperforming loans 251.7 360.5 443.8 396.1 410.2 ----------------------------------------------------------------------
National City maintains an allowance for loan losses sufficient to absorb estimated probable losses inherent in the loan portfolio. The evaluation of each element and the overall allowance are based on the size and current risk characteristics of the loan portfolio and include an assessment of individual problem loans, actual loss experience, economic trends in specific industries and geographical areas, and other factors including regulatory guidance and general economic conditions. While management considers the Corporation's allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary due to changes in economic conditions, management's assumptions as to future delinquencies or loss rates, and management's intent with regard to asset disposition options. In addition, the Corporation's allowance for loan losses is periodically reviewed by the bank regulatory agencies as an integral part of their examination process. Based on their review, the agencies may require the Corporation to adjust the allowance for loan 16 NATIONAL CITY 2000 ANNUAL REPORT 19 losses based on their judgments about information available to them at the time of their review. As portfolio loans are identified for sale or securitization, the balances, along with the attributable allowance for loan losses, are reclassified to a held-for-sale or securitization classification on the balance sheet. In 2000, $42.4 million of allowance, attributable to portfolio loans sold or securitized during the year and additional loans planned for securitization in early 2001, became direct adjustments to the bases of these loans. Net charge-offs increased in 2000 due to portfolio growth, a shift in mix toward nonconforming loans and weakness in commercial credits, particularly leveraged transactions. An allocation of the ending allowance for loan losses by portfolio type follows:
---------------------------------------------------------------------- (IN MILLIONS) 2000 1999 1998 1997 1996 ---------------------------------------------------------------------- Commercial $349.0 $241.9 $217.8 $196.3 $197.0 Real estate(a) 128.8 93.1 102.0 93.7 96.3 Consumer and home equity 127.3 132.7 121.7 145.6 147.3 Credit card 120.3 134.5 101.7 81.3 82.2 Unallocated 203.2 368.3 427.0 425.0 435.9 ---------------------------------------------------------------------- TOTAL ALLOWANCE $928.6 $970.5 $970.2 $941.9 $958.7 ----------------------------------------------------------------------
(a)Includes allowance allocated to both real estate - commercial and real estate - residential loan categories. The allowance is allocated to the individual loan portfolios based on the specific risks and loss factors associated with each loan type. The allowance allocated to the commercial loan portfolio increased in 2000 reflecting increased risk in certain sectors, such as health care and leveraged transactions, a slowing economy and portfolio growth. Additional allowance was also allocated to the residential real estate portfolio due to a higher concentration of nonconforming loans. The unallocated portion of the allowance reflects estimated inherent but undetected losses within the portfolio that are probable due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, and risk factors that have not yet manifested themselves in loss allocation factors. The unallocated allowance has declined over the past two years as allowance has been allocated for the aforementioned weakness in commercial credits, particularly leveraged transactions, softer economic conditions, increased loss experience as portfolios have seasoned, as well as other factors. Average loans by portfolio type follow:
---------------------------------------------------------------------- (IN MILLIONS) 2000 1999 1998 1997 1996 ---------------------------------------------------------------------- Commercial $24,830 $22,359 $20,135 $16,837 $14,899 Real estate - commercial 6,222 6,239 6,407 6,562 7,230 Real estate - residential 11,721 9,922 10,634 11,472 12,112 Consumer 13,215 13,831 12,589 11,257 11,406 Credit card 2,430 2,025 1,860 2,070 2,244 Home equity 4,204 3,312 3,102 2,702 2,258 ---------------------------------------------------------------------- TOTAL $62,622 $57,688 $54,727 $50,900 $50,149 ----------------------------------------------------------------------
Net charge-offs as a percentage of average loans by portfolio type follow:
-------------------------------------------------------------- 2000 1999 1998 1997 1996 -------------------------------------------------------------- Commercial .32% .28% .09% .21% .18% Real estate - commercial .05 (.03) .03 .01 .03 Real estate - residential .20 .15 .15 .11 .10 Consumer .71 .67 .66 .71 .78 Credit card 3.43 3.93 4.08 4.37 4.23 Home equity .08 .09 .17 .11 .16 -------------------------------------------------------------- TOTAL NET CHARGE-OFFS TO AVERAGE LOANS .46% .43% .37% .44% .46% --------------------------------------------------------------
CAPITAL The Corporation has consistently maintained regulatory capital ratios at or above the "well-capitalized" standards. For further detail on capital ratios, see Note 14 to the Consolidated Financial Statements. Stockholders' equity was $6.8 billion at December 31, 2000, up 18.2% from $5.7 billion at December 31, 1999. Reduced share repurchase activity and appreciation in the unrealized fair value of the securities portfolio in 2000 drove most of the growth in stockholders' equity. Book value per common share increased to $11.06 at December 31, 2000, from $9.39 at December 31, 1999. Book value per common share at December 31, 2000 included after-tax net unrealized gains on securities available for sale of $.10 compared to after-tax net unrealized losses of $.30 at year-end 1999. During 2000 and 1999, the Corporation repurchased 2.5 million and 2.6 million shares, respectively, of its common stock in accordance with an October 1999 authorization by the Corporation's Board of Directors allowing for the repurchase of up to 30 million shares of National City common stock, subject to an aggregate purchase limit of $1.0 billion. As of December 31, 2000, 24.9 million shares remained available for repurchase under this authorization. During 1999 and 1998, 50 million and 10 million shares, respectively, of the Corporation's common stock were repurchased in accordance with an October 1998 authorization by the Board of Directors, which allowed for the repurchase of up to 60 million shares of National City common stock, subject to an aggregate purchase limit of $2.7 billion. In connection with the October 1999 authorization, the Corporation entered into an agreement with a third party that provides the Corporation with an option to purchase up to $300 million of National City common stock through the use of forward transactions. The forward transactions can be settled from time to time, at the Corporation's election, on a physical, net cash or net share basis. In the case of net cash or net share settlement, the amount at which these forward purchases can be settled depends primarily on the number of shares to be settled and the future market price of the Corporation's common stock as compared with the forward purchase price per share. At December 31, 2000, the Corporation had open forward transactions involving 17 NATIONAL CITY 2000 ANNUAL REPORT 20 FINANCIAL REVIEW CONTINUED 9.3 million shares of its common stock. These forward transactions were settled in early January 2001 through physical share settlement whereby National City paid cash of $166.2 million, or $17.84 per share, to the third party in exchange for taking physical delivery of the 9.3 million shares. On the settlement date, common shares outstanding and stockholders' equity were reduced. The Corporation may, but is not obligated to, enter into further forward transactions with the third party until the agreement's final maturity date of April 19, 2002. At December 31, 2000, the Corporation's market capitalization was $17.5 billion, and there were 68,981 common stockholders of record. National City's common stock is traded on the New York Stock Exchange under the symbol "NCC." The Corporation paid dividends of $1.14 per common share in 2000, representing a 7.5% increase over the $1.06 per share paid in 1999. The dividend payout is continually reviewed by management and the Board of Directors. The dividend payout ratio, which shows the percentage of earnings per share declared to stockholders as dividends, has averaged over 50% for the past five years. It is management's intention to migrate to a lower payout ratio over time. LIQUIDITY MANAGEMENT Effective liquidity management ensures the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, the ability to acquire large deposits and issue bank notes in the local and national markets, and the capability to securitize or package loans for sale. The parent company has four major sources of funding to meet its liquidity requirements: dividends and returns of investment from its subsidiaries, the commercial paper market, a revolving credit agreement and access to the capital markets. The main sources for parent company cash requirements have been dividends and returns of investment from its subsidiaries. At January 1, 2001, the amount of dividends the bank subsidiaries can pay to the parent company without prior regulatory approval was $1.2 billion, versus $1.4 billion at January 1, 2000. The subsidiary banks declared dividends to the parent company of $950.0 million in 2000 and $432.8 million in 1999. In 1999, the bank subsidiaries also provided liquidity to the parent company in the form of returns of capital totaling $1.4 billion. As discussed in Note 14 to the Consolidated Financial Statements and Item 1 of Form 10-K (page 49), subsidiary banks are subject to regulation and, among other things, may be limited in their ability to pay dividends or transfer funds to the parent company. Accordingly, consolidated cash flows as presented in the Consolidated Statements of Cash Flows on page 26 may not represent cash immediately available for the payment of cash dividends to stockholders. Funds raised in the commercial paper market through the Corporation's subsidiary, National City Credit Corporation, support short-term cash needs of the parent company and non-bank subsidiaries. National City has a $350 million revolving credit agreement with a group of unaffiliated banks which serves as a back-up liquidity facility. The agreement expires February 1, 2001, with a provision to extend the expiration date under certain circumstances. No borrowings have occurred under this facility. The parent company also has in place a $300 million shelf registration with the Securities and Exchange Commission permitting ready access to the public debt markets. MARKET RISK MANAGEMENT Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. Interest rate risk is National City's primary market risk and results from timing differences in the repricing of assets, liabilities and off-balance-sheet instruments, changes in relationships between rate indices and the potential exercise of explicit or embedded options. The Asset/Liability Management Committee (ALCO) meets monthly and is responsible for reviewing the interest-rate-sensitivity position of the Corporation and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the Investment Committee of the Corporation's Board of Directors. ASSET/LIABILITY MANAGEMENT: The primary goals of asset/liability management are to maximize net interest income and the net value of the Corporation's future cash flows within authorized interest rate risk limits. Interest Rate Risk Measurement: Interest rate risk is monitored primarily through the use of two complementary measures: earnings simulation modeling and net present value estimation. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Corporation, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. The key assumptions employed by these measures are analyzed periodically and reviewed by ALCO. Earnings Simulation Modeling: The Corporation's net income is affected by changes in the absolute level of interest rates. Net income is also subject to changes in the shape of the yield curve. In general, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and funding rates, while a steepening would result in increased earnings as investment margins widen. Earnings are also 18 NATIONAL CITY 2000 ANNUAL REPORT 21 affected by changes in spread relationships between certain rate indices, such as the prime rate and LIBOR. The earnings simulation model forecasts the effects on income under a variety of scenarios that incorporate changes in the absolute level of interest rates, changes in the shape of the yield curve and changes in interest rate relationships against earnings in a stable rate environment. This model includes assumptions about how the balance sheet is likely to evolve through time in different interest rate environments. Loan and deposit growth rate assumptions are derived from historical analysis and management's outlook, as are the assumptions used to project yields and rates for new loans and deposits. Securities portfolio maturities and prepayments are assumed to be reinvested in similar instruments. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds in conjunction with the historical prepayment performance of the Corporation's own loans. Noncontractual deposit growth rates and pricing are modeled on historical patterns. The most recent earnings simulation model projects net income would increase by approximately .7% of stable-rate net income if rates were to fall gradually by two percentage points over the next year. It projects a decrease of approximately 1.0% if the rates were to rise gradually by two percentage points over the same period. The projected decrease is within the ALCO guideline of minus 4.0%. Net Present Value Estimation: The Net Present Value ("NPV") measure is used for discerning levels of risk present in the balance sheet that might not be taken into account in the earnings simulation model due to the shorter time horizon used by that model. The NPV of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows and derivative cash flows minus the discounted value of liability cash flows. Interest rate risk analysis using NPV involves changing the interest rates used in determining the cash flows and in discounting the cash flows. The resulting percentage change in NPV is an indication of the longer-term repricing risk and options risk embedded in the balance sheet. In contrast to the earnings simulation model, which assumes rates will experience a gradual change and then stabilize at a particular level after one year, implied forward rates are used for the NPV measure. The NPV measure also assumes a static balance sheet, versus the growth assumptions that are incorporated into the earnings simulation measure and an unlimited time horizon instead of the one-year horizon applied in the earnings simulation. As with earnings simulation modeling, assumptions about the timing and variability of balance sheet cash flows are critical in NPV analysis. Particularly important are the assumptions driving mortgage prepayments and the assumptions about expected growth in the core deposit portfolios. These assumptions are applied consistently in both models. Based on the most recent net present value estimation, a 150 basis point immediate decrease in rates was estimated to reduce NPV by .7%. NPV was projected to decline by 3.7% if rates immediately increased by 150 basis points. Policy limits restrict the amount of the estimated decline in NPV to 7.0%. Summary information about the interest-rate risk measures follows:
------------------------------------------------------------ 2000 1999 ------------------------------------------------------------ ONE-YEAR NET INCOME SIMULATION PROJECTION -200 bp Ramp vs. Stable Rate .7% 2.4% +200 bp Ramp vs. Stable Rate -1.0% -2.2% STATIC NET PRESENT VALUE CHANGE -150 bp Shock vs. Stable Rate -.7% 1.0% +150 bp Shock vs. Stable Rate -3.7% -6.9% ------------------------------------------------------------
As the measures presented above indicate, during 2000 the Corporation shifted to a less liability-sensitive position aided by asset sales, reduced reinvestment in securities and the use of off-balance-sheet instruments. Interest Rate Risk Management: Financial instruments used to manage interest rate risk include on-balance-sheet investment securities and off-balance-sheet interest rate derivatives, which include interest rate swaps, interest rate caps and floors, and exchange-traded futures and options contracts. Interest rate derivatives have characteristics similar to securities but possess the advantages of customization of the risk-reward profile of the instrument, minimization of balance sheet leverage and improvement of the liquidity position. See Notes 1, 2 and 22 to the Consolidated Financial Statements for further discussion of off-balance-sheet derivatives. TRADING RISK MANAGEMENT: The Corporation maintains a trading account primarily to provide investment products and risk management services to its customers and, to a lesser extent, take proprietary risk positions. Trading risk is monitored on a regular basis through the use of the value-at-risk methodology ("VAR"). The Corporation primarily uses the historical simulation VAR method. VAR is defined as the potential overnight dollar loss from adverse market movements, with 97.5% confidence, based on historical prices and market rates. During 2000, the average, high and low VAR amounts were $.3 million, $.4 million and $.2 million, respectively, within the limit established by ALCO of $2.3 million. During 1999, the average, high, and low VAR amounts were $.5 million, $.6 million and $.4 million, respectively. Month-end VAR estimates are monitored regularly. Income from trading activities, including interest income, totaled $20.4 million in 2000, $18.6 million in 1999 and $23.1 million in 1998. 19 NATIONAL CITY 2000 ANNUAL REPORT 22 QUARTERLY DATA FOURTH QUARTER SUMMARY For the fourth quarter of 2000, net income was $308.0 million, or $.50 per diluted share, down from $343.5 million, or $.55 per diluted share, in the 1999 fourth quarter. Included in the 2000 fourth quarter results were pretax charges of $44.0 million, or $28.6 million after tax, incurred in connection with the realignment of the Corporation's consumer finance business, as well as after-tax charges of $4.0 million incurred in connection with the decision to close a small operating unit of National Processing. The effect of these charges was equivalent to $.05 per diluted share. Excluding these charges, net income declined due to increases in noninterest expense and the provision for loan losses, offset in part by increases in fees and other income and net securities gains. For the fourth quarter of 2000, returns on average common equity and average assets were 18.8% and 1.44%, respectively, compared to 22.8% and 1.59%, respectively, for the 1999 fourth quarter. QUARTERLY FINANCIAL INFORMATION Unaudited quarterly results are summarized as follows:
--------------------------------------------------------------------------------------------------------------------------------- FULL (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH YEAR --------------------------------------------------------------------------------------------------------------------------------- 2000 CONDENSED INCOME STATEMENT Interest income $1,580,019 $1,646,474 $1,651,957 $1,688,133 $6,566,583 Interest expense 847,563 905,819 914,424 940,415 3,608,221 Net interest income 732,456 740,655 737,533 747,718 2,958,362 Provision for loan losses 66,326 68,691 70,363 81,415 286,795 Fees and other income 557,366 674,328 590,878 604,810 2,427,382 Net securities gains (losses) 21,533 (42,780) 27,435 50,664 56,852 Noninterest expense 759,093 785,070 785,309 854,437 3,183,909 Income before income tax expense 485,936 518,442 500,174 467,340 1,971,892 Net income 321,343 342,387 330,636 308,011 1,302,377 FINANCIAL RATIOS Return on average common equity 22.45% 23.13% 21.13% 18.75% 21.29% Return on average assets 1.50 1.59 1.56 1.44 1.52 Net interest margin 3.79 3.80 3.90 3.90 3.85 Efficiency ratio 58.47 55.16 58.74 62.78 58.75 PER COMMON SHARE Basic net income $.53 $.56 $.55 $.50 $2.14 Diluted net income .53 .56 .54 .50 2.13 Dividends declared -- .285 .285 .285 .855 Dividends paid .285 .285 .285 .285 1.14 --------------------------------------------------------------------------------------------------------------------------------- 1999 CONDENSED INCOME STATEMENT Interest income $1,460,490 $1,440,265 $1,464,734 $1,547,120 $5,912,609 Interest expense 704,355 691,321 717,255 799,656 2,912,587 Net interest income 756,135 748,944 747,479 747,464 3,000,022 Provision for loan losses 68,034 59,542 55,476 66,622 249,674 Fees and other income 590,891 543,631 528,614 579,273 2,242,409 Net securities gains 23,688 57,224 20,353 37,095 138,360 Noninterest expense 739,202 757,235 705,963 780,104 2,982,504 Income before income tax expense 563,478 533,022 535,007 517,106 2,148,613 Net income 351,019 354,488 356,462 343,516 1,405,485 FINANCIAL RATIOS Return on average common equity 21.12% 22.96% 23.79% 22.84% 22.64% Return on average assets 1.66 1.71 1.71 1.59 1.67 Net interest margin 4.02 4.04 4.03 3.87 3.99 Efficiency ratio 54.53 58.16 54.88 58.41 56.49 PER COMMON SHARE Basic net income $.55 $.56 $.58 $.56 $2.25 Diluted net income .54 .56 .57 .55 2.22 Dividends declared .26 .27 .27 .285 1.085 Dividends paid .26 .26 .27 .27 1.06 ---------------------------------------------------------------------------------------------------------------------------------
20 NATIONAL CITY 2000 ANNUAL REPORT 23 STATISTICAL DATA CONSOLIDATED SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA(a)
--------------------------------------------------------------------------------------------------------------------------------- For the Calendar Year --------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998 1997 1996 1995 1994 1993 --------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Interest Income: Loans $5,790 $4,938 $4,812 $4,487 $4,425 $4,383 $3,673 $3,420 Securities 740 922 885 840 854 966 911 945 Other 37 53 60 36 40 52 20 14 --------------------------------------------------------------------------------------------------------------------------------- Total interest income 6,567 5,913 5,757 5,363 5,319 5,401 4,604 4,379 Interest Expense: Deposits 1,937 1,636 1,846 1,813 1,862 1,975 1,479 1,547 Borrowings and long-term debt 1,671 1,277 999 739 612 673 420 187 --------------------------------------------------------------------------------------------------------------------------------- Total interest expense 3,608 2,913 2,845 2,552 2,474 2,648 1,899 1,734 --------------------------------------------------------------------------------------------------------------------------------- Net Interest Income 2,959 3,000 2,912 2,811 2,845 2,753 2,705 2,645 Provision for Loan Losses 287 250 201 225 240 205 196 228 --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 2,672 2,750 2,711 2,586 2,605 2,548 2,509 2,417 Fees and Other Income 2,427 2,243 2,180 1,766 1,528 1,332 1,274 1,202 Net Securities Gains 57 138 134 81 109 42 35 59 --------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 2,484 2,381 2,314 1,847 1,637 1,374 1,309 1,261 Noninterest Expense Before Merger Charges 3,184 2,983 2,998 2,727 2,725 2,690 2,635 2,540 Merger Charges -- -- 379 66 75 24 -- -- --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 3,184 2,983 3,377 2,793 2,800 2,714 2,635 2,540 --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting changes 1,972 2,148 1,648 1,640 1,442 1,208 1,183 1,138 Income Taxes 670 743 577 518 448 380 364 334 --------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting changes 1,302 1,405 1,071 1,122 994 828 819 804 Cumulative effect of accounting changes, net -- -- -- -- -- -- -- 60 --------------------------------------------------------------------------------------------------------------------------------- Net Income $1,302 $1,405 $1,071 $1,122 $ 994 $ 828 $ 819 $ 864 --------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Diluted net income $2.13 $2.22 $1.61 $1.71 $1.48 $1.22 $1.21 $1.25 Diluted net income before merger charges 2.13 2.22 2.00 1.77 1.55 1.25 1.21 1.25 Dividends declared .855 1.085 .97 .86 .94 .65 .59 .53 Dividends paid 1.14 1.06 .94 .84 .74 .65 .59 .53 Average diluted shares 612.63 632.45 665.72 655.47 673.10 676.48 674.85 691.68 FINANCIAL RATIOS Return on average common equity 21.29% 22.64% 15.40% 18.20% 16.69% 15.44% 16.39% 18.38% Return on average common equity before merger charges 21.29 22.64 19.18 18.77 17.53 15.82 16.39 18.38 Return on average assets 1.52 1.67 1.34 1.56 1.40 1.15 1.23 1.37 Return on average assets before merger charges 1.52 1.67 1.66 1.61 1.47 1.18 1.23 1.37 Average stockholders' equity to average assets 7.18 7.39 8.70 8.57 8.44 7.59 7.62 7.88 Dividend payout ratio 40.14 48.87 60.25 50.29 63.51 53.28 48.76 42.40 Net interest margin 3.85 3.99 4.11 4.37 4.47 4.24 4.53 4.71 AT YEAR END Assets $88,535 $87,121 $88,246 $75,779 $72,918 $74,142 $70,438 $66,395 Loans(b) 69,043 62,935 61,519 53,244 50,886 50,543 47,536 42,996 Securities (fair value) 9,904 14,904 16,119 13,798 13,412 15,384 15,338 16,441 Deposits 55,256 50,066 58,247 52,617 53,619 54,923 54,755 51,388 Long-term debt 18,145 15,038 9,689 6,297 3,516 3,515 2,693 1,515 Common stockholders' equity 6,740 5,698 6,977 6,158 6,216 5,706 4,851 5,120 Total stockholders' equity 6,770 5,728 7,013 6,158 6,216 5,892 5,039 5,318 Common shares outstanding 609.19 607.06 652.65 631.39 661.72 650.96 652.68 665.66 --------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------- --------------------------- For the Calendar Year -------------------------------------------------- --------------------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1992 1991 1990 -------------------------------------------------- --------------------------- SUMMARY OF OPERATIONS Interest Income: Loans $3,540 $3,869 $4,110 Securities 1,041 1,052 1,025 Other 56 120 128 -------------------------------------------------------------------------------- Total interest income 4,637 5,041 5,263 Interest Expense: Deposits 1,949 2,513 2,762 Borrowings and long-term debt 153 212 295 -------------------------------------------------------------------------------- Total interest expense 2,102 2,725 3,057 -------------------------------------------------------------------------------- Net Interest Income 2,535 2,316 2,206 Provision for Loan Losses 305 394 484 -------------------------------------------------------------------------------- Net interest income after provision for loan losses 2,230 1,922 1,722 Fees and Other Income 1,099 957 888 Net Securities Gains 100 50 -- -------------------------------------------------------------------------------- Total noninterest income 1,199 1,007 888 Noninterest Expense Before Merger Charges 2,597 2,309 2,177 Merger Charges -- -- -- -------------------------------------------------------------------------------- Total noninterest expense 2,597 2,309 2,177 -------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting changes 832 620 433 Income Taxes 256 161 143 -------------------------------------------------------------------------------- Income before cumulative effect of accounting changes 576 459 290 Cumulative effect of accounting changes, net (21) -- -- -------------------------------------------------------------------------------- Net Income $ 555 $ 459 $ 290 -------------------------------------------------------------------------------- PER COMMON SHARE Diluted net income $.82 $.71 $.46 Diluted net income before merger charges .82 .71 .46 Dividends declared .47 .47 .47 Dividends paid .47 .47 .47 Average diluted shares 677.63 641.67 626.82 FINANCIAL RATIOS Return on average common equity 13.72% 12.60% 8.11% Return on average common equity before merger charges 13.72 12.60 8.11 Return on average assets .91 .80 .53 Return on average assets before merger charges .91 .80 .53 Average stockholders' equity to average assets 7.27 7.00 6.96 Dividend payout ratio 57.32 66.20 102.17 Net interest margin 4.68 4.59 4.62 AT YEAR END Assets $62,469 $61,443 $57,417 Loans(b) 39,708 38,723 37,492 Securities (fair value) 15,525 14,327 12,003 Deposits 51,228 50,370 47,537 Long-term debt 1,264 780 575 Common stockholders' equity 4,269 3,756 3,492 Total stockholders' equity 4,582 4,159 3,719 Common shares outstanding 653.40 608.65 611.14 --------------------------------------------------------------------------------
(a)Prior period data have been restated for stock splits and pooling-of-interests transactions. (b)Includes loans held for sale or securitization. 21 NATIONAL CITY 2000 ANNUAL REPORT 24 REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS REPORT OF MANAGEMENT The management of National City Corporation has prepared the accompanying financial statements and is responsible for their integrity and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States and necessarily include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements. National City Corporation maintains a system of internal control over financial reporting designed to produce reliable financial statements. The system contains self-monitoring mechanisms, and compliance is tested and evaluated through an extensive program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any internal control system has inherent limitations, including the possibility that controls can be circumvented or overridden. Further, because of changes in conditions, internal control system effectiveness may vary over time. The Audit Committee, consisting entirely of outside directors, meets regularly with management, internal auditors and independent auditors, and reviews audit plans and results, as well as management's actions taken in discharging responsibilities for accounting, financial reporting and internal controls. Ernst & Young LLP, independent auditors, and the internal auditors have direct and confidential access to the Audit Committee at all times to discuss the results of their examinations. National City Corporation assessed its internal control system as of December 31, 2000, in relation to criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework", issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2000, its system of internal control met those criteria. /s/ David A. Daberko /s/ Jeffrey D. Kelly DAVID A. DABERKO JEFFREY D. KELLY Chairman and Chief Chief Financial Officer Executive Officer
Cleveland, Ohio January 24, 2001 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Stockholders National City Corporation Cleveland, Ohio We have audited the accompanying consolidated balance sheets of National City Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of National City's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the 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 Corporation and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Cleveland, Ohio January 24, 2001 22 NATIONAL CITY 2000 ANNUAL REPORT 25 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------------- DECEMBER 31 ------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 ---------------------------------------------------------------------------------------------- ASSETS Loans: Commercial $26,703,622 $23,402,556 Real estate - commercial 6,511,018 6,012,016 Real estate - residential 13,357,438 10,396,422 Consumer 12,100,567 14,367,133 Credit card 2,152,445 2,339,658 Home equity 4,779,359 3,686,119 ---------------------------------------------------------------------------------------------- Total loans 65,604,449 60,203,904 Allowance for loan losses (928,592) (970,463) ---------------------------------------------------------------------------------------------- Net loans 64,675,857 59,233,441 Loans held for sale or securitization: Mortgage loans held for sale 3,030,672 2,731,166 Credit card loans held for securitization 407,900 -- ---------------------------------------------------------------------------------------------- Total loans held for sale or securitization 3,438,572 2,731,166 Securities available for sale, at fair value 9,904,533 14,904,343 Federal funds sold and security resale agreements 81,040 556,351 Other investments 687,732 231,099 Cash and demand balances due from banks 3,535,186 3,480,756 Properties and equipment 1,071,637 1,127,980 Accrued income and other assets 5,140,052 4,856,363 ---------------------------------------------------------------------------------------------- TOTAL ASSETS $88,534,609 $87,121,499 ---------------------------------------------------------------------------------------------- LIABILITIES Deposits: Noninterest bearing deposits $11,500,026 $11,182,681 NOW and money market accounts 17,262,587 16,561,494 Savings accounts 2,883,763 3,470,700 Time deposits of individuals 15,816,422 14,700,944 Other deposits 4,072,308 2,897,166 Foreign deposits 3,721,316 1,253,325 ---------------------------------------------------------------------------------------------- Total deposits 55,256,422 50,066,310 Federal funds borrowed and security repurchase agreements 5,677,643 5,182,506 Borrowed funds 903,725 9,772,611 Long-term debt 17,964,800 14,858,014 Corporation-obligated mandatorily redeemable capital securities of subsidiary trusts holding solely debentures of the Corporation 180,000 180,000 Accrued expenses and other liabilities 1,782,198 1,334,325 ---------------------------------------------------------------------------------------------- TOTAL LIABILITIES 81,764,788 81,393,766 ---------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred Stock, stated value $50 per share, authorized 5,000,000 shares, outstanding 599,365 shares in 2000 and 604,652 shares in 1999 29,968 30,233 Common stock, par value $4 per share, authorized 1,400,000,000 shares, outstanding 609,188,668 shares in 2000 and 607,058,364 shares in 1999 2,436,755 2,428,234 Capital surplus 837,444 782,960 Retained earnings 3,405,077 2,665,674 Accumulated other comprehensive income (loss) 60,577 (179,368) ---------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 6,769,821 5,727,733 ---------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $88,534,609 $87,121,499 ----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 23 NATIONAL CITY 2000 ANNUAL REPORT 26 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------------------------------------------------------------------------- FOR THE CALENDAR YEAR ------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998 ----------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $5,790,093 $4,938,372 $4,811,735 Securities: Taxable 641,406 826,332 793,461 Exempt from Federal income taxes 43,450 48,000 48,831 Dividends 54,852 47,918 42,969 Federal funds sold and security resale agreements 18,854 37,862 43,793 Other investments 17,928 14,125 15,888 ----------------------------------------------------------------------------------------------------------- Total interest income 6,566,583 5,912,609 5,756,677 INTEREST EXPENSE Deposits 1,937,034 1,635,533 1,846,276 Federal funds borrowed and security repurchase agreements 395,935 368,061 353,882 Borrowed funds 164,716 144,232 168,507 Long-term debt and capital securities 1,110,536 764,761 476,364 ----------------------------------------------------------------------------------------------------------- Total interest expense 3,608,221 2,912,587 2,845,029 ----------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 2,958,362 3,000,022 2,911,648 PROVISION FOR LOAN LOSSES 286,795 249,674 201,400 ----------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 2,671,567 2,750,348 2,710,248 NONINTEREST INCOME Mortgage banking revenue 478,954 389,292 327,247 Deposit service charges 442,753 420,448 384,938 Item processing revenue 412,444 416,782 484,503 Trust and investment management fees 334,627 325,856 311,050 Card-related fees 188,024 191,677 201,168 Other 570,580 498,354 470,777 ----------------------------------------------------------------------------------------------------------- Total fees and other income 2,427,382 2,242,409 2,179,683 Net securities gains 56,852 138,360 134,459 ----------------------------------------------------------------------------------------------------------- Total noninterest income 2,484,234 2,380,769 2,314,142 NONINTEREST EXPENSE Salaries, benefits and other personnel 1,627,260 1,558,403 1,594,757 Equipment 229,476 209,774 212,871 Net occupancy 209,229 202,077 202,664 Third-party services 197,485 193,148 226,262 Merger charges -- -- 379,376 Other 920,459 819,102 761,183 ----------------------------------------------------------------------------------------------------------- Total noninterest expense 3,183,909 2,982,504 3,377,113 ----------------------------------------------------------------------------------------------------------- Income before income tax expense 1,971,892 2,148,613 1,647,277 Income tax expense 669,515 743,128 576,596 ----------------------------------------------------------------------------------------------------------- NET INCOME $1,302,377 $1,405,485 $1,070,681 ----------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic $2.14 $2.25 $1.64 Diluted 2.13 2.22 1.61 AVERAGE COMMON SHARES OUTSTANDING Basic 607,378,801 623,623,811 652,011,504 Diluted 612,625,349 632,452,146 665,720,330 -----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 24 NATIONAL CITY 2000 ANNUAL REPORT 27 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------- PREFERRED COMMON CAPITAL RETAINED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STOCK STOCK SURPLUS EARNINGS --------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1998 $ -- $1,262,790 $ 1,108,920 $ 3,440,763 Comprehensive income: Net income 1,070,681 Other comprehensive income, net of tax: Change in unrealized gains and losses on securities of $13,689, net of reclassification adjustment for net gains included in net income of $87,398 Total comprehensive income Common dividends declared, $.97 per share (637,099) Preferred dividends declared (2,182) Issuances of 9,584,990 common shares under stock-based compensation and dividend reinvestment plans, including related tax effects 19,170 185,835 Repurchase of 10,000,000 common shares (20,000) (17,041) (310,667) Issuances of 21,620,168 common shares and 739,976 preferred shares pursuant to acquisition 36,999 43,240 690,245 (130,824) Conversions of 18,022 shares of preferred stock to 54,590 common shares (901) 109 792 --------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 $36,098 $1,305,309 $ 1,968,751 $ 3,430,672 Comprehensive income: Net income 1,405,485 Other comprehensive income, net of tax: Change in unrealized gains and losses on securities of $(361,512), net of reclassification adjustment for net gains included in net income of $89,934 Total comprehensive income Common dividends declared, $1.085 per share (669,699) Preferred dividends declared (1,749) Issuances of 6,471,813 common shares under stock-based compensation and dividend reinvestment plans, including related tax effects 16,776 121,455 Repurchases of 52,595,200 common shares (128,805) (82,225) (1,499,035) Issuance of 171,719 common shares pursuant to acquisition 687 3,381 Conversions of 117,302 shares of preferred stock to 355,312 common shares (5,865) 745 5,120 Stock split 1,233,522 (1,233,522) --------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $30,233 $2,428,234 $ 782,960 $ 2,665,674 Comprehensive income: Net income 1,302,377 Other comprehensive income, net of tax: Change in unrealized gains and losses on securities of $276,899, net of reclassification adjustment for net gains included in net income of $36,954 Total comprehensive income Common dividends declared, $.855 per share (519,561) Preferred dividends declared (1,342) Issuances of 4,618,092 common shares under stock-based compensation and dividend reinvestment plans, including related tax effects 18,472 56,598 Repurchases of 2,503,800 common shares (10,015) (2,315) (42,071) Conversions of 5,287 shares of preferred stock to 16,012 common shares (265) 64 201 --------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $29,968 $2,436,755 $ 837,444 $ 3,405,077 --------------------------------------------------------------------------------------------------- ------------------------------------------------ ----------------------------- ACCUMULATED OTHER COMPREHENSIVE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME (LOSS) TOTAL ------------------------------------------------ ----------------------------- BALANCE, JANUARY 1, 1998 $ 345,787 $ 6,158,260 Comprehensive income: Net income 1,070,681 Other comprehensive income, net of tax: Change in unrealized gains and losses on securities of $13,689, net of reclassification adjustment for net gains included in net income of $87,398 (73,709) (73,709) ---------- Total comprehensive income 996,972 Common dividends declared, $.97 per share (637,099) Preferred dividends declared (2,182) Issuances of 9,584,990 common shares under stock-based compensation and dividend reinvestment plans, including related tax effects 205,005 Repurchase of 10,000,000 common shares (347,708) Issuances of 21,620,168 common shares and 739,976 preferred shares pursuant to acquisition 639,660 Conversions of 18,022 shares of preferred stock to 54,590 common shares -- -------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 $ 272,078 $ 7,012,908 Comprehensive income: Net income 1,405,485 Other comprehensive income, net of tax: Change in unrealized gains and losses on securities of $(361,512), net of reclassification adjustment for net gains included in net income of $89,934 (451,446) (451,446) ---------- Total comprehensive income 954,039 Common dividends declared, $1.085 per share (669,699) Preferred dividends declared (1,749) Issuances of 6,471,813 common shares under stock-based compensation and dividend reinvestment plans, including related tax effects 138,231 Repurchases of 52,595,200 common shares (1,710,065) Issuance of 171,719 common shares pursuant to acquisition 4,068 Conversions of 117,302 shares of preferred stock to 355,312 common shares -- Stock split -- -------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $(179,368) $ 5,727,733 Comprehensive income: Net income 1,302,377 Other comprehensive income, net of tax: Change in unrealized gains and losses on securities of $276,899, net of reclassification adjustment for net gains included in net income of $36,954 239,945 239,945 ---------- Total comprehensive income 1,542,322 Common dividends declared, $.855 per share (519,561) Preferred dividends declared (1,342) Issuances of 4,618,092 common shares under stock-based compensation and dividend reinvestment plans, including related tax effects 75,070 Repurchases of 2,503,800 common shares (54,401) Conversions of 5,287 shares of preferred stock to 16,012 common shares -- -------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $ 60,577 $ 6,769,821 --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 25 NATIONAL CITY 2000 ANNUAL REPORT 28 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------- FOR THE CALENDAR YEAR ---------------------------------------------- (IN THOUSANDS) 2000 1999 1998 -------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 1,302,377 $ 1,405,485 $ 1,070,681 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses 286,795 249,674 201,400 Depreciation and amortization of properties and equipment 173,187 160,445 156,214 Amortization of intangibles and servicing rights 211,294 179,617 129,756 Amortization of premiums/discounts on securities and debt (6,513) (10,697) 1,717 Net securities gains (56,852) (138,360) (134,459) Other gains and losses, net (264,102) (294,898) (274,007) Originations and purchases of mortgage loans held for sale (22,004,534) (17,911,207) (19,468,702) Proceeds from sales of mortgage loans held for sale 21,139,085 18,610,242 14,642,818 Provision for deferred income taxes 276,473 298,978 230,093 Increase in accrued interest receivable (89,312) (73,122) (8,180) Increase (decrease) in accrued interest payable 179,995 104,464 (78,669) Merger charges -- -- 379,376 Net change in other assets/liabilities 31,719 (590,261) (726,225) -------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 1,179,612 1,990,360 (3,878,187) -------------------------------------------------------------------------------------------------------------- LENDING AND INVESTING ACTIVITIES Net decrease (increase) in federal funds sold, security resale agreements and other investments 18,678 361,191 (509,633) Purchases of available-for-sale securities (2,476,211) (5,140,076) (14,848,366) Proceeds from sales of available-for-sale securities 5,929,403 2,734,712 9,957,772 Proceeds from maturities and prepayments of available-for-sale securities 1,953,207 3,099,308 3,662,739 Net increase in loans (8,605,866) (2,793,683) (1,902,952) Proceeds from sales of loans 2,342,499 802,251 285,289 Proceeds from securitization of credit card receivables 600,000 -- -- Net increase in properties and equipment (134,359) (141,005) (230,156) (Acquisitions)/disposals, net -- (234,566) 157,632 -------------------------------------------------------------------------------------------------------------- Net cash used in lending and investing activities (372,649) (1,311,868) (3,427,675) -------------------------------------------------------------------------------------------------------------- DEPOSIT AND FINANCING ACTIVITIES Net increase (decrease) in Federal funds borrowed and security repurchase agreements 495,137 (4,244,803) 4,331,739 Net (decrease) increase in borrowed funds (8,868,886) 7,333,108 (2,177,174) Net increase (decrease) in deposits 5,190,112 (8,180,599) 3,079,540 Repayments of long-term debt and capital securities (6,372,300) (2,320,643) (1,770,596) Proceeds from issuances of long-term debt, net 9,476,838 7,672,035 5,045,431 Dividends paid (694,103) (668,491) (596,193) Issuances of common stock 75,070 138,231 205,005 Repurchases of common stock (54,401) (1,710,065) (347,708) -------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by deposit and financing activities (752,533) (1,981,227) 7,770,044 -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and demand balances due from banks 54,430 (1,302,735) 464,182 Cash and demand balances due from banks, January 1 3,480,756 4,783,491 4,319,309 -------------------------------------------------------------------------------------------------------------- CASH AND DEMAND BALANCES DUE FROM BANKS, DECEMBER 31 $ 3,535,186 $ 3,480,756 $ 4,783,491 -------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Interest paid $ 3,428,226 $ 2,805,805 $ 2,992,709 Income taxes paid 382,030 389,938 242,892 Common and preferred stock issued in purchase acquisitions -- 4,068 787,184 --------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 26 NATIONAL CITY 2000 ANNUAL REPORT 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF OPERATIONS National City Corporation ("National City" or "the Corporation") is a financial holding company headquartered in Cleveland, Ohio. National City operates banks and other financial services subsidiaries principally in Ohio, Michigan, Pennsylvania, Indiana, Kentucky and Illinois. Principal activities include commercial and retail banking, consumer finance, asset management, mortgage financing and servicing, and item processing. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of National City conform with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation. STATEMENT OF CASH FLOWS: Cash and due from banks are considered "cash and cash equivalents" for financial reporting purposes. BUSINESS COMBINATIONS: Business combinations accounted for under the purchase method of accounting include the results of operations of the acquired business from the date of acquisition. Net assets of the companies acquired are recorded at their estimated fair value as of the date of acquisition. Other business combinations accounted for under the pooling-of-interests method of accounting retroactively combine the assets, liabilities and stockholders' equity of the merged entity with the Corporation's respective accounts at recorded value. Prior period financial statements are restated to give effect to business combinations accounted for under this method. LOANS: Loans are generally reported at the principal amount outstanding, net of unearned income. Loans held for sale or securitization are valued at the lower of carrying cost or fair value. Interest income is recognized on an accrual basis. Loan origination fees, certain direct costs and unearned discounts are amortized as an adjustment to the yield over the term of the loan. Loan commitment fees are generally deferred and amortized into fee income on a straight-line basis over the commitment period. Other credit-related fees, including letter and line of credit fees and loan syndication fees, are recognized as fee income when earned. Commercial loans and leases and loans secured by real estate are designated as nonperforming when either principal or interest payments are 90 days or more past due, terms are renegotiated below market levels, or when an individual analysis of a borrower's creditworthiness indicates that a credit should be placed on nonperforming status, unless the loan or lease is sufficiently collateralized such that full repayment of both principal and interest is assured and is in the process of collection. When a loan is placed on nonperforming status, uncollected interest accrued in prior years is charged against the allowance for loan losses, while uncollected interest accrued in the current year is charged against interest income. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Commercial loans and leases and loans secured by real estate are generally charged off to the extent principal and interest due exceed the net realizable value of the collateral no later than when the loan becomes 180 days past due. Commercial and commercial real estate loans exceeding $1 million are evaluated for impairment in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, which requires an allowance to be established as a component of the allowance for loan losses when it is probable that all amounts due pursuant to the contractual terms of the loan will not be collected and the recorded investment in the loan exceeds its fair value. Fair value is measured using either the present value of expected future cash flows discounted at the loan's effective interest rate, the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. All loans considered impaired are included in nonperforming assets. Consumer loans are subject to mandatory charge-off at a specified delinquency date and are usually not classified as nonperforming prior to being charged off. Closed-end consumer loans, which include installment and student loans and automobile leases, are generally charged off in full no later than when the loan becomes 120 days past due. Open-end unsecured consumer loans, such as credit card loans, are generally charged off in full no later than when the loan becomes 150 days past due. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans, actual and anticipated loss experience, current economic events in specific industries and geographical areas, and other pertinent factors including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of economic trends, all of which may be 27 NATIONAL CITY 2000 ANNUAL REPORT 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED susceptible to significant change. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors. When loans are identified for sale or securitization, attributed loan loss allowance is reclassified as a direct reduction to the carrying value of the loans. The allowance for loan losses consists of an allocated component and an unallocated component. The components of allowance for loan losses represent an estimation done pursuant to either SFAS No. 5, Accounting for Contingencies, or SFAS No. 114. The allocated component of the allowance for loan losses reflects expected losses resulting from analysis developed through specific credit allocations for individual loans and historical loss experience for each loan category. The specific credit allocations are based on a regular analysis of all loans over a fixed-dollar amount where the internal credit rating is at or below a predetermined classification. The historical loan loss element is determined statistically using a loss migration analysis that examines loss experience and the related internal gradings of loans charged off. The loss migration analysis is performed quarterly and loss factors are updated regularly based on actual experience. The allocated component of the allowance for loan losses also includes management's determination of the amounts necessary for concentrations and changes in portfolio mix and volume. The unallocated portion of the allowance is determined based on management's assessment of general economic conditions, as well as specific economic factors in the individual markets in which National City operates. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet manifested themselves in the Corporation's historical loss factors used to determine the allocated component of the allowance, and it recognizes knowledge of the portfolio may be incomplete. TRADING ACCOUNT ASSETS AND SECURITIES: Assets purchased with the intention of recognizing short-term profits are considered trading assets, carried at fair value and included in short-term investments. Realized and unrealized gains and losses are included in other income. Interest on trading account assets is recorded in interest income. Securities are classified as held to maturity when management has the positive intent and ability to hold the securities to maturity. Securities held to maturity, when present, are carried at amortized cost. Securities not classified as held to maturity or trading are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately through accumulated other comprehensive income, net of tax. Interest and dividends on securities, including amortization of premiums and accretion of discounts, are included in interest income. The adjusted cost of specific securities sold is used to compute gains or losses on sales. VENTURE CAPITAL INVESTMENTS: Venture capital investments are included in other assets. These investments are carried at estimated fair value with changes in fair value recognized in other noninterest income. The fair values of publicly traded investments are determined using quoted market prices. Investments that are not publicly traded are carried at cost together with any other-than-temporary valuation adjustments determined appropriate by management. This adjusted cost basis approximates fair value. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. Securities, generally U.S. government and Federal agency securities, pledged as collateral under these financing arrangements cannot be sold or repledged by the secured party. The fair value of collateral either received from or provided to a third party is continually monitored and additional collateral obtained or requested to be returned to the Corporation as deemed appropriate. INTANGIBLE ASSETS: Goodwill and other intangible assets, net of accumulated amortization, are included in other assets in the Consolidated Balance Sheets and totaled $1,124.0 million and $77.3 million, respectively, at December 31, 2000, and $1,210.4 million and $96.0 million, respectively, at December 31, 1999. Goodwill, which represents the excess of the cost of an acquisition over the fair value of the net assets acquired, is amortized on a straight-line basis over varying periods generally not exceeding 25 years. Certain goodwill related to purchase acquisitions at the Corporation's 87%-owned item processing subsidiary, National Processing, Inc., is amortized over 40 years. Other intangibles are amortized on a straight-line basis over varying periods not exceeding 10 years. When certain events or other changes occur, management evaluates goodwill and other intangible assets for recoverability. In circumstances that indicate the carrying value of these assets may not be recoverable, an impairment charge is recorded. MORTGAGE SERVICING ASSETS: The Corporation recognizes rights to service mortgage loans as separate assets. The total cost of loans sold is allocated between loans and servicing rights based on the relative fair values of each. Purchased mortgaged servicing rights are initially recorded at cost. All servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, and deferred hedge gains and losses, or fair value. Servicing rights are amortized in proportion to estimated net servicing income. Hedge gains and losses are generated from off-balance-sheet derivative instruments which are used to protect the value of the servicing assets in a falling interest rate environment. The fair value associated with these derivative instruments is considered when 28 NATIONAL CITY 2000 ANNUAL REPORT 31 evaluating the servicing assets for impairment. The fair value of the servicing rights is determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs and other economic factors. As of December 31, 2000 and 1999, mortgage servicing assets with a carrying value of $999.7 million and $785.0 million, respectively, were included in other assets. DEPRECIABLE ASSETS: Properties and equipment are stated at cost less accumulated depreciation and amortization. Buildings and equipment, including costs related to developing or obtaining software for internal use, are depreciated on a straight-line basis over their useful lives. Leasehold improvements are amortized over the lives of the leases. Maintenance and repairs are charged to expense as incurred, while improvements which extend the useful life are capitalized and depreciated over the remaining life. Long-lived assets to be held and those to be disposed of and certain intangibles are evaluated for impairment using the guidance provided by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The provisions of this statement establish when an impairment loss should be recognized and how it should be measured. DERIVATIVE FINANCIAL INSTRUMENTS: Interest Rate Risk Management: As part of managing the Corporation's interest rate risk, a variety of derivative financial instruments are used to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities or on future cash flows. These derivative financial instruments consist primarily of interest rate swaps, including callable swaps, interest rate caps and floors, and interest rate futures. The derivative instruments used to manage interest rate risk are linked with a specific asset or liability or a group of related assets or liabilities or cash flows at the inception of the derivative contract. Net amounts payable or receivable from these derivative contracts are accrued as adjustments to interest income or expense of the hedged asset or liability. Realized gains and losses on contracts, either settled or terminated, are deferred and are recorded as either an adjustment to the carrying value of the related on-balance-sheet asset or liability or in other assets or other liabilities. Deferred amounts are amortized into interest income or expense over either the remaining original life of the derivative instrument or the expected life of the associated asset or liability. Unrealized gains or losses on these contracts are not recognized on the balance sheet, except for those contracts linked to available-for-sale securities, which are carried at fair value with changes in fair value, net of interest accruals, recorded as other comprehensive income within stockholders' equity, net of tax. Mortgage Servicing Asset Risk Management: Net cash flows related to derivative financial instruments used to hedge the value of mortgage servicing assets are recognized as adjustments to the carrying value of the mortgage servicing assets and are amortized over the life of the mortgage servicing portfolio. Unrealized gains and losses are not recognized on the balance sheet but are considered when evaluating the recoverability of the servicing assets. Trading: Derivatives not used in an interest rate risk or mortgage servicing asset risk hedging strategy are considered trading derivatives and are carried at fair value with changes in fair value (including payments and receipts) included in other income. These transactions are executed primarily with the Corporation's customers to facilitate their interest rate and foreign currency risk management strategies. Derivative instruments used for trading purposes typically include interest rate swaps, including callable swaps, interest rate caps and floors, and interest rate and foreign exchange futures, forwards and options. STOCK-BASED COMPENSATION: The Corporation's stock-based compensation plans are accounted for based on the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation expense for stock options is generally not recognized if the exercise price of the option equals or exceeds the fair market value of the stock on the date of grant. Compensation expense for restricted share awards is recognized over the period of service, usually the restricted period, based on the fair value of the stock on the date of grant. INCOME TAXES: The Corporation and its subsidiaries file a consolidated Federal income tax return. The provision for income taxes is based upon income in the financial statements, rather than amounts reported on the Corporation's income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. TREASURY STOCK: Acquisitions of treasury stock are recorded on the par value method, which requires the cash paid to be allocated to common or preferred stock, capital surplus and retained earnings. ASSET SECURITIZATION: Asset securitization involves the sale, generally to a trust, of a pool of loan receivables. The Corporation continues to own the accounts which generate the loan receivables. In addition, the Corporation also sells the rights to new loan receivables, including most fees generated by and payments received from the accounts. The trust sells undivided interests in the trust to investors, while the Corporation retains the remaining undivided interest. The senior classes of the asset-backed securities receive an AAA or A credit rating at the time of issuance. These ratings are generally achieved through the creation and sale of lower-rated subordinated classes 29 NATIONAL CITY 2000 ANNUAL REPORT 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED of asset-backed securities. The Corporation continues to service the accounts and receives a servicing fee. During the revolving period, which generally approximates 48 months, the trust is not required to make principal payments to the investors. Instead, the trust uses principal payments received on the accounts to purchase new loan receivables. Therefore, the principal dollar amount of the investor's undivided interest remains unchanged. Once the revolving period ends, the trust distributes principal payments to the investors according to the terms of the transaction. Distribution of principal to the investors may begin earlier if the average annualized yield on the receivables securitized (generally including interest income, interchange and other fees, less principal credit losses during the period) for three consecutive months drops below a minimum yield (generally equal to the sum of the coupon rate payable to investors plus contractual servicing fees), or certain other events occur. In accordance with SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, gains are recognized in income at the time of initial sale and each subsequent sale of loan receivables in an asset securitization. 2. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, requires all derivative instruments to be carried at fair value on the balance sheet. This requirement is in contrast to previous accounting guidance, which does not require unrealized gains and losses on derivatives used for hedging purposes to be recorded in the financial statements. The new statement does allow hedge accounting treatment for derivatives used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be applied. Hedge accounting treatment provides for changes in fair value or cash flows of both the derivative and the hedged item to be recognized in earnings in the same period. SFAS No. 133 does not change the accounting for those derivative instruments not designated in a hedge accounting relationship, considered trading derivatives, for which fair value changes are recorded through earnings as they occur. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under SFAS No. 133, while derivative instruments used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Fair value hedges are accounted for by recording the fair value related to the risk being hedged of both the derivative instrument and the hedged asset or liability on the balance sheet with a corresponding offset recorded in the income statement. Cash flow hedges are accounted for by recording only the value of the derivative instrument on the balance sheet as either an asset or liability with a corresponding offset recorded in other comprehensive income within stockholders' equity, net of tax. Amounts are reclassified from other comprehensive income to the income statement in the period the hedged cash flow occurs. Under both scenarios, derivative gains and losses not considered effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement. As discussed in Note 22 to the Consolidated Financial Statements, the Corporation uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities or on future cash flows. The fair value of these derivative instruments is currently not on the balance sheet. On January 1, 2001, the Corporation adopted SFAS No. 133, and at that time, designated anew the derivative instruments used for risk management into hedging relationships in accordance with the requirements of the new standard. Derivative instruments used to hedge changes in the fair value of assets and liabilities due to changes in interest rates or other factors were designated in fair value hedge relationships. Derivative instruments used to hedge the variability of forecasted cash flows attributable to a specific risk, generally interest rate risk, were designated in cash flow hedge relationships. Also on January 1, 2001, after-tax transition amounts associated with establishing the fair values of the derivative instruments and hedged items on the balance sheet of $5.1 million and $26.0 million were recorded as reductions of net income and other comprehensive income, respectively. The transition adjustments will be presented as cumulative effect adjustments, as described in Accounting Principles Board Opinion No. 20, Accounting Changes, in the 2001 Consolidated Financial Statements. The transition amounts were determined based on the interpretive guidance issued by the Financial Accounting Standards Board to date. The FASB continues to issue interpretive guidance which could require changes in National City's application of the standard and adjustments to the transition amounts. SFAS No. 133, as applied to the Corporation's risk management strategies, may increase or decrease reported net income and stockholders' equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows or economic risk. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES: SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in September 2000 and replaces SFAS No. 125. The guidance in SFAS No. 140, while not changing most of the guidance originally issued in SFAS No. 125, revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain additional disclosures related to transferred assets. 30 NATIONAL CITY 2000 ANNUAL REPORT 33 Certain provisions of the statement related to the recognition, reclassification and disclosure of collateral, as well as the disclosure of securitization transactions, became effective for the Corporation for 2000 year-end reporting. Other provisions related to the transfer and servicing of financial assets and extinguishments of liabilities are effective for transactions occurring after March 31, 2001. Based on current circumstances and after consideration of planned revisions to existing securitization agreements to conform them to the requirements of SFAS No. 140, management believes the application of the new rules will not have a material impact on the Corporation's results of operations, financial position or liquidity. 3. MERGERS AND ACQUISITIONS On November 1, 1999, National City acquired the retail, wholesale and telemarketing production units of AccuBanc Mortgage Corporation, a single-family residential mortgage lender headquartered in Dallas, Texas, for $42.3 million. Goodwill of $40.1 million was recorded at the time of acquisition and is being amortized over 20 years. On August 31, 1999, National City acquired First Franklin Financial Companies, Inc., a wholesale originator of nonconforming residential mortgage loans headquartered in San Jose, California, for $266.1 million. First Franklin was accounted for as a purchase and included in the Consolidated Statements of Income from the date of acquisition. Goodwill of $233.2 million was recorded in connection with the acquisition and is being amortized over 20 years. On March 31, 1998, National City merged with First of America Bank Corporation, a $21 billion asset bank holding company headquartered in Kalamazoo, Michigan, in a transaction accounted for as a pooling of interests. National City issued 209.8 million shares of common stock to the shareholders of First of America based upon an exchange ratio of 2.4 shares of National City common stock for each outstanding share of First of America common stock. The historical Consolidated Financial Statements have been restated to reflect this transaction. On March 30, 1998, National City acquired Fort Wayne National Corporation, a $3 billion asset bank holding company headquartered in Fort Wayne, Indiana, in a transaction accounted for as a purchase. Upon acquisition, each share of Fort Wayne common stock outstanding was converted into 1.5 shares of National City common stock. A total of 21.6 million shares of National City common stock were issued. National City also issued .7 million shares of 6% Cumulative Convertible Preferred Stock, Series 1 in exchange for all of the outstanding shares of Fort Wayne's 6% Cumulative Convertible Class B Preferred Stock. Goodwill of $571.0 million and a core deposit intangible asset of $71.9 million were recorded in connection with the acquisition and are being amortized on a straight-line basis over 25 and seven years, respectively. In 1998, pretax merger charges totaling $379.4 million, or $261.9 million after tax, were incurred in connection with the First of America and Fort Wayne transactions. 4. DIVESTITURES AND REALIGNMENT CHARGES During 2000, National City divested certain assets as part of a balance sheet restructuring initiative intended to improve asset returns and capital position, reduce reliance on purchased funding and lessen interest rate sensitivity. These transactions included the sale of $3.7 billion of fixed-rate debt securities, $2.0 billion of thin-spread student loans, and $1.0 billion of low-spread adjustable rate mortgage loans. Losses totaling $56.3 million pretax, or $36.6 million after tax, were incurred related to the disposition of these securities and are included in net securities gains. A pretax gain of $74.2 million, or $48.2 million after tax, was recognized related to the sale of the student loans and is included in other noninterest income. The sale of the adjustable-rate mortgage loans generated a pretax gain of $10.6 million, or $6.9 million after tax, which is included in mortgage banking revenue. A portion of the debt securities, having a principal balance of $1.1 billion, were sold to an unconsolidated qualified special purpose entity ("QSPE"). Through a receive-fixed interest rate swap, the Corporation receives the spread between the yield earned on the debt securities and the commercial paper funding cost. The interest rate swap is accounted for as a trading derivative. The Corporation also provides certain services for which fees are earned. These fees are included in other fee income. As of December 31, 2000, the QSPE held $2.0 billion of high grade fixed- and variable-rate securities. On December 15, 2000, National City announced that, as part of a realignment of the consumer finance business, it was closing its 69 Loan Zone(R) retail stores, exiting the wholesale loan origination business of Altegra Credit Company, a wholly-owned Pittsburgh-based subsidiary, and exiting the automobile leasing business. Charges recorded in connection with this realignment totaled $44.0 million pretax, or $28.6 million after tax, and consisted of $26.0 million for residual value write-downs on the Corporation's automobile lease portfolio, $3.7 million for severance costs, $9.0 million for goodwill impairment, $2.9 million for facilities closures and lease obligations, and $2.4 million for fixed asset impairment and other costs. The employees affected by this realignment were individually notified of their status prior to December 31, 2000. These charges are included in other noninterest expense. Also in 2000, National Processing elected to divest of a small operating unit and recorded a pretax charge of $7.1 million for goodwill and fixed-asset impairment. The following summarizes certain asset divestitures included in the Corporation's 1999 results: National City sold its 20% ownership interest in Electronic Payment Services, Inc. ("EPS"), a provider of transaction 31 NATIONAL CITY 2000 ANNUAL REPORT 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED processing services, to Concord EFS, Inc. ("Concord") and recognized a pretax gain of $95.7 million, or $62.2 million after tax. The gain on the sale of EPS is included in other noninterest income. The transaction was effected by exchanging common shares of EPS for shares of unregistered Concord common stock. The shares were subsequently registered by Concord and National City sold its holdings in Concord in the open market and recognized a pretax gain of $32.1 million, or $20.8 million after tax, which is included in net securities gains. National Processing sold its freight payables, payables outsourcing, remittance and merchant check services business lines. As a result, National City recognized a loss, net of minority interest, of $60.8 million pretax, or $61.2 million after tax. The larger after-tax loss was the result of nondeductible goodwill. The pretax impact of the National Processing business line divestitures is included in other noninterest income. National City also sold its interest in Stored Value Systems, Inc., a subsidiary that had been involved in the development of smart card technology, for a gain of $6.1 million pretax, or $4.0 million after tax. The gain is included in other noninterest income. 5. ASSET SECURITIZATIONS During 2000, the Corporation sold $600 million of credit card receivables in a securitization transaction and recognized a pretax gain of $27.2 million, which was recorded in other noninterest income, and was comprised of $25.0 million, representing the attributed allowance for loan losses and $2.2 million, reflecting the Corporation's recognition of its retained interest in the cash flows of the trust. In the securitization, the Corporation retained servicing responsibilities and subordinated interests. The Corporation receives annual servicing fees approximating 2% of the outstanding credit card balances and the rights to future cash flows arising after the investors in the securitization trust have received the return for which they contracted. The investors and the securitization trusts have no recourse to the Corporation's other assets for failure of debtors to pay when due. The Corporation's retained interests are subordinate to investor's interests. Their value is subject to credit, prepayment, and interest rate risks on the transferred financial assets. The retained interest is included in other assets. Transaction costs of $3.0 million incurred in 2000 by the Corporation were deferred and will be amortized over the five-year term of the trust as a reduction to card-related fee income. Card- related fee income also includes other fees received by the Corporation for the servicing of securitized and portfolio loans. As of December 31, 2000, credit card portfolio loans of $425.0 million were identified for securitization, and accordingly, the balances, along with the attributable $17.1 million allowance for loan losses, were classified as loans held for sale or securitization. The Corporation uses certain assumptions and estimates in determining the fair value allocated to the retained interest at the time of initial sale and each subsequent sale in accordance with SFAS No. 125. These assumptions and estimates include projections concerning the annual percentage rates charged to customers, charge-off experience, loan repayment rates, the cost of funds, and discount rates commensurate with the risks involved. These assumptions are reviewed periodically by management. If these assumptions change, the related asset and income would be affected. For the credit card securitization completed during 2000, the fair value assigned to the retained interest at the date of securitization was $2.2 million. Key economic assumptions used in measuring the retained interest at this date were as follows: a monthly payment rate of 18.08%, a weighted average life of 5.5 months, expected annual credit losses of 4.17%, a discount rate of 15.0%, a yield of 14.43% and a variable coupon rate to investors of 6.86%. At December 31, 2000, key economic assumptions and the sensitivity of the current fair value of residual cash flows on credit card receivables to immediate 10% and 20% adverse changes in those assumptions follow:
------------------------------------------------------------ (DOLLARS IN MILLIONS) ------------------------------------------------------------ Carrying amount/fair value of retained interests $4.5 Weighted-average life (in months) 4.8 ------------------------------------------------------------ PREPAYMENT SPEED ASSUMPTION (MONTHLY RATE) 17.84% Decline in fair value of 10% adverse change $.4 Decline in fair value of 20% adverse change .7 ------------------------------------------------------------ EXPECTED CREDIT LOSSES (ANNUAL RATE) 4.09% Decline in fair value of 10% adverse change $1.0 Decline in fair value of 20% adverse change 2.1 ------------------------------------------------------------ RESIDUAL CASH FLOWS DISCOUNT RATE (ANNUAL RATE) 15.0% Decline in fair value of 10% adverse change $.02 Decline in fair value of 20% adverse change .04 ------------------------------------------------------------ INTEREST RATES ON VARIABLE CONTRACTS (ANNUAL RATE) 14.80% Decline in fair value of 10% adverse change $3.7 Decline in fair value of 20% adverse change 7.5 ------------------------------------------------------------
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. 32 NATIONAL CITY 2000 ANNUAL REPORT 35 Certain cash flows received from and paid to securitization trusts follow:
----------------------------------------------------------------- FOR THE CALENDAR YEAR ----------------------------------------------------------------- (IN MILLIONS) 2000 1999 ----------------------------------------------------------------- Proceeds from new securitizations $600.0 $ -- Proceeds from collections reinvested in previous credit card securitizations 927.2 1,024.5 Servicing fees received 9.1 11.8 Other cash flows received on retained interests 23.0 40.3 Purchases of delinquent or foreclosed assets -- -- Servicing advances -- -- Repayments of servicing advances -- -- -----------------------------------------------------------------
At December 31, 2000, investor principal in securitized loan receivables scheduled to amortize into the Corporation's loan receivables in future years or mature are $30 million in 2001 and $600 million after 2005. These amounts are based upon estimated amortization periods, which are subject to change. The average annualized yield and the minimum yield for the three-month period ended December 31, 2000, presented on a cash basis, were 13.25% and 7.86%, respectively, and included various credit card and other fees as specified in the securitization agreements. Quantitative information about delinquencies, net credit losses, and components of managed credit card loans follows. This information excludes certain unsecured personal and business lines of credit included in the caption "credit card loans" presented elsewhere in this annual report.
--------------------------------------------------------------- (DOLLARS IN MILLIONS) 2000 1999 1998 --------------------------------------------------------------- Average credit card loans: Loans held in portfolio $1,611.3 $1,401.9 $1,336.6 Loans securitized 477.9 601.3 855.8 --------------------------------------------------------------- Total managed loans $2,089.2 $2,003.2 $2,192.4 --------------------------------------------------------------- Year-end loans: Loans held in portfolio $1,243.5 $1,618.1 $1,310.3 Loans held for securitization 407.9 -- -- Loans securitized 630.0 500.0 770.0 --------------------------------------------------------------- Total managed loans $2,281.4 $2,118.1 $2,080.3 --------------------------------------------------------------- Net credit losses $ 84.9 $ 96.9 $ 115.1 Net credit losses to average managed loans 4.06% 4.84% 5.25% Delinquencies (30 days or more) to year-end managed loans 3.57% 3.80% 4.60% ---------------------------------------------------------------
6. LOANS AND ALLOWANCE FOR LOAN LOSSES Total loans outstanding were recorded net of unearned income of $706.2 million in 2000 and $667.9 million in 1999. Activity in the allowance for loan losses follows:
----------------------------------------------------------------- FOR THE CALENDAR YEAR ----------------------------------------------------------------- (IN THOUSANDS) 2000 1999 1998 ----------------------------------------------------------------- BALANCE AT BEGINNING OF YEAR $ 970,463 $ 970,243 $ 941,874 Provision 286,795 249,674 201,400 Allowance related to loans acquired (sold or securitized) (42,421) 45 27,501 Charge-offs (407,998) (387,779) (321,385) Recoveries 121,753 138,280 120,853 ----------------------------------------------------------------- Net charge-offs (286,245) (249,499) (200,532) ----------------------------------------------------------------- BALANCE AT END OF YEAR $ 928,592 $ 970,463 $ 970,243 -----------------------------------------------------------------
In 2000, $42.4 million of the allowance was transferred to the bases of portfolio loans sold or securitized during the year and additional loans held for securitization in early 2001. The Financial Review section provides detail regarding nonperforming loans. At December 31, 2000 and 1999, impaired loans totaled $85.4 million and $24.9 million, respectively. Average impaired loans for 2000, 1999 and 1998 totaled $59.4 million, $30.7 million and $21.5 million, respectively. All impaired loans are included in nonperforming loans. The majority of the loans deemed impaired were evaluated using the fair value of the collateral as the measurement method. The related allowance allocated to impaired loans for 2000 and 1999 was $45.1 million and $10.9 million, respectively. All impaired loans at December 31, 2000 and 1999 had an associated allowance. The contractual interest due and actual interest recognized on nonperforming loans, including impaired loans, for 2000 was $33.1 million and $9.8 million, respectively, compared to $27.5 million and $11.4 million, respectively, for 1999, and $44.7 million and $10.2 million, respectively, for 1998. 7. SECURITIES Securities available for sale follow:
------------------------------------------------------------------------ DECEMBER 31, 2000 ------------------------------------------------------------------------ (IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------------------------------ U.S. Treasury and Federal agency debentures $1,124,766 $ 8,052 $ 6,041 $1,126,777 Mortgage-backed securities 5,514,642 16,578 55,079 5,476,141 Asset-backed and corporate debt securities 1,440,377 2,149 7,760 1,434,766 States and political subdivisions 767,649 30,167 415 797,401 Other 963,903 107,093 1,548 1,069,448 ------------------------------------------------------------------------ TOTAL SECURITIES $9,811,337 $164,039 $70,843 $9,904,533 ------------------------------------------------------------------------
33 NATIONAL CITY 2000 ANNUAL REPORT 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
-------------------------------------------------------------------------- DECEMBER 31, 1999 -------------------------------------------------------------------------- (IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------------------------------------------------------------------------- U.S. Treasury and Federal agency debentures $ 1,171,397 $ 137 $ 52,026 $ 1,119,508 Mortgage-backed securities 9,629,200 13,638 291,041 9,351,797 Asset-backed and corporate debt securities 2,633,335 386 33,593 2,600,128 States and political subdivisions 825,941 10,933 8,064 828,810 Other 920,376 84,829 1,105 1,004,100 -------------------------------------------------------------------------- TOTAL SECURITIES $15,180,249 $109,923 $385,829 $14,904,343 --------------------------------------------------------------------------
Other securities includes the Corporation's internally-managed equity portfolio of bank and thrift common stock investments, which had an amortized cost and fair value of $569.7 million and $668.8 million, respectively, at December 31, 2000, and $486.5 million and $550.9 million, respectively, at December 31, 1999. The following table presents the amortized cost, fair value and weighted-average yield of securities at December 31, 2000 by maturity:
------------------------------------------------------------------------------------ WEIGHTED WITHIN 1 TO 5 5 TO 10 AFTER 10 AVERAGE (DOLLARS IN MILLIONS) 1 YEAR YEARS YEARS YEARS TOTAL YIELD(a) ------------------------------------------------------------------------------------ U.S. Treasury and Federal agency debentures $ 30 $ 567 $ 528 $ -- $1,125 5.29% Mortgage-backed securities 14 2,265 3,195 41 5,515 6.32 Asset-backed and corporate debt securities 508 701 191 40 1,440 6.88 States and political subdivisions 30 108 438 191 767 8.35 Other 76 -- -- 888 964 5.92 ------------------------------------------------------------------------------------ AMORTIZED COST $658 $3,641 $4,352 $1,160 $9,811 6.41% ------------------------------------------------------------------------------------ FAIR VALUE $664 $3,634 $4,341 $1,265 $9,904 ------------------------------------------------------------------------------------ Weighted Average Yield(a) 4.13% 6.39% 6.37% 7.67% 6.41% ------------------------------------------------------------------------------------
(a) Yield on debt securities only; equity securities excluded. Weighted-average yields are based on amortized cost. Yields on tax-exempt securities are calculated on a tax-equivalent basis using the marginal Federal income tax rate of 35%. Mortgage-backed securities are assigned to maturity categories based on their estimated average lives. Equity securities are included in other securities in the "after 10 years" category. At December 31, 2000, the carrying value of securities pledged to secure public and trust deposits, trading account liabilities, U.S. Treasury demand notes and security repurchase agreements totaled $7.3 billion. At December 31, 2000, there were no securities of a single issuer, other than U.S. Treasury and other U.S. government agency securities, which exceeded 10% of stockholders' equity. In 2000, 1999 and 1998, gross securities gains of $124.3 million, $148.5 million and $177.9 million and gross securities losses of $67.4 million, $10.1 million and $43.4 million were recognized, respectively. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. As such, the derived fair value estimates cannot be substantiated by comparison to independent markets and, further, may not be realizable in an immediate settlement of the instruments. The following table presents the estimates of fair value of financial instruments at December 31, 2000 and 1999. Excluded are certain items not defined as financial instruments including non-financial assets, intangibles and future business growth, as well as certain liabilities such as obligations for pension and other postretirement benefits, deferred compensation arrangements and leases. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying value of the Corporation. 34 NATIONAL CITY 2000 ANNUAL REPORT 37
-------------------------------------------------------------------- 2000 1999 ------------------- ------------------- CARRYING FAIR CARRYING FAIR (IN MILLIONS) VALUE VALUE VALUE VALUE -------------------------------------------------------------------- FINANCIAL ASSETS Cash and cash equivalents $ 5,081 $ 5,081 $ 5,074 $ 5,074 Loans held for sale or securitization 3,439 3,456 2,731 2,731 Loans, net of allowance for loan losses 64,675 65,099 59,233 59,277 Securities 9,904 9,904 14,904 14,904 Other 384 384 253 253 -------------------------------------------------------------------- FINANCIAL LIABILITIES Deposits $(55,256) $(55,530) $(50,066) $(50,055) Short-term borrowings (6,581) (6,581) (14,955) (14,955) Long-term debt (18,145) (17,932) (15,038) (14,848) Other (749) (749) (572) (572) -------------------------------------------------------------------- OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Interest rate swaps $ (24) $ 24 $ (6) $ (285) Interest rate caps, floors and futures 4 9 12 31 Trading account derivatives 34 34 17 17 Commitments to extend credit (48) (48) (33) (33) Standby letters of credit (7) (7) (7) (7) --------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of each class of financial instrument: CASH AND CASH EQUIVALENTS: Due to their short-term nature, the carrying amounts reported in the balance sheet approximate fair value for these assets. For purposes of this disclosure only, cash equivalents include Federal funds sold, security resale agreements, accrued interest receivable and other short-term investments. LOANS AND LOANS HELD FOR SALE OR SECURITIZATION: For performing variable rate loans that reprice frequently and mortgage loans held for sale, estimated fair values are based on carrying values. The fair value of credit card loans held for securitization is based on the principal amount of the loans to be securitized. The fair values for all other loans are estimated using a discounted cash flow calculation that applies interest rates used to price new, similar loans to a schedule of aggregated expected monthly maturities, adjusted for market and credit risks. SECURITIES: The fair values of securities are based primarily upon quoted market prices. DEPOSITS: The fair values disclosed for demand deposits (e.g., interest and noninterest bearing checking, savings, and certain types of money market accounts) are equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. SHORT-TERM BORROWINGS: The carrying amounts of Federal funds borrowed, security repurchase agreements, commercial paper, and other short-term borrowings approximate their fair values. LONG-TERM DEBT: The fair values of long-term borrowings (other than deposits) are based on quoted market prices, where available, or are estimated using discounted cash flow analyses based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: The amounts shown under carrying value represent accruals or deferred income (fees) arising from the related off-balance-sheet financial instruments. Fair values for off-balance-sheet instruments (futures, swaps, forwards, options, guarantees and lending commitments) are based on quoted market prices (futures); current settlement values (financial forwards); quoted market prices of comparable instruments; fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing (guarantees, loan commitments); or, if there are no relevant comparables, on pricing models or formulas using current assumptions (interest rate swaps and options). 9. PROPERTIES, EQUIPMENT AND LEASES Properties and equipment follow:
----------------------------------------------------------------- DECEMBER 31 ----------------------------------------------------------------- (IN THOUSANDS) 2000 1999 ----------------------------------------------------------------- Land $ 138,235 $ 150,955 Buildings and leasehold improvements 939,835 994,953 Equipment 1,389,655 1,334,675 ----------------------------------------------------------------- 2,467,725 2,480,583 Less accumulated depreciation and amortization 1,396,088 1,352,603 ----------------------------------------------------------------- NET PROPERTIES AND EQUIPMENT $1,071,637 $1,127,980 -----------------------------------------------------------------
The Corporation and certain of its subsidiary banks occupy their respective headquarters offices and other facilities under long-term operating leases and, in addition, lease certain data processing equipment. The aggregate minimum annual rental commitments under these leases total approximately $101.7 million in 2001, $91.9 million in 2002, $81.3 million in 2003, $70.5 million in 2004, $61.8 million in 2005 and $269.0 million thereafter. Total expense recorded under all operating leases in 2000, 1999 and 1998 was $120.9 million, $103.2 million and $104.2 million, respectively. 35 NATIONAL CITY 2000 ANNUAL REPORT 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 10. FEDERAL FUNDS BORROWED AND SECURITY REPURCHASE AGREEMENTS Detail of Federal funds borrowed and security repurchase agreements follows:
--------------------------------------------------------------- (DOLLARS IN MILLIONS) 2000 1999 1998 --------------------------------------------------------------- Balance at December 31: Federal funds borrowed $1,786 $ 953 $4,303 Security repurchase agreements 3,892 4,230 5,124 Maximum outstanding at any month-end: Federal funds borrowed $4,474 $4,949 $4,303 Security repurchase agreements 4,136 5,185 5,435 Daily average amount outstanding: Federal funds borrowed $3,043 $3,258 $3,124 Security repurchase agreements 3,846 4,821 4,118 Weighted daily average interest rate: Federal funds borrowed 6.43% 5.10% 5.37% Security repurchase agreements 5.21 4.19 4.52 Weighted daily interest rate for amounts outstanding at December 31: Federal funds borrowed 5.82% 3.79% 4.78% Security repurchase agreements 5.29 4.19 4.18 ---------------------------------------------------------------
Federal funds borrowed and security repurchase agreements generally mature within 30 days of the transaction date. 11. BORROWED FUNDS Detail of borrowed funds follows:
---------------------------------------------------------------- DECEMBER 31 ---------------------------------------------------------------- (IN THOUSANDS) 2000 1999 ---------------------------------------------------------------- U.S. Treasury demand notes $413,947 $9,228,154 Commercial paper 368,619 313,396 Other 121,159 231,061 ---------------------------------------------------------------- TOTAL BORROWED FUNDS $903,725 $9,772,611 ----------------------------------------------------------------
U.S. Treasury demand notes represent secured borrowings from the U.S. Treasury. These borrowings are collateralized by qualifying securities and loans. The funds are placed with the banks at the discretion of the U.S. Treasury and may be called at any time. 12. LONG-TERM DEBT The composition of long-term debt, net of unamortized discount, follows:
----------------------------------------------------------------- DECEMBER 31 ----------------------------------------------------------------- (Dollars in Thousands) 2000 1999 ----------------------------------------------------------------- 6.50% subordinated notes due 2000 $ -- $ 99,983 8.50% subordinated notes due 2002 99,967 99,943 6.625% subordinated notes due 2004 249,590 249,460 7.75% subordinated notes due 2004 199,082 198,825 8.50% subordinated notes due 2004 149,611 149,484 7.20% subordinated notes due 2005 249,872 249,843 5.75% subordinated notes due 2009 299,071 298,956 6.875% subordinated notes due 2019 698,870 698,809 Other 10,000 10,000 ----------------------------------------------------------------- TOTAL PARENT COMPANY 1,956,063 2,055,303 ----------------------------------------------------------------- 6.50% subordinated notes due 2003 199,825 199,750 7.25% subordinated notes due 2010 223,435 223,271 6.30% subordinated notes due 2011 200,000 200,000 7.25% subordinated notes due 2011 197,869 197,672 6.25% subordinated notes due 2011 297,627 297,394 Other -- 1,142 ----------------------------------------------------------------- TOTAL SUBSIDIARY 1,118,756 1,119,229 ----------------------------------------------------------------- TOTAL LONG-TERM DEBT QUALIFYING FOR TIER 2 CAPITAL 3,074,819 3,174,532 Senior bank notes 11,654,335 8,918,601 Federal Home Loan Bank advances 3,231,246 2,757,648 Other 4,400 7,233 ----------------------------------------------------------------- TOTAL OTHER LONG-TERM DEBT 14,889,981 11,683,482 ----------------------------------------------------------------- TOTAL LONG-TERM DEBT $17,964,800 $14,858,014 -----------------------------------------------------------------
All of the subordinated notes of the parent and bank subsidiaries pay interest semi-annually and may not be redeemed prior to maturity. Long-term advances from the Federal Home Loan Bank (FHLB) are at fixed and variable rates and have maturities ranging from 2001 to 2023. The weighted average interest rate of the advances as of December 31, 2000 and 1999 was 6.59% and 6.14%, respectively. Advances from the FHLB are collateralized by qualifying residential mortgage loans. The senior bank notes are at fixed and variable rates and have maturities ranging from 2001 to 2078. The weighted average interest rate of the notes as of December 31, 2000 and 1999 was 6.73% and 6.08%, respectively. A credit agreement dated March 14, 1997, with a group of unaffiliated banks, allows the Corporation to borrow up to $350 million until February 1, 2001, with a provision to extend the expiration date under certain circumstances. The Corporation pays an annual facility fee of 10 basis points on the amount of the line. There were no borrowings outstanding under this agreement at December 31, 2000. Long-term debt maturities for the next five years are as follows: $6,414.1 million in 2001; $3,396.2 million in 2002; $1,527.7 million in 2003; $1,325.6 million in 2004, $1,407.3 million in 2005 and $3,906.0 million thereafter. 36 NATIONAL CITY 2000 ANNUAL REPORT 39 13. CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY DEBENTURES OF THE CORPORATION
--------------------------------------------------------------- DECEMBER 31 --------------------------------------------------------------- (DOLLARS IN THOUSANDS) 2000 1999 --------------------------------------------------------------- 8.12% capital securities of First of America Capital Trust I due January 31, 2027 $150,000 $150,000 9.85% capital securities of Fort Wayne Capital Trust I due April 15, 2027 30,000 30,000 --------------------------------------------------------------- TOTAL CAPITAL SECURITIES $180,000 $180,000 ---------------------------------------------------------------
The corporation-obligated mandatorily redeemable capital securities (the "capital securities") of subsidiary trusts holding solely junior subordinated debt securities of the Corporation (the "debentures") were issued by two statutory business trusts - First of America Capital Trust I and Fort Wayne Capital Trust I, of which 100% of the common equity in each of the trusts is owned by the Corporation. The trusts were formed for the purpose of issuing the capital securities and investing the proceeds from the sale of such capital securities in the debentures. The debentures held by each trust are the sole assets of that trust. Distributions on the capital securities issued by each trust are payable semi-annually at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust and are recorded as interest expense by the Corporation. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Corporation has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The debentures held by First of America Capital Trust I and Fort Wayne Capital Trust I qualify as Tier 1 capital under Federal Reserve Board guidelines and are first redeemable, in whole or in part, by the Corporation on January 31, 2007 and April 15, 2007, respectively. 14. REGULATORY RESTRICTIONS AND CAPITAL RATIOS The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administrated by the federal banking agencies that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can result in certain mandatory and possible additional discretionary actions by regulators that could have a material effect on the Corporation's financial statements and operations. Regulatory and various other capital measures at December 31 follow:
------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------ (DOLLARS IN MILLIONS) AMOUNT RATIO AMOUNT RATIO ------------------------------------------------------------------ Total equity(a) $6,769.8 7.65% $5,727.7 6.57% Total common equity(a) 6,739.9 7.61 5,697.5 6.54 Tangible common equity(b) 5,538.7 6.34 4,391.1 5.12 Tier 1 capital(c) 5,554.5 6.91 4,828.0 6.61 Total risk-based capital(d) 9,108.8 11.34 8,190.2 11.22 Leverage(e) 5,554.5 6.60 4,828.0 5.72 ------------------------------------------------------------------
(a) Computed in accordance with generally accepted accounting principles, including unrealized fair value adjustment of securities available for sale. (b) Common stockholders' equity less all intangible assets; computed as a ratio to total assets less all intangible assets. (c) Stockholders' equity plus qualifying capital securities and minority interest less certain intangibles and other assets and the unrealized fair value adjustment of securities available for sale; computed as a ratio to risk-weighted assets, as defined. (d) Tier 1 capital plus qualifying loan loss allowance and subordinated debt, and 45% of unrealized holding gains on certain equity securities (Tier 2 capital); computed as a ratio to risk-weighted assets, as defined. (e) Tier 1 capital; computed as a ratio to average total assets less certain intangibles. National City's Tier 1, total risk-based capital and leverage ratios for the current period are based on preliminary data. Such ratios are above the required minimum levels of 4.00%, 8.00% and 3.00%, respectively. The capital levels at all of National City's subsidiary banks are maintained at or above the well-capitalized minimums of 6.00%, 10.00% and 5.00% for the Tier 1 capital, total risk-based capital and leverage ratios, respectively. As of December 31, 2000 and 1999, National City and each of its affiliate banks were categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since December 31, 2000 that management believes have changed any entity's capital category. The Corporation's subsidiary banks are required to maintain noninterest bearing reserve balances with the Federal Reserve Bank. The consolidated average reserve balance was $238.4 million for 2000. Under current Federal Reserve regulations, the banking subsidiaries are limited in the amount they may loan to the parent company and its nonbank subsidiaries. Loans to a single affiliate may not exceed 10% and loans to all affiliates may not exceed 20% of the bank's capital stock, surplus and undivided profits plus the allowance for loan losses. Loans from subsidiary banks to nonbank affiliates, including the parent company, are also required to be collateralized. Dividends that may be paid by subsidiary banks to the parent company are also subject to certain legal and regulatory limitations and also may be impacted by capital needs, as well as other factors. Without regulatory approval, the subsidiary banks can pay dividends in 2001 of $1.2 billion, plus an additional amount equal to their net profits for 2001, as defined by statute, up to the date of any such dividend declaration. 37 NATIONAL CITY 2000 ANNUAL REPORT 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 15. STOCKHOLDERS' EQUITY National City's preferred stock has a stated value of $50 per share. The holders of the preferred shares are entitled to receive cumulative preferred dividends payable quarterly at the annual rate of 6%. The preferred shares may be redeemed by National City at its option at any time, or from time to time, on or after April 1, 2002 at $50 per share, plus unpaid dividends. Such redemption may be subject to prior approval by the Federal Reserve Bank. Holders of the preferred shares have the right, at any time at their option, to convert each share of preferred stock into 3.0291 shares of National City common stock. Except in certain circumstances, the holders of the preferred stock have no voting rights. During 2000 and 1999, the Corporation repurchased 2.5 million and 2.6 million shares, respectively, of its common stock in accordance with an October 1999 authorization by the Corporation's Board of Directors allowing for the repurchase of up to 30 million shares of National City common stock, subject to an aggregate purchase limit of $1.0 billion. As of December 31, 2000, 24.9 million shares remained available for repurchase under this authorization. During 1999 and 1998, 50 million and 10 million shares, respectively, of the Corporation's common stock were purchased in accordance with an October 1998 authorization by the Board of Directors, which allowed for the repurchase of up to 60 million shares of National City common stock, subject to an aggregate purchase limit of $2.7 billion. In connection with the October 1999 authorization, the Corporation entered into an agreement with a third party that provides the Corporation with an option to purchase up to $300 million of National City common stock through the use of forward transactions. The forward transactions can be settled from time to time, at the Corporation's election, on a physical, net cash or net share basis. In the case of net cash or net share settlement, the amount at which these forward purchases can be settled depends primarily on the number of shares to be settled and the future market price of the Corporation's common stock as compared with the forward purchase price per share. At December 31, 2000, the Corporation had open forward transactions involving 9.3 million shares of its common stock. These forward transactions were settled in early January 2001 through physical share settlement whereby National City paid cash of $166.2 million, or $17.84 per share, to the third party in exchange for taking physical delivery of the 9.3 million shares. On the settlement date, common shares outstanding and stockholders' equity were reduced. The Corporation may, but is not obligated to, enter into forward transactions with the third party until the agreement's final maturity date of April 19, 2002. Common shares issued in connection with the Corporation's stock-based compensation plans, including related tax effects, totaled 2.8 million, 4.9 million and 8.1 million in 2000, 1999 and 1998, respectively, while common shares issued for the dividend reinvestment program totaled 1.8 million, 1.6 million and 1.5 million, respectively, for those same years. Beginning in late 2000, the dividend reinvestment program began purchasing shares of National City common stock in the open market. Consequently, the Corporation no longer directly issues shares of its common stock for this program. On June 30, 1999, the Corporation declared a two-for-one stock split of its common stock, which became effective July 26, 1999, to stockholders of record July 9, 1999. The stock split was accounted for by a transfer of $1.2 billion from capital surplus to common stock. 16. NET INCOME PER COMMON SHARE Basic and diluted net income per common share calculations follow:
--------------------------------------------------------------------- FOR THE CALENDAR YEAR --------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998 --------------------------------------------------------------------- BASIC Net income $1,302,377 $1,405,485 $1,070,681 Less preferred dividends 1,799 1,749 2,182 --------------------------------------------------------------------- Net income applicable to common stock $1,300,578 $1,403,736 $1,068,499 --------------------------------------------------------------------- Average common shares outstanding 607,378,801 623,623,811 652,011,504 --------------------------------------------------------------------- Net income per common share - basic $2.14 $2.25 $1.64 --------------------------------------------------------------------- DILUTED Net income $1,302,377 $1,405,485 $1,070,681 --------------------------------------------------------------------- Average common shares outstanding 607,378,801 623,623,811 652,011,504 Stock option adjustment 3,429,063 6,958,873 12,040,250 Preferred stock adjustment 1,817,485 1,869,462 1,668,576 --------------------------------------------------------------------- Average common shares outstanding - diluted 612,625,349 632,452,146 665,720,330 --------------------------------------------------------------------- Net income per common share - diluted $2.13 $2.22 $1.61 ---------------------------------------------------------------------
Basic net income per common share is calculated by dividing net income, less dividend requirements on convertible preferred stock, by the weighted-average number of common shares outstanding for the period. Diluted net income per common share takes into consideration the pro forma dilution assuming the Corporation's outstanding convertible preferred stock and in-the-money outstanding stock options were converted or exercised into common shares. Unsettled forward transactions to purchase the Corporation's common stock may also affect diluted net income per common share. The forward transactions entered into in 2000 and discussed in Note 15 had no dilutive impact on diluted net income per common share during the year. Net income is not adjusted for preferred dividend requirements since the preferred shares are assumed to be converted from the beginning of the period. The average price of the 38 NATIONAL CITY 2000 ANNUAL REPORT 41 Corporation's common stock for the period is used to determine the dilutive effect of outstanding stock options. 17. INCOME TAXES The composition of income tax expense follows:
------------------------------------------------------------------ FOR THE CALENDAR YEAR ------------------------------------------------------------------ (IN THOUSANDS) 2000 1999 1998 ------------------------------------------------------------------ Current: Federal $379,851 $428,492 $340,074 State 13,191 15,658 6,429 ------------------------------------------------------------------ Total current 393,042 444,150 346,503 Deferred: Federal 266,150 284,306 222,194 State 10,323 14,672 7,899 ------------------------------------------------------------------ Total deferred 276,473 298,978 230,093 ------------------------------------------------------------------ INCOME TAX EXPENSE $669,515 $743,128 $576,596 ------------------------------------------------------------------ INCOME TAX EXPENSE APPLICABLE TO SECURITIES TRANSACTIONS $ 19,898 $ 48,426 $ 47,061 ------------------------------------------------------------------
The effective tax rate differs from the statutory Federal tax rate applicable to corporations as a result of permanent differences between accounting and taxable income as shown below:
------------------------------------------------------------------ FOR THE CALENDAR YEAR ------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------ Statutory Federal tax rate 35.0% 35.0% 35.0% Life insurance (1.2) (1.0) (2.0) Tax-exempt income (1.3) (1.2) (1.6) Merger charges and goodwill .9 1.8 3.0 Other .6 -- .6 ------------------------------------------------------------------ EFFECTIVE TAX RATE 34.0% 34.6% 35.0% ------------------------------------------------------------------
Significant components of deferred tax liabilities and assets as of December 31 follow:
--------------------------------------------------------------- (IN THOUSANDS) 2000 1999 --------------------------------------------------------------- Deferred tax liabilities: Mortgage servicing $ 264,761 $191,209 Leasing 676,878 532,929 Depreciation 20,765 22,212 Mark-to-market adjustments 37,989 -- Other, net 198,479 173,400 --------------------------------------------------------------- Total deferred tax liabilities 1,198,872 919,750 Deferred tax assets: Provision for loan losses 327,016 340,759 Employee benefits 4,904 32,325 Mark-to-market adjustments -- 102,800 Other, net 148,263 132,016 --------------------------------------------------------------- Total deferred tax assets 480,183 607,900 --------------------------------------------------------------- NET DEFERRED TAX LIABILITY $ 718,689 $311,850 ---------------------------------------------------------------
For the years ended 2000, 1999 and 1998, income tax benefits of $6.7 million, $36.4 million and $41.0 million, respectively, were credited to stockholders' equity related to the exercise of nonqualified employee stock options. 18. OTHER CONTINGENT LIABILITIES During the fourth quarter of 1999, the Corporation was notified by the Internal Revenue Service ("IRS") of adjustments relating to its corporate-owned life insurance ("COLI") programs proposed in the Revenue Agent's Reports for the Corporation's Federal income tax returns for the years 1990 through 1995. These proposed adjustments involve the disallowance of certain deductions, which, with the expected effect on tax returns for years subsequent to 1995, represent an exposure for tax and interest of approximately $200 million. In the first quarter of 2000, the Corporation made payments of taxes and interest attributable to COLI interest deductions for years 1990 through 1995 to avoid the potential assessment by the IRS of any additional above-market rate interest on the contested amount. The payments to the IRS are included on the balance sheet in other assets pending the resolution of this matter. Management does not agree with the proposed adjustments, will vigorously contest the IRS claim, and will seek refund, either administratively or through litigation, of all amounts paid plus interest. In the event that resolution of this matter is unfavorable, it may have a material adverse effect on the Corporation's net income for the period in which such unfavorable resolution occurs. National City or its subsidiaries are also involved in a number of legal proceedings arising out of their businesses and regularly face various claims, including unasserted claims, which may ultimately result in litigation. Exclusive of the aforementioned claim by the IRS, it is management's opinion the Consolidated Financial Statements would not be materially affected by the outcome of any present legal proceedings, commitments or asserted claims. 39 NATIONAL CITY 2000 ANNUAL REPORT 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 19. PARENT COMPANY At December 31, 2000 and 1999, retained earnings of the parent company included $5.0 billion and $4.7 billion, respectively, of equity in undistributed earnings of subsidiaries. Condensed parent company financial statements, which include transactions with subsidiaries, follow: BALANCE SHEETS
---------------------------------------------------------------- DECEMBER 31 ---------------------------------------------------------------- (IN THOUSANDS) 2000 1999 ---------------------------------------------------------------- ASSETS Cash and demand balances due from banks $ 1,686 $ 11,870 Loans to and receivables from subsidiaries 232,233 257,848 Securities 1,142,187 975,790 Investments in: Subsidiary banks 7,444,621 6,250,281 Nonbank subsidiaries 442,694 763,028 Goodwill, net of accumulated amortization 79,852 86,738 Other assets 709,463 479,897 ---------------------------------------------------------------- TOTAL ASSETS $10,052,736 $8,825,452 ---------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Long-term debt and capital securities $ 2,146,031 $2,245,673 Borrowed funds 360,500 -- Accrued expenses and other liabilities 776,384 852,046 ---------------------------------------------------------------- Total liabilities 3,282,915 3,097,719 Stockholders' equity 6,769,821 5,727,733 ---------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,052,736 $8,825,452 ----------------------------------------------------------------
STATEMENTS OF INCOME
------------------------------------------------------------------ FOR THE CALENDAR YEAR ------------------------------------------------------------------ (IN THOUSANDS) 2000 1999 1998 ------------------------------------------------------------------ INCOME Dividends from: Subsidiary banks $ 950,000 $ 432,774 $ 752,217 Nonbank subsidiaries 39,738 19,964 21,000 Interest on loans to subsidiaries 28,510 16,891 28,034 Interest and dividends on securities 45,821 36,279 33,590 Net securities gains 112,810 126,173 109,906 Other income 30,149 173,758 116,980 ------------------------------------------------------------------ TOTAL INCOME 1,207,028 805,839 1,061,727 ------------------------------------------------------------------ EXPENSE Interest on debt and other borrowings 194,436 182,980 129,586 Goodwill amortization 6,886 6,886 7,389 Other expense 14,731 15,793 413,500 ------------------------------------------------------------------ TOTAL EXPENSE 216,053 205,659 550,475 ------------------------------------------------------------------ Income before tax (benefit) expense and equity in undistributed net income of subsidiaries 990,975 600,180 511,252 Income tax (benefit) expense (7,508) 39,913 (60,621) ------------------------------------------------------------------ Income before equity in undistributed net income of subsidiaries 998,483 560,267 571,873 Equity in undistributed net income of subsidiaries 303,894 845,218 498,808 ------------------------------------------------------------------ NET INCOME $1,302,377 $1,405,485 $1,070,681 ------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------- FOR THE CALENDAR YEAR -------------------------------------------------------------------- (IN THOUSANDS) 2000 1999 1998 -------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 1,302,377 $1,405,485 $1,070,681 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (303,894) (845,218) (498,808) Amortization of goodwill 6,886 6,886 7,389 Depreciation and amortization of properties and equipment 1,596 1,596 1,596 Decrease in receivables from subsidiaries 157,482 22,415 481,003 Net securities gains (112,810) (126,173) (109,906) Increase in accrued expenses and other liabilities 94,724 231,084 44,108 Other, net (200,247) (34,596) (174,433) -------------------------------------------------------------------- Net cash provided by operating activities 946,114 661,479 821,630 -------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of securities (585,134) (588,913) (577,267) Proceeds from sales and maturities of securities 553,529 610,037 460,391 Principal collected on loans to subsidiaries 132,697 59,780 260,721 Loans to subsidiaries (264,564) (212,298) (233,147) Investments in subsidiaries (5,384,850) (274,438) (192,707) Returns of investment from subsidiaries 5,004,600 1,373,000 310,000 -------------------------------------------------------------------- Net cash (used in) provided by investing activities (543,722) 967,168 27,991 -------------------------------------------------------------------- FINANCING ACTIVITIES Repayment of corporate long-term debt and capital securities (99,642) (568,951) (15,043) Proceeds from issuance of long-term debt, net -- 1,000,000 -- Net increase in borrowed funds 360,500 -- -- Dividends paid (694,103) (668,491) (596,193) Issuances of common stock 75,070 138,231 205,005 Purchases of common stock (54,401) (1,710,065) (347,708) -------------------------------------------------------------------- Net cash used in financing activities (412,576) (1,809,276) (753,939) -------------------------------------------------------------------- (Decrease) increase in cash and demand balances due from banks (10,184) (180,629) 95,682 Cash and demand balances due from banks, January 1 11,870 192,499 96,817 -------------------------------------------------------------------- CASH AND DEMAND BALANCES DUE FROM BANKS, DECEMBER 31 $ 1,686 $ 11,870 $ 192,499 -------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Interest paid $ 192,741 $ 166,759 $ 132,590 Common and preferred stock issued in purchase acquisitions -- 4,068 787,184 --------------------------------------------------------------------
40 NATIONAL CITY 2000 ANNUAL REPORT 43 20. STOCK OPTIONS AND AWARDS National City maintains various incentive and non-qualified stock-based compensation plans that allow for the granting of restricted shares, stock options or other stock-based awards to eligible employees and directors. STOCK OPTION PLANS: The stock option plans under which options may currently be granted authorize the issuance to officers and key employees of up to 50,000,000 options to purchase shares of common stock at the fair market value of the common stock on the date of grant. These options generally become exercisable to the extent of 50% annually beginning one year from the date of grant and expire not later than ten years from the date of grant. In addition, stock options may be granted that include the right to receive additional options not exceeding the number of options exercised under the original grant if certain criteria are met. The exercise price of an additional option is equal to the fair market value of the common stock on the date the additional option is granted. Additional options vest six months from the date of grant and have a contractual term equal to the remaining term of the original option. In 1995, National City granted 5.6 million options to purchase common stock at the fair market value of the common stock on the date of grant to virtually all employees in commemoration of National City's 150th anniversary. The options became exercisable to the extent of 33% per year beginning two years from the date of grant. As of December 31, 2000, 1.3 million of these options remained outstanding and all were exercisable. RESTRICTED STOCK PLANS: National City's restricted stock plans provide for the issuance of up to 5,000,000 shares of common stock to officers, key employees and outside directors. In general, restrictions on outside directors' shares expire after nine months and restrictions on shares granted to key employees and officers expire within a four-year period. The Corporation generally recognizes compensation expense over the restricted period. Compensation expense recognized in 2000, 1999 and 1998 totaled $6.9 million, $9.8 million and $5.8 million, respectively, related to shares issued under these plans. Compensation expense in 1999 included $4.3 million related to certain one-time executive contract obligations. OPTION AND RESTRICTED STOCK AWARD ACTIVITY: Stock option and restricted stock award activity follow:
----------------------------------------------------------------------- SHARES ------------------------------------ AVAILABLE WEIGHTED- FOR GRANT AVERAGE ----------- OUTSTANDING OPTION AWARDS & ---------------------- PRICE PER OPTIONS AWARDS OPTIONS SHARE ----------------------------------------------------------------------- January 1, 1998 33,673,082 1,163,904 34,538,864 $16.83 Options acquired -- -- 997,118 Cancelled 303,592 (32,096) (668,496) 20.65 Exercised -- (269,722) (8,643,776) 14.58 Granted (8,895,198) 499,410 9,525,446 34.10 ----------------------------------------------------------------------- December 31, 1998 25,081,476 1,361,496 35,749,156 21.91 ----------------------------------------------------------------------- Cancelled 785,437 (74,313) (977,412) 27.25 Exercised -- (537,217) (5,896,671) 14.18 Granted (8,418,024) 446,584 8,926,407 28.11 ----------------------------------------------------------------------- December 31, 1999 17,448,889 1,196,550 37,801,480 24.38 ----------------------------------------------------------------------- Cancelled 1,286,940 (96,908) (1,404,340) 26.49 Exercised -- (242,899) (2,489,526) 13.28 Granted (12,563,754) 979,896 12,040,430 18.17 ----------------------------------------------------------------------- DECEMBER 31, 2000 6,172,075 1,836,639 45,948,044 $23.29 -----------------------------------------------------------------------
Cancelled activity includes both forfeited and expired awards and options. Information about stock options outstanding at December 31, 2000 follows:
------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED REMAINING WEIGHTED AVERAGE CONTRACTUAL AVERAGE RANGE OF EXERCISE LIFE EXERCISE EXERCISE PRICES OUTSTANDING PRICE (IN YEARS) EXERCISABLE PRICE ------------------------------------------------------------------------------- $3.47-$11.99 1,962,726 $ 9.91 1.2 1,962,726 $ 9.91 12.00-16.99 5,584,593 14.08 1.6 5,584,593 14.08 17.00-21.99 15,127,456 17.81 8.4 3,749,971 17.59 22.00-26.99 1,633,406 24.66 5.1 1,239,808 24.28 27.00-31.99 13,167,267 28.29 7.5 8,616,279 28.45 32.00-37.81 8,472,596 34.21 7.3 7,760,267 34.22 ------------------------------------------------------------------------------- TOTAL 45,948,044 $23.29 6.7 28,913,644 $24.38 -------------------------------------------------------------------------------
At December 31, 2000, 1999 and 1998, options for 28,913,644, 22,289,080 and 18,687,238 shares of common stock, respectively, were exercisable. PRO FORMA DISCLOSURES: For purposes of providing the pro forma disclosures required under SFAS No. 123, Accounting for Stock-Based Compensation, the fair value of stock options granted from 1995 through 2000 were estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option pricing model was originally developed for use in estimating the fair value of traded options, which have different characteristics from the Corporation's employee stock options. The model is also sensitive to changes in the subjective assumptions, which can materially affect the fair value estimate. As a result, management believes the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options. 41 NATIONAL CITY 2000 ANNUAL REPORT 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED The following weighted-average assumptions were used in the option pricing model for options granted in each of the last three years: a risk-free interest rate of 5.01%, 6.33% and 4.54% for 2000, 1999 and 1998, respectively; an expected life of the option of four years for 2000, 1999 and 1998; an expected dividend yield of 3.50% for 2000, 4.00% for 1999 and 3.00% for 1998; and expected volatility of 22.1% for 2000 and 1999 and 20.8% for 1998. The weighted-average grant date fair value of options granted during 2000, 1999 and 1998 was $3.11, $4.97 and $5.61, respectively. For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Had compensation cost for the Corporation's stock option plans been determined consistent with SFAS No. 123, net income and net income per share would have been as follows:
------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998 ------------------------------------------------------------------- Pro forma net income $1,265,978 $1,371,182 $1,043,044 Pro forma net income per share: Basic $2.08 $2.20 $1.60 Diluted 2.07 2.17 1.57 -------------------------------------------------------------------
21. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS National City has a noncontributory, defined benefit retirement plan covering substantially all employees. Retirement benefits are derived from a cash balance formula adopted in 1998, whereby credits based on salary, age and years of service are credited to employee accounts. Actuarially-determined pension costs are charged to current operations. The funding policy is to pay at least the minimum amount required by the Employee Retirement Income Security Act of 1974. National City also has a benefit plan, which offers post-retirement medical and life insurance benefits. The medical portion of the plan is contributory and the life insurance coverage is noncontributory to the participants. The Corporation has no plan assets attributable to the plan and funds the benefits as claims arise. Benefit costs related to this plan are recognized in the periods employees provide service for such benefits. The Corporation reserves the right to terminate or make plan changes at any time. Plan asset and benefit obligation activity for each of the plans follows:(a)
----------------------------------------------------------------------- OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ----------------------- --------------------- (DOLLARS IN THOUSANDS) 2000 1999 2000 1999 ----------------------------------------------------------------------- CHANGE IN FAIR VALUE OF PLAN ASSETS Balance at beginning of measurement period $1,459,918 $1,294,517 $ -- $ -- Actual return on plan assets 195,623 221,798 -- -- Employer contribution -- -- 9,070 9,699 Participant contributions -- -- 6,105 5,548 Expenses paid (5,043) (5,161) -- -- Benefits paid (60,602) (51,236) (15,175) (15,247) ----------------------------------------------------------------------- BALANCE AT END OF MEASUREMENT PERIOD $1,589,896 $1,459,918 $ -- $ -- ----------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Balance at beginning of measurement period $ 932,528 $ 957,992 $ 111,847 $ 107,152 Service cost 39,405 37,278 2,174 2,268 Interest cost 68,225 65,864 8,008 7,622 Participant contributions -- -- 6,105 5,548 Actuarial (gains) losses 31,934 (77,370) 1,230 4,504 Benefits paid (60,602) (51,236) (15,175) (15,247) ----------------------------------------------------------------------- BALANCE AT END OF MEASUREMENT PERIOD $1,011,490 $ 932,528 $ 114,189 $ 111,847 ----------------------------------------------------------------------- Funded status $ 578,406 $ 527,390 $(114,189) $(111,847) Unrecognized prior service cost (61,859) (67,916) 796 (1,986) Unrecognized net actuarial (gain) loss (335,463) (328,144) 15,301 12,781 Unrecognized net (asset) obligation (8,500) (14,377) 15,877 21,440 ----------------------------------------------------------------------- PREPAID (ACCRUED) BENEFIT COST $ 172,584 $ 116,953 $ (82,215) $ (79,612) ----------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS FOR THE MEASUREMENT PERIOD Discount rate 7.25% 7.25% 7.25% 7.25% Rate of compensation increase 2.75-7.50 2.75-7.50 2.75-7.50 2.75-7.50 Expected return on plan assets 10.00 10.00 -- -- -----------------------------------------------------------------------
(a) Using a measurement date of October 31, 2000 and 1999 for the pension plan and October 31, 2000 and December 31, 1999 for the postretirement plan. Plan assets of the defined benefit retirement plan consisted primarily of marketable equity securities and bonds, including $144.2 million and $28.3 million of National City common stock at December 31, 2000 and 1999, respectively. 42 NATIONAL CITY 2000 ANNUAL REPORT 45 Components of net defined benefit pension plan and other postretirement benefit plan costs follow:(a)
------------------------------------------------------------------- (IN THOUSANDS) 2000 1999 1998 ------------------------------------------------------------------- PENSION BENEFITS Service cost $ 39,405 $ 37,278 $ 34,192 Interest cost 68,225 65,864 64,753 Expected return on plan assets (138,352) (126,815) (110,585) Amortization of prior service cost (6,057) (5,850) (3,454) Transition benefit (5,778) (5,778) (5,778) Recognized net actuarial gain (13,074) (1,504) (6,531) ------------------------------------------------------------------- NET PERIODIC BENEFIT $ (55,631) $ (36,805) $ (27,403) ------------------------------------------------------------------- OTHER POSTRETIREMENT BENEFITS Service cost $ 2,174 $ 2,268 $ 2,072 Interest cost 8,008 7,622 7,363 Amortization of prior service cost (819) (819) (648) Transition obligation 1,923 1,923 1,923 Recognized net actuarial gain 386 331 125 ------------------------------------------------------------------- NET PERIODIC COST $ 11,672 $ 11,325 $ 10,835 -------------------------------------------------------------------
(a) Using a measurement date of October 31, 2000 and 1999 for the pension plan and October 31, 2000 and December 31, 1999 for the postretirement plan. The health care trend rate assumption only affects those participants retired under the plan prior to April 1, 1989. The 2000 health care trend rate is projected to be 8.5% for participants under age 65 and 5.5% for participants over 65. These rates are assumed to decrease incrementally by one half of a percentage point per year until they reach 5.0% and remain at that level thereafter. The health care trend rate assumption does not have a significant effect on the medical plan; therefore, a one percentage point change in the trend rate is not material in the determination of the accumulated postretirement benefit obligation or the ongoing expense. The Corporation also maintains nonqualified supplemental retirement plans for certain key employees. All benefits provided under these plans are unfunded and any payments to plan participants are made by the Corporation. At December 31, 2000 and 1999, obligations of $64.3 million and $56.1 million, respectively, were included in accrued expenses and other liabilities for these plans. For the years ended December 31, 2000, 1999 and 1998, expense related to these plans was $16.1 million, $12.3 million and $24.9 million, respectively. The expense for 1998 included a $14.4 million curtailment charge relating to supplemental executive retirement plans for former key employees of First of America. Substantially all employees with one or more years of service are eligible to contribute a portion of their pretax salary to a defined contribution plan. The Corporation may make contributions to the plan in varying amounts depending on the level of employee contributions. For the years ended 2000, 1999 and 1998, the expense related to this plan was $35.5 million, $44.4 million and $39.2 million, respectively. 22. OFF-BALANCE-SHEET FINANCIAL AGREEMENTS The Corporation uses a variety of off-balance-sheet financial instruments such as interest rate swaps, futures, options, forwards, and cap and floor contracts. These financial agreements, frequently called interest rate derivatives, enable the Corporation to manage its exposure to changes in interest rates. As with any financial instrument, derivatives have inherent risks. Market risk includes the risk of gains and losses that result from changes in interest rates. These gains and losses may be offset by other on- or off-balance-sheet transactions. Credit risk is the risk that a counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement. Credit risk can be measured as the cost of acquiring a new derivative agreement with cash flows identical to those of a defaulted agreement in the current interest rate environment. Credit exposure with counterparties is managed by limiting the aggregate amount of net unrealized gains in agreements outstanding, monitoring the size and the maturity structure of the derivatives portfolio, applying uniform credit standards maintained for all activities with credit risk, and collateralizing unrealized gains. The Corporation has established bilateral collateral agreements with its major off-balance-sheet counterparties that provide for exchanges of marketable securities to collateralize either party's unrealized gains. On December 31, 2000, these collateral agreements covered approximately 90% of the notional amount of the derivatives portfolio, and the Corporation held net U.S. government and agency securities with a fair value of $5.8 million from various counterparties to collateralize unrealized gains. The Corporation has never experienced a credit loss associated with any interest rate derivative. Note 1 to the Consolidated Financial Statements includes a summary of how derivative instruments used for interest rate and mortgage servicing risk management are accounted for in the financial statements. In 2001, the accounting for these instruments will change to comply with the requirements of SFAS No. 133, which was adopted by the Corporation on January 1, 2001. The new accounting requirements are discussed in Note 2 to the Consolidated Financial Statements. INTEREST RATE RISK MANAGEMENT: As part of managing interest rate risk, a variety of derivative instruments are used to protect against the risk of interest rate movements on the value of certain assets and liabilities or on future cash flows. The nature and volume of derivative instruments used by the Corporation to manage interest rate risk related to loans, investment securities and funding products depend on the level and type of these on-balance-sheet items and the Corporation's risk management strategies given the current and anticipated interest rate environment. The fair values of fixed-rate funding products were hedged against changes in interest rates primarily through the use of receive-fixed interest rate swaps, while the fair values of fixed-rate loans were hedged against 43 NATIONAL CITY 2000 ANNUAL REPORT 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED changes in interest rates through the use of pay-fixed interest rate swaps, interest rate futures and interest rate caps and floors. Cash flow variability stemming from adjustable-rate loan and funding products was hedged primarily through the use of receive-fixed interest rate swaps and pay-fixed interest rate swaps, respectively. Basis swaps were also used to manage risk associated with certain variable cash flows. The notional amounts of interest rate derivatives used for interest-rate risk management purposes at December 31 follow:
--------------------------------------------------------------------------------------------------------------------------- 2000 1999 -------------------------------------- -------------------------------------- NOTIONAL AMOUNT NOTIONAL AMOUNT APPLICABLE TO HEDGED APPLICABLE TO HEDGED ASSET/LIABILITY ASSET/LIABILITY ------------------------ TOTAL -------------------------------------- (IN THOUSANDS) LOANS FUNDING NOTIONAL LOANS SECURITIES FUNDING --------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS Receive-fixed swaps $ 130,000 $6,104,250 $ 6,234,250 $ 961,488 $ -- $ 4,792,000 Pay-fixed swaps 2,812,049 3,775,000 6,587,049 2,690,841 156,000 1,000,000 Basis swaps -- -- -- 2,000,000 -- 4,091,000 --------------------------------------------------------------------------------------------------------------------------- Total interest rate swaps 2,942,049 9,879,250 12,821,299 5,652,329 156,000 9,883,000 INTEREST RATE CAPS AND FLOORS Eurodollar caps purchased 3,396 -- 3,396 3,605 70,000 1,500,000 Eurodollar caps sold 390,000 -- 390,000 35,000 -- -- Eurodollar floors purchased -- -- -- 665,000 525,000 -- Eurodollar floors sold 10,000 -- 10,000 10,000 -- -- Prime caps sold 50,000 -- 50,000 -- -- -- --------------------------------------------------------------------------------------------------------------------------- Total interest rate caps and floors 453,396 -- 453,396 713,605 595,000 1,500,000 INTEREST RATE FUTURES Futures purchased 627,000 -- 627,000 637,000 -- -- Futures sold 2,738,000 -- 2,738,000 808,000 10,756,000 -- --------------------------------------------------------------------------------------------------------------------------- Total interest rate futures 3,365,000 -- 3,365,000 1,445,000 10,756,000 -- --------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST RATE SWAPS, CAPS, FLOORS AND FUTURES $6,760,445 $9,879,250 $16,639,695 $7,810,934 $11,507,000 $11,383,000 --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------ ----------- 1999 ----------- TOTAL (IN THOUSANDS) NOTIONAL ------------------------------------------ ----------- INTEREST RATE SWAPS Receive-fixed swaps $ 5,753,488 Pay-fixed swaps 3,846,841 Basis swaps 6,091,000 ------------------------------------------------------- Total interest rate swaps 15,691,329 INTEREST RATE CAPS AND FLOORS Eurodollar caps purchased 1,573,605 Eurodollar caps sold 35,000 Eurodollar floors purchased 1,190,000 Eurodollar floors sold 10,000 Prime caps sold -- ------------------------------------------------------- Total interest rate caps and floors 2,808,605 INTEREST RATE FUTURES Futures purchased 637,000 Futures sold 11,564,000 ------------------------------------------------------- Total interest rate futures 12,201,000 ------------------------------------------------------- TOTAL INTEREST RATE SWAPS, CAPS, FLOORS AND FUTURES $30,700,934 -------------------------------------------------------
Summary information regarding the interest rate derivatives portfolio used for interest rate risk management purposes at December 31, 2000 follows:
----------------------------------------------------------------------------------------------- TOTAL UNREALIZED UNREALIZED (DOLLARS IN THOUSANDS) NOTIONAL GAINS LOSSES ----------------------------------------------------------------------------------------------- INTEREST RATE SWAPS Receive-fixed swaps $ 4,452,250 $38,198 $ (13,912) Pay-fixed swaps 6,505,698 15,563 (79,804) Receive-fixed callable swaps 1,782,000 10,376 (18,831) Pay-fixed callable swaps 81,351 1,183 (2,678) ----------------------------------------------------------------------------------------------- Total interest rate swaps 12,821,299 65,320 (115,225) INTEREST RATE CAPS AND FLOORS One-month Eurodollar caps purchased 3,396 -- (68) Three-month Eurodollar caps sold 390,000 9,302 (3,700) Three-month Eurodollar floors sold 10,000 358 (556) Prime caps sold 50,000 1,295 (373) ----------------------------------------------------------------------------------------------- Total interest rate caps and floors 453,396 10,955 (4,697) INTEREST RATE FUTURES Eurodollar futures purchased 627,000 436 -- Eurodollar futures sold 2,738,000 46 (1,960) ----------------------------------------------------------------------------------------------- Total interest rate futures 3,365,000 482 (1,960) ----------------------------------------------------------------------------------------------- TOTAL INTEREST RATE SWAPS, CAPS, FLOORS AND FUTURES $16,639,695 $76,757 $(121,882) ----------------------------------------------------------------------------------------------- ------------------------------------------ ------------------------------------- WEIGHTED AVERAGE ------------------------------------- RECEIVE PAY STRIKE LIFE (DOLLARS IN THOUSANDS) RATE(a) RATE(a) RATE(a) (YEARS) ------------------------------------------ ------------------------------------- INTEREST RATE SWAPS Receive-fixed swaps 6.38% 6.64% -- 5.6 Pay-fixed swaps 6.65 6.40 -- 2.5 Receive-fixed callable swaps 6.99 6.79 -- 3.0 Pay-fixed callable swaps 6.81 6.35 -- 5.4 --------------------------------------------------------------------------------- Total interest rate swaps INTEREST RATE CAPS AND FLOORS One-month Eurodollar caps purchased -- -- 9.00% 11.2 Three-month Eurodollar caps sold -- -- 7.12 4.4 Three-month Eurodollar floors sold -- -- 6.52 5.9 Prime caps sold -- -- 10.00 4.1 --------------------------------------------------------------------------------- Total interest rate caps and floors INTEREST RATE FUTURES Eurodollar futures purchased -- -- -- -- Eurodollar futures sold -- -- -- -- --------------------------------------------------------------------------------- Total interest rate futures --------------------------------------------------------------------------------- TOTAL INTEREST RATE SWAPS, CAPS, FLO FUTURES ---------------------------------------------------------------------------------
(a) The weighted average rates are those in effect in the specified contracts at December 31, 2000. 44 NATIONAL CITY 2000 ANNUAL REPORT 47 The expected notional maturities of off-balance-sheet instruments used for interest-rate risk management at December 31, 2000 follow:
--------------------------------------------------------------------------------------------------------------------------------- GREATER LESS THAN 1 TO 3 3 TO 5 5 TO 10 THAN 10 (IN THOUSANDS) 1 YEAR YEARS YEARS YEARS YEARS --------------------------------------------------------------------------------------------------------------------------------- Receive-fixed swaps $2,869,250 $ 935,000 $ 365,000 $ 645,000 $1,420,000 Pay-fixed swaps 779,962 4,083,342 1,001,205 721,465 1,075 Caps purchased -- -- -- -- 3,396 Caps sold -- -- 430,000 10,000 -- Floors sold -- -- -- 10,000 -- Futures purchased 185,000 317,000 125,000 -- -- Futures sold 1,261,000 494,000 374,000 609,000 -- --------------------------------------------------------------------------------------------------------------------------------- TOTAL $5,095,212 $5,829,342 $2,295,205 $1,995,465 $1,424,471 ---------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SERVICING ASSET RISK MANAGEMENT: The Corporation uses off-balance-sheet derivative contracts to hedge the fair value of its mortgage servicing portfolio. The fair value of the mortgage servicing portfolio is adversely affected when mortgage interest rates decline and mortgage loan prepayments increase. To hedge this exposure, the Corporation enters into receive-fixed interest rate swaps and purchases interest rate caps and floors. The Corporation also enters into interest rate swaps where the Corporation receives the periodic total return of principal only mortgage-backed securities and pays a variable rate based on one-month Eurodollar rates. Information regarding the interest rate derivatives portfolio used for hedging mortgage servicing assets follows:
--------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2000 ---------------------------------------------------------------------------------- WEIGHTED AVERAGE DECEMBER 31, ----------------------------- 1999 NOTIONAL UNREALIZED UNREALIZED RECEIVE PAY STRIKE LIFE NOTIONAL (DOLLARS IN THOUSANDS) AMOUNT GAINS LOSSES RATE(a) RATE(a) RATE(a) (YEARS) AMOUNT --------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS Receive-fixed swaps $3,153,000 $ 71,428 $ (18,235) 6.31% 6.68% -- 6.7 $1,808,000 Principal-only swaps 482,707 71,164 (26,031) -- 6.85 -- 1.4 364,792 --------------------------------------------------------------------------------------------------------------------------------- Total interest rate swaps 3,635,707 142,592 (44,266) 2,172,792 INTEREST RATE CAPS AND FLOORS Ten-year U.S. Treasury caps purchased 3,175,000 209 (6,679) -- -- 6.71% 1.8 2,690,000 Ten-year U.S. Treasury floors purchased 270,000 1,164 -- -- -- 5.39 1.0 700,000 Three-month Eurodollar floors purchased 1,190,000 5,781 -- -- -- 5.50 2.6 -- --------------------------------------------------------------------------------------------------------------------------------- Total interest rate caps and floors 4,635,000 7,154 (6,679) 3,390,000 --------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST RATE SWAPS, CAPS AND FLOORS $8,270,707 $149,746 $ (50,945) $5,562,792 ---------------------------------------------------------------------------------------------------------------------------------
(a) The weighted average rates are those in effect in the specified contracts at December 31, 2000. TRADING ACTIVITIES: The Corporation also enters into off-balance-sheet financial instruments for its trading account. These transactions are executed primarily with customers to facilitate their interest rate and foreign currency risk management strategies. Customer trading activity consists of a portfolio of derivative contracts with the Corporation's customers and offsetting derivative instruments, futures, forwards, option contracts and cash securities, which effectively reduce the risk of fair value fluctuations in the portfolio caused by changes in market conditions. At December 31, 2000, the total notional amount of derivative contracts held for trading was $13.5 billion with a net fair value of $33.6 million, compared to $6.3 billion in notional and a net fair value of $17.0 million at December 31, 1999. Total trading revenue was $18.2 million, $17.8 million and $22.5 million in 2000, 1999 and 1998, respectively. All off-balance-sheet contracts in the preceding tables are valued using cash flow projection models either acquired from third parties or developed in-house. Pricing models used for valuing derivative instruments are regularly validated by testing through comparison with other third parties. Valuations and notional maturities presented above are based on yield curves, forward yield curves, and implied volatilities that were observable in the cash and derivatives markets on December 31, 2000. 45 NATIONAL CITY 2000 ANNUAL REPORT 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED OTHER OFF-BALANCE-SHEET COMMITMENTS: In the normal course of business, the Corporation makes various commitments to extend credit which are not reflected in the balance sheet. A summary of these commitments follows:
--------------------------------------------------------------- DECEMBER 31 --------------------------------------------------------------- (IN MILLIONS) 2000 1999 --------------------------------------------------------------- Commitments to extend credit $43,070 $38,243 Standby letters of credit 3,420 3,152 ---------------------------------------------------------------
The credit risk associated with loan commitments and standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal credit policies. Collateral is obtained based on management's credit assessments of the customer. The Corporation also enters into forward contracts related to its mortgage banking business. At December 31, 2000 and 1999, the Corporation had commitments to sell residential real estate loans totaling $3.7 billion and $2.5 billion, respectively. These contracts mature in less than one year. 23. LINE OF BUSINESS RESULTS National City operates six major lines of business: retail sales and distribution, corporate banking, consumer finance, asset management, National City Mortgage and National Processing. During the third quarter of 2000, National City announced several organizational changes, which, once operationally complete, may result in changes to the presentation of the line of business results in future periods. Retail sales and distribution includes direct lending, deposit gathering and small business services. Corporate banking includes lending and related financial services to large- and medium-sized corporations. Consumer finance is comprised of credit card lending, education finance, dealer finance, national home equity lending and nonconforming residential lending. Asset management includes the institutional trust, brokerage and personal wealth management businesses. National City Mortgage represents conforming mortgage banking activities conducted through the Corporation's wholly-owned subsidiary, National City Mortgage Company. National Processing consists of merchant credit card processing services and corporate outsourcing services conducted through National Processing, Inc., National City's 87%-owned subsidiary. The business units are identified by the product or services offered and the channel through which the product or service is delivered. The accounting policies of the individual business units are the same as those of the Corporation. Prior period amounts have been reclassified to conform with the current year's presentation. The reported results reflect the underlying economics of the businesses. Expenses for centrally provided services are allocated based upon estimated usage of those services. The business units' assets and liabilities are match-funded and interest rate risk is centrally managed. Transactions between business units are primarily conducted at fair value, resulting in profits that are eliminated for reporting consolidated results of operations. Parent and other is comprised of several smaller business units, the results of investment funding activities, intersegment revenue (expense) eliminations and unallocated amounts. Operating results of the business units are discussed in the Line of Business Results section of Financial Review. Selected financial information by line of business is included in the table on the next page. 46 NATIONAL CITY 2000 ANNUAL REPORT 49
--------------------------------------------------------------------------------------------------- NATIONAL RETAIL SALES CORPORATE CONSUMER ASSET CITY (IN THOUSANDS) AND DISTRIBUTION BANKING FINANCE MANAGEMENT MORTGAGE --------------------------------------------------------------------------------------------------- 2000 Net interest income (expense)(a) $1,483,564 $944,695 $636,496 $100,911 $39,687 Provision (benefit) for loan losses 43,583 69,459 179,933 9,633 -- ---------- -------- -------- -------- -------- Net interest income (expense) after provision 1,439,981 875,236 456,563 91,278 39,687 Noninterest income 548,831 225,593 221,871 476,313 402,905 Noninterest expense 1,143,148 410,722 437,068 337,803 343,317 ---------- -------- -------- -------- -------- Income (loss) before taxes 845,664 690,107 241,366 229,788 99,275 Income tax expense (benefit)(a) 324,176 260,436 90,916 85,016 37,878 --------------------------------------------------------------------------------------------------- Net income (loss) $ 521,488 $429,671 $150,450 $144,772 $61,397 --------------------------------------------------------------------------------------------------- Intersegment revenue (expense) $ 14,316 $ -- $ -- $ 28,599 $10,333 Average assets (in millions) 16,105 28,318 18,587 2,558 3,559 --------------------------------------------------------------------------------------------------- 1999 Net interest income (expense)(a) $1,490,583 $865,304 $592,823 $ 90,067 $58,654 Provision (benefit) for loan losses 39,243 55,188 179,903 2,533 -- ---------- -------- -------- -------- -------- Net interest income (expense) after provision 1,451,340 810,116 412,920 87,534 58,654 Noninterest income 553,600 203,414 145,528 477,676 314,698 Noninterest expense 1,169,257 391,380 317,309 334,190 246,958 ---------- -------- -------- -------- -------- Income (loss) before taxes 835,683 622,150 241,139 231,020 126,394 Income tax expense (benefit)(a) 316,367 231,674 89,640 84,466 48,658 --------------------------------------------------------------------------------------------------- Net income (loss) $ 519,316 $390,476 $151,499 $146,554 $77,736 --------------------------------------------------------------------------------------------------- Intersegment revenue (expense) $ 37,670 $ -- $ -- $ 32,219 $10,405 Average assets (in millions) 17,260 26,076 15,794 2,313 3,087 --------------------------------------------------------------------------------------------------- 1998 Net interest income (expense)(a) $1,480,331 $880,330 $556,189 $ 72,983 $42,244 Provision (benefit) for loan losses 34,637 17,118 192,684 2,074 -- ---------- -------- -------- -------- -------- Net interest income (expense) after provision 1,445,694 863,212 363,505 70,909 42,244 Noninterest income 586,064 197,636 89,127 455,581 279,433 Noninterest expense 1,224,471 395,163 266,169 326,256 214,373 ---------- -------- -------- -------- -------- Income (loss) before taxes 807,287 665,685 186,463 200,234 107,304 Income tax expense (benefit)(a) 298,697 246,304 68,991 73,489 37,772 --------------------------------------------------------------------------------------------------- Net income (loss) $ 508,590 $419,381 $117,472 $126,745 $69,532 --------------------------------------------------------------------------------------------------- Intersegment revenue (expense) $ 20,771 $ -- $ -- $ 39,441 $11,861 Average assets (in millions) 18,570 24,753 13,502 1,947 2,726 --------------------------------------------------------------------------------------------------- ---------------------------------- ------------------------------------- NATIONAL PARENT CONSOLIDATED (IN THOUSANDS) PROCESSING AND OTHER TOTAL ---------------------------------- ------------------------------------- 2000 Net interest income (expense)(a) $ 9,187 $(222,449) $2,992,091 Provision (benefit) for loan losses -- (15,813) 286,795 -------- --------- ---------- Net interest income (expense) after provision 9,187 (206,636) 2,705,296 Noninterest income 419,446 189,275 2,484,234 Noninterest expense 358,180 153,671 3,183,909 -------- --------- ---------- Income (loss) before taxes 70,453 (171,032) 2,005,621 Income tax expense (benefit)(a) 27,066 (122,244) 703,244 ------------------------------------------------------------------------ Net income (loss) $ 43,387 $(48,788) $1,302,377 ------------------------------------------------------------------------ Intersegment revenue (expense) $ 11,631 $(64,879) $ -- Average assets (in millions) 385 16,038 85,550 ------------------------------------------------------------------------ 1999 Net interest income (expense)(a) $ 5,024 $(65,498) $3,036,957 Provision (benefit) for loan losses -- (27,193) 249,674 -------- --------- ---------- Net interest income (expense) after provision 5,024 (38,305) 2,787,283 Noninterest income 354,849 331,004 2,380,769 Noninterest expense 379,613 143,797 2,982,504 -------- --------- ---------- Income (loss) before taxes (19,740) 148,902 2,185,548 Income tax expense (benefit)(a) 17,678 (8,420) 780,063 ------------------------------------------------------------------------ Net income (loss) $(37,418) $157,322 $1,405,485 ------------------------------------------------------------------------ Intersegment revenue (expense) $ 12,608 $(92,902) $ -- Average assets (in millions) 400 19,361 84,291 ------------------------------------------------------------------------ 1998 Net interest income (expense)(a) $ 6,948 $(87,152) $2,951,873 Provision (benefit) for loan losses -- (45,113) 201,400 -------- --------- ---------- Net interest income (expense) after provision 6,948 (42,039) 2,750,473 Noninterest income 493,070 213,231 2,314,142 Noninterest expense 476,884 473,797 3,377,113 -------- --------- ---------- Income (loss) before taxes 23,134 (302,605) 1,687,502 Income tax expense (benefit)(a) 9,713 (118,145) 616,821 ------------------------------------------------------------------------ Net income (loss) $ 13,421 $(184,460) $1,070,681 ------------------------------------------------------------------------ Intersegment revenue (expense) $ 9,628 $(81,701) $ -- Average assets (in millions) 506 18,049 80,053 ------------------------------------------------------------------------
(a) Includes tax-equivalent adjustment for tax-exempt interest income. 47 NATIONAL CITY 2000 ANNUAL REPORT 50 FORM 10-K The Annual Report includes the materials required in Form 10-K filed with the Securities and Exchange Commission. The integration of the two documents gives stockholders and other interested parties timely, efficient and comprehensive information on 2000 results. Portions of the Annual Report are not required by the Form 10-K report and are not filed as part of the Corporation's Form 10-K. Only those portions of the Annual Report referenced in the cross-reference index are incorporated in the Form 10-K. The report has not been approved or disapproved by the Securities and Exchange Commission, nor has the Commission passed upon its accuracy or adequacy. UNITED STATES 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, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______ Commission File Number 1-10074 NATIONAL CITY CORPORATION -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware --------------------------------------------------------- (State or Other Jurisdiction of Incorporation or Organization) 34-1111088 --------------------------------------------------------- (I.R.S. Employer Identification No.) 1900 East Ninth Street, Cleveland, Ohio --------------------------------------------------------- (Address of Principal Executive Offices) 44114-3484 --------------------------------------------------------- (ZIP Code) Registrant's telephone number, including area code: 216-575-2000 Securities registered pursuant to Section 12(b) of the Act: National City Corporation Common Stock, $4.00 Per Share -------------------------------------------------------------------------------- (Title of Class) New York Stock Exchange -------------------------------------------------------------------------------- (Name of Each Exchange on Which Registered) Securities registered pursuant to Section 12(g) of the Act: none 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 ____ 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. [ ] The aggregate market value of the voting common stock held by nonaffiliates of the Registrant as of December 31, 2000 - $17,374,835,367 The number of shares outstanding of each of the Registrant's classes of common stock, as of December 31, 2000: Common Stock, $4.00 Per Share - 609,188,668 Documents Incorporated By Reference: Portions of the Registrant's Proxy Statement (to be dated approximately March 8, 2001) are incorporated by reference into Item 10. Directors and Executive Officers of the Registrant; Item 11. Executive Compensation; Item 12. Security Ownership of Certain Beneficial Owners and Management; and Item 13. Certain Relationships and Related Transactions, of Part III. 48 NATIONAL CITY 2000 ANNUAL REPORT 51 FORM 10-K CROSS REFERENCE INDEX
PAGES ------------------------------------------------------------------ PART I Item 1 - Business Description of Business 49 Average Balance Sheets/Interest/Rates 8-9 Volume and Rate Variance Analysis 10 Securities 15, 33-34 Loans 14 Risk Elements of Loan Portfolio 14, 16-17 Interest-bearing Liabilities 8-9, 15, 36 Line of Business Results 13 Financial Ratios 21 Item 2 - Properties 50 Item 3 - Legal Proceedings 50 Item 4 - Submission of Matters to a Vote of Security Holders - None ------------------------------------------------------------------ PART II Item 5 - Market for the Registrant's Common 18, 20 Stock and Related Stockholder inside Matters back cover Item 6 - Selected Financial Data 21 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 6-19 Item 7A - Quantitative and Qualitative Disclosures About Market Risk 18-19 Item 8 - Financial Statements and Supplementary Data 20, 22-47 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - None ------------------------------------------------------------------ PART III Item 10 - Directors and Executive Officers of the Registrant - Note (1) Executive Officers 50-51 Compliance with Section 16(a) of the Securities Exchange Act - Note (1) Item 11 - Executive Compensation - Note (1) Item 12 - Security Ownership of Certain Beneficial Owners and Management - Note (1) Item 13 - Certain Relationships and Related Transactions - Note (1) ------------------------------------------------------------------ PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K Report of Ernst & Young LLP, Independent Auditors 22 Consolidated Financial Statements 23-47 Signatures 51 ------------------------------------------------------------------
Reports on Form 8-K filed in the fourth quarter of 2000: October 16, 2000 - National City issued a news release reporting earnings for the third quarter and first nine months of fiscal year 2000. December 15, 2000 - National City issued a news release announcing that National City, as part of a realignment of the consumer finance business, would be closing its 69 Loan Zone(R) retail stores in the United States, exiting the wholesale loan origination business of its Pittsburgh-based Altegra subsidiary, and exiting the automobile leasing business. Exhibits - The index of exhibits has been filed as separate pages of the 2000 Form 10-K and is available to stockholders on request from the Secretary of the Corporation at the principal executive offices. Copies of exhibits may be obtained at a cost of 30 cents per page. Financial Statement Schedules - Omitted due to inapplicability or because required information is shown in the Financial Statements or the Notes thereto. -------------------------------------------------------------------------------- Note (1) - Incorporated by reference from the Corporation's Proxy Statement to be dated approximately March 8, 2001. -------------------------------------------------------------------------------- BUSINESS National City Corporation ("National City" or "the Corporation") is an $89 billion financial holding company headquartered in Cleveland, Ohio. The company provides a full range of banking and financial services to individuals and businesses, including commercial and retail banking, consumer finance, asset management, mortgage financing and servicing, and item processing. Operations are primarily conducted through more than 1,200 banking offices in Ohio, Pennsylvania, Indiana, Kentucky, Illinois, and Michigan and over 350 retail mortgage offices located throughout the United States. National City and its subsidiaries had 36,097 full-time equivalent employees at December 31, 2000. COMPETITION The financial services business is highly competitive. The banking subsidiaries of National City compete actively with national and state banks, thrift institutions, securities dealers, mortgage bankers, finance companies, insurance companies and other financial service entities. SUPERVISION AND REGULATION National City is a financial holding company and, as such, is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The BHC Act requires the prior approval of the Federal Reserve Board for a financial holding company to acquire or hold more than a 5% voting interest in any bank, and restricts interstate banking activities. The BHC Act allows interstate bank acquisitions anywhere in the country and interstate branching by acquisition and consolidation in those states that had not opted out by January 1, 1997. The BHC Act restricts National City's nonbanking activities to those which are determined by the Federal Reserve Board to be financial in nature, incidental to such financial activity, or complementary to a financial activity. The BHC Act does not place territorial restrictions on the 49 NATIONAL CITY 2000 ANNUAL REPORT 52 FORM 10-K CONTINUED activities of nonbank subsidiaries of bank holding companies. National City's banking subsidiaries are subject to limitations with respect to transactions with affiliates. The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act") represented a pivotal point in the history of the financial services industry. The GLB Act swept away large parts of a regulatory framework that had its origins in the Depression Era of the 1930s. Effective March 11, 2000, new opportunities became available for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services. The GLB Act provides a new regulatory framework for regulation through the financial holding company, which has as its umbrella regulator the Federal Reserve Board. Functional regulation of the financial holding company's separately regulated subsidiaries is conducted by their primary functional regulator. The GLB Act requires "satisfactory" or higher Community Reinvestment Act compliance for insured depository institutions and their financial holding companies in order for them to engage in new financial activities. The GLB Act provides a federal right to privacy of non-public personal information of individual customers. National City and its subsidiaries are also subject to certain state laws that deal with the use and distribution of non-public personal information. A substantial portion of the Corporation's cash revenue is derived from dividends paid by its subsidiary banks. These dividends are subject to various legal and regulatory restrictions as summarized in Note 14 to the Corporation's Consolidated Financial Statements. The subsidiary banks are subject to the provisions of the National Bank Act or the banking laws of their respective states, are under the supervision of, and are subject to periodic examination by, the Comptroller of the Currency (the "OCC") or the respective state banking departments, and are subject to the rules and regulations of the OCC, Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation ("FDIC"). National City's subsidiary banks are also subject to certain laws of each state in which such bank is located. Such state laws may restrict branching of banks within the state and acquisition or merger involving banks located in other states. Ohio, Kentucky, Illinois, Indiana, Michigan and Pennsylvania have all adopted nationwide reciprocal interstate banking. The Financial Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of any FDIC-assisted transaction involving an affiliated insured bank or savings association. During 2000, the Securities and Exchange Commission issued Regulation FD which established affirmative disclosure requirements on public corporations such that material nonpublic information must be widely, rather than selectively, disseminated. Regulation FD is based on the premise that full and fair disclosure is the cornerstone of an efficient market system. National City is subject to Regulation FD. Through Regulation FD, the Securities and Exchange Commission seeks to encourage broad public disclosure in order to increase investor confidence in the integrity of the capital markets. The monetary policies of regulatory authorities, including the Federal Reserve Board and the FDIC, have a significant effect on the operating results of banks and holding companies. The nature of future monetary policies and the effect of such policies on the future business and earnings of National City and its subsidiaries cannot be predicted. PROPERTIES National City and its significant subsidiaries occupy their headquarters offices under long-term leases. The Corporation also owns freestanding operations centers in Columbus and Cleveland, Ohio and Kalamazoo and Royal Oak, Michigan and leases operations centers in Pittsburgh, Pennsylvania and Chicago, Illinois. Branch office locations are variously owned or leased. LEGAL PROCEEDINGS The information contained in Note 18 to the Consolidated Financial Statements on page 39 of this Annual Report is incorporated herein by reference. EXECUTIVE OFFICERS The Executive Officers of National City (as of January 24, 2001) are as follows:
NAME AGE POSITION ------------------------------------------------------------------ David A. Daberko 55 Chairman and Chief Executive Officer Vincent A. DiGirolamo 63 Vice Chairman Robert G. Siefers 55 Vice Chairman William E. MacDonald III 54 Senior Executive Vice President James R. Bell III 44 Executive Vice President Paul G. Clark 47 Executive Vice President Gary A. Glaser 56 Executive Vice President Thomas W. Golonski 58 Executive Vice President Jon L. Gorney 50 Executive Vice President Jeffrey D. Kelly 47 Executive Vice President and Chief Financial Officer Timothy J. Lathe 45 Executive Vice President Herbert R. Martens, Jr. 48 Executive Vice President Robert J. Ondercik 54 Executive Vice President A. Joseph Parker 46 Executive Vice President J. Armando Ramirez 45 Executive Vice President Peter E. Raskind 44 Executive Vice President Phillip L. Rice 42 Executive Vice President Frederick W. Schantz 65 Executive Vice President Shelley J. Seifert 46 Executive Vice President Stephen A. Stitle 55 Executive Vice President David L. Zoeller 51 Executive Vice President, General Counsel and Secretary James P. Gulick 42 Senior Vice President and General Auditor Thomas A. Richlovsky 49 Senior Vice President and Treasurer ------------------------------------------------------------------
50 NATIONAL CITY 2000 ANNUAL REPORT 53 The term of office for executive officers is one year. There is no family relationship between any of the executive officers. Except as noted below, each of the officers listed above has been an executive officer of the Corporation or one of its subsidiaries during the past five years. Mr. Lathe was appointed president and chief executive officer of National City Bank of Michigan/Illinois in 2000. Prior to that time he was executive vice president of National City Bank for the syndications division from 1998 to 2000 and the structured finance division from 1997 to 1998. Prior to 1997, he was senior vice president of the multinational division. Mr. Ramirez was appointed an executive vice president in 2000. Prior to that time he was senior vice president of corporate planning. Mr. Raskind was appointed an executive vice president in 2000. Prior to that time he was vice chairman of U.S. Bancorp. Mr. Rice was appointed an executive vice president and president of National City Bank in 2000. Prior to that time, he was executive vice president of the northcoast region from 1997 to 2000. Prior to 1997, he was senior vice president of the Metro/Ohio division of National City Bank. Ms. Seifert was appointed an executive vice president of corporate human resources in 2000. Prior to that time, she was senior vice president of corporate human resources. Mr. Schantz was appointed an executive vice president in 1999. Since 1998, he has been president and chief executive officer of National City Bank of Kentucky. Prior to 1998, he was chief executive officer of National City Bank's Southwest region. Mr. Stitle was appointed an executive vice president in 1999. Since 1995, he has been chairman, president and chief executive officer of National City Bank of Indiana. Mr. Parker was appointed an executive vice president in 1998. Prior to that time he was the Retail Business Line Manager of the Corporation. Mr. Clark was appointed an executive vice president in 1998. Prior to that time, he was president and chief executive officer of National City Bank of Michigan/ Illinois. Prior to 1998, he was executive vice president of National City Bank of Pennsylvania. Mr. Martens was appointed an executive vice president in 1997. He has been chairman of NatCity Investments, Inc. since 1995. Mr. Golonski was appointed an executive vice president in 1996. Prior to that time he was the president of Integra Bank. 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, on January 24, 2001. National City Corporation /s/ David A. Daberko --------------------------------------- David A. Daberko Chairman and 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 indicated, on January 24, 2001. /s/ David A. Daberko --------------------------------------- David A. Daberko Chairman and Chief Executive Officer /s/ Robert G. Siefers --------------------------------------- Robert G. Siefers Vice Chairman /s/ Vincent A. DiGirolamo --------------------------------------- Vincent A. DiGirolamo Vice Chairman /s/ Jeffrey D. Kelly --------------------------------------- Jeffrey D. Kelly Executive Vice President and Chief Financial Officer /s/ Thomas A. Richlovsky --------------------------------------- Thomas A. Richlovsky Senior Vice President and Treasurer The Directors of National City Corporation (listed on page 52, except John W. Brown) executed a power of attorney appointing David L. Zoeller, Carlton E. Langer and Thomas A. Richlovsky their attorneys-in-fact, empowering them to sign this report on their behalf. /s/ David L. Zoeller --------------------------------------- By David L. Zoeller Attorney-in-fact 51 NATIONAL CITY 2000 ANNUAL REPORT 54 BOARD OF DIRECTORS AND OFFICERS BOARD OF DIRECTORS DAVID A. DABERKO (2,3) DANIEL E. EVANS (1,5) MICHAEL A. SCHULER (1,6) Chairman & CEO Chairman Chairman, President & CEO National City Corporation Bob Evans Farms, Inc. Zippo Manufacturing Company JON E. BARFIELD (1,4,6) JOSEPH T. GORMAN (5,7) JEROME F. TATAR (1,4,7) Chairman & President Chairman & CEO Chairman, President & CEO The Bartech Group, Inc. TRW Inc. The Mead Corporation EDWARD B. BRANDON (2,3,6) BERNADINE P. HEALY, M.D. (3,6,7) MORRY WEISS (3,4,6) Retired Chairman President & CEO Chairman & CEO National City Corporation American Red Cross American Greetings Corporation HONORARY DIRECTORS JOHN G. BREEN (3,4,5) DOROTHY A. JOHNSON (1,4,6) CLAUDE M. BLAIR Retired Chairman President Retired Chairman The Sherwin-Williams Company Ahlburg Company National City Corporation JAMES S. BROADHURST (1,5) President-Emeritus JULIEN L. MCCALL Chairman & CEO Council of Michigan Foundations Retired Chairman Eat'n Park Hospitality Group, Inc. National City Corporation PAUL A. ORMOND (3,5,7) JOHN W. BROWN (3,4,5) President & CEO COMMITTEES: Chairman, President & CEO Manor Care, Inc. Stryker Corporation (1) Audit ROBERT A. PAUL (2,3,7) (2) Dividend DUANE E. COLLINS (2,3,5) President & CEO (3) Executive Chairman & CEO Ampco-Pittsburgh Corporation (4) Nominating and Board of Directors Parker Hannifin Corporation Governance WILLIAM F. ROEMER (2,6) (5) Compensation & Organization SANDRA AUSTIN CRAYTON (2,4,7) Retired Chairman (6) Public Policy President & CEO National City Bank of Pennsylvania (7) Investment PhyServ LLC ---------------------------------------------------------------------------------------------------------------------------------
OFFICERS Office of the Chairman HERBERT R. MARTENS, JR. MARY H. GRIFFITH DAVID A. DABERKO Private Investment Advisors Corporate Communications and Marketing Chairman & CEO ROBERT J. ONDERCIK JAMES P. GULICK VINCENT A. DIGIROLAMO Credit Administration General Auditor, Risk Management Vice Chairman A. JOSEPH PARKER JOSEPH J. HERR ROBERT G. SIEFERS Retail Sales & Distribution Loan Review Vice Chairman J. ARMANDO RAMIREZ JAMES A. HUGHES Senior Executive Vice President Corporate Planning Information Services WILLIAM E. MACDONALD III PETER E. RASKIND J. MICHAEL KEARNEY Corporate Banking, Regional Banking Consumer Finance Properties Executive Vice Presidents PHILLIP L. RICE JANIS E. LYONS JAMES R. BELL III Ohio Banking Comptroller Capital Markets FREDERICK W. SCHANTZ BRUCE A. MCCRODDEN PAUL G. CLARK Kentucky Banking Public Affairs Fee Businesses SHELLEY J. SEIFERT MICHAEL J. MINNAUGH GARY A. GLASER Human Resources Institutional Trust Ohio Banking STEPHEN A. STITLE GARY P. OBERS THOMAS W. GOLONSKI Indiana Banking Corporate Services Pennsylvania Banking DAVID L. ZOELLER THOMAS A. RICHLOVSKY JON L. GORNEY General Counsel & Secretary Treasurer Information Services & Operations Senior Vice Presidents WILLIAM H. SCHECTER JEFFREY D. KELLY JEFFREY M. BIGGAR Merchant Banking Chief Financial Officer Sterling THOMAS H. SCHROTH TIMOTHY J. LATHE WILLIAM I. CORNETT, JR. Operations Michigan/Illinois Banking Corporate Banking JEFFREY T. SILER RICHARD J. DEKASER Dealer Finance Economist
52 NATIONAL CITY 2000 ANNUAL REPORT 55 CORPORATE INFORMATION CORPORATE HEADQUARTERS National City Center 1900 East Ninth Street Cleveland, Ohio 44114-3484 (216) 575-2000 www.national-city.com TRANSFER AGENT AND REGISTRAR National City Bank Corporate Trust Operations Department 5352 P.O. Box 92301 Cleveland, Ohio 44193-0900 1-800-622-6757 INVESTOR INFORMATION Derek Green Vice President Investor Relations Department 2101 P.O. Box 5756 Cleveland, Ohio 44101-0756 1-800-622-4204 COMMON STOCK LISTING National City Corporation common stock is traded on the New York Stock Exchange under the symbol "NCC." The stock is abbreviated in financial publications as "NtlCity." National City's 87%-owned item processing subsidiary, National Processing, Inc., is traded on the New York Stock Exchange under the symbol "NAP." The stock is abbreviated in financial publications as "NtlProc." ANNUAL MEETING The Annual Meeting of Stockholders will be on Monday, April 23, 2001 at 10:00 a.m. Eastern Time National City Corporation National City Center 1900 East Ninth Street Cleveland, Ohio 44114-3484 DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN National City Corporation offers stockholders a convenient way to increase their investment through the National City Corporation Amended and Restated Dividend Reinvestment and Stock Purchase Plan (the "Plan"). Under the Plan, investors can elect to acquire shares by reinvesting dividends and through optional cash payments. National City absorbs fees and brokerage commissions on shares acquired through the Plan. To obtain a Plan prospectus and authorization card, please call 1-800-622-6757. DIRECT DEPOSIT OF DIVIDENDS The direct deposit program, which is offered at no charge, provides for automatic deposit of quarterly dividends directly to a checking or savings account. For information regarding this program, call 1-800-622-6757. NAIC National City is a proud sponsor of the National Association of Investors Corporation (NAIC) and participates in its Low-Cost Investment Plan. To receive more information on NAIC, call (248) 583-NAIC. DEBT RATINGS
--------------------------------------------------------------- MOODY'S FITCH IBCA, INVESTORS STANDARD DUFF & PHELPS SERVICE & POOR'S --------------------------------------------------------------- NATIONAL CITY CORPORATION A/B COMMERCIAL PAPER F1+ P-1 A-1 SENIOR DEBT AA- A1 A SUBORDINATED DEBT A+ A2 A- --------------------------------------------------------------- BANK SUBSIDIARIES CERTIFICATES OF DEPOSIT AA Aa3 A+ SUBORDINATED BANK NOTES A+ A1 A
COMMON STOCK INFORMATION
------------------------------------------------------------------ FIRST SECOND THIRD FOURTH FULL QUARTER QUARTER QUARTER QUARTER YEAR ------------------------------------------------------------------ 2000 DIVIDENDS PAID $ .285 $ .285 $ .285 $ .285 $ 1.14 HIGH 23.56 22.75 23.13 29.75 29.75 LOW 17.19 16.00 17.19 18.50 16.00 CLOSE 20.63 17.06 22.00 28.75 28.75 ------------------------------------------------------------------ 1999 DIVIDENDS PAID $ .26 $ .26 $ .27 $ .27 $ 1.06 HIGH 37.81 36.75 33.38 31.44 37.81 LOW 33.09 31.44 26.13 22.13 22.13 CLOSE 33.19 32.75 26.69 23.69 23.69
56 [NATIONAL CITY LOGO] Bulk Rate U.S. Postage 1900 East Ninth Street PAID Cleveland, OH 44114 National City Corporation 74-0549-00(Rev. 01/01) 57 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 3.1 Restated Certificate of Incorporation of National City Corporation, as amended (filed as Exhibit 3.1 to National City Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference). 3.2 Amended and Restated Certificate of Incorporation of National City Corporation dated April 13, 1999 (filed as Exhibit 3.2 to Registrant's Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2000 and incorporated herein by reference). 3.3 National City Corporation First Restatement of By-laws adopted April 27, 1987 (As Amended through October 24, 1994) (filed as Exhibit 3.2 to Registrant's Form S-4 Registration Statement No. 33-56539 dated November 18, 1994 and incorporated herein by reference). 4.1 The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of Senior and Subordinated debt of the Company. 4.2 Credit Agreement dated as of February 2, 1996 by and between National City and the banks named therein (filed as Exhibit 4.2 to Registrant's Form S-4 Registration Statement No. 333-01697 dated March 15, 1996 and incorporated herein by reference). 4.3 Certificate of Stock Designation dated as of February 2, 1998 designating National City Corporation's 6% Cumulative Convertible Preferred Stock, Series 1, without par value, and fixing the powers, preferences, rights, qualifications, limitations and restrictions thereof (filed as Appendix D to Registrant's Form S-4 Registration Statement No. 333-45609 dated February 19, 1998 and incorporated herein by reference) in addition to those set forth in National City Corporation's Restated Certificate of Incorporation, as amended (filed as Exhibit 3.2 to Registrant's Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2000 and incorporated herein by reference). 10.1 Amendment No. 7 to the National City Savings and Investment Plan, As Amended and Restated Effective July 1, 1992 (filed as Exhibit 10.1). 10.2 Amendment No. 6 to the National City Savings and Investment Plan No. 2, As Amended and Restated Effective January 1, 1992 (filed as Exhibit 10.2). 10.3 National City Corporation's Amended 1984 Stock Option Plan (filed as Exhibit No. 10.2 to National City's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference). 10.4 National City Corporation 1989 Stock Option Plan (filed as Exhibit 10.7 to National City's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, and incorporated herein by reference). 10.5 National City Corporation's 1993 Stock Option Plan (filed as Exhibit 10.5 to Registration Statement No. 33-49823 and incorporated herein by reference). 10.6 National City Corporation 150th Anniversary Stock Option Plan (filed as Exhibit 10.9 to Registrant's Form S-4 Registration Statement No. 33-59487 dated May 19, 1995 and incorporated herein by reference). 10.7 National City Corporation Plan for Deferred Payment of Directors' Fees, As Amended (filed as Exhibit 10.5 to Registration Statement No. 2-914334 and incorporated herein by reference). 10.8 National City Corporation Supplemental Executive Retirement Plan, As Amended and Restated Effective January 1, 1997 (filed as Exhibit 10.12 to Registrant's Form S-4 Registration Statement No. 333-46571 dated February 19, 1998 and incorporated herein by reference). 10.9 National City Corporation Executive Savings Plan, As Amended and Restated Effective January 1, 2001 (filed as Exhibit 10.35 to Registrant's Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2000 and incorporated herein by reference.). 10.10 National City Corporation Amended and Second Restated 1991 Restricted Stock Plan (filed as Exhibit 10.9 to Registration Statement No. 33-49823 and incorporated herein by reference). 10.11 Form of grant made under National City Corporation 1991 Restricted Stock Plan in connection with National City Corporation Supplemental Executive Retirement Plan As Amended (filed as Exhibit 10.10 to National City's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference).
58
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 10.12 Merchants National Corporation Director's Deferred Compensation Plan, As Amended and Restated August 16, 1983 (filed as Exhibit 10(3) to Merchants National Corporation's Form S-2 Registration Statement dated June 28, 1985, and incorporated herein by reference). 10.13 Merchants National Corporation Supplemental Pension Plan dated November 20, 1984; First Amendment to the Supplemental Pension Plans dated January 21, 1986; Second Amendment to the Supplemental Pension Plans dated July 3, 1989; and Third Amendment to the Supplemental Pension Plans dated November 21, 1990 (filed respectively as Exhibit 10(n) to Merchants National Corporation Annual Report on Form 10-K for the year ended December 21, 1984; as Exhibit 10(q) to the Merchants National Corporation Annual Report on Form 10-K for the year ended December 31, 1985; as Exhibit 10(49) to Merchants National Corporation Annual Report on Form 10-K for the year ended December 31, 1990; and as Exhibit 10(50) to the Merchants National Corporation Annual Report on Form 10-K for the year ended December 31, 1990; all incorporated herein by reference). 10.14 Merchants National Corporation Employee Benefit Trust Agreement, effective July 1, 1987 (filed as Exhibit 10(27) to Merchants National Corporation Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference). 10.15 Merchants National Corporation Non-Qualified Stock Option Plan, effective January 20, 1987, and the First Amendment to that Merchants National Non-Qualified Stock Option Plan, effective October 16, 1990 (filed respectively as Exhibit 10(23) to Merchants National Corporation Annual Report on Form 10-K for the year ended December 31, 1986, and as Exhibit 10(55) to Merchants National Corporation Annual Report on Form 10-K for the year ended December 31, 1990, both of which are incorporated herein by reference). 10.16 Merchants National Corporation 1987 Non-Qualified Stock Option Plan, effective November 17, 1987, and the First Amendment to effective October 16, 1990 (filed respectively as Exhibit 10(30) to Merchants National Corporation Annual Report on Form 10-K for the year ended December 31, 1987, and as Exhibit 10(61) to Merchants National Corporation Annual Report on Form 10-K for the year ended December 31, 1990, both of which are incorporated herein by reference). 10.17 Merchants National Corporation Directors Non-Qualified Stock Option Plan and the First Amendment to Merchants National Corporation Directors Non-qualified Stock Option Plan effective October 16, 1990 (filed respectively as Exhibit 10(44) to Merchants National Corporation Annual Report on Form 10-K for the year ended December 31, 1988, and as Exhibit 10(68) to Merchants National Corporation Annual Report on Form 10-K for the year ended December 31, 1990, both of which are incorporated herein by reference). 10.18 Central Indiana Bancorp Option Plan effective March 15, 1991 (filed as Exhibit 10.26 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 10.19 Central Indiana Bancorp 1993 Option Plan effective October 12, 1993 (filed as Exhibit 10.27 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 10.20 Form of contracts with David A. Daberko, Vincent A. DiGirolamo, William E. MacDonald III, Jon L. Gorney, Robert G. Siefers, Robert J. Ondercik, Jeffrey D. Kelly, David L. Zoeller, Thomas A. Richlovsky, James P. Gulick, Gary A. Glaser, Herbert R. Martens, Jr., Thomas W. Golonski, Stephen A. Stitle, James R. Bell III, Peter E. Raskind, Phillip L. Rice, Timothy J. Lathe, J. Armando Ramirez and Shelley J. Seifert (filed as Exhibit 10.29 to Registrant's Form S-4 Registration Statement No. 333-46571 dated February 19, 1998 and incorporated herein by reference). 10.21 Split Dollar Insurance Agreement effective January 1, 1994 between National City Corporation and those individuals listed in Exhibit 10.27 and other key employees filed as exhibit 10.28 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference).
59
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- 10.22 Restated First of America Bank Corporation 1987 Stock Option Plan (filed as Exhibit 4.4 to Registrant's Post-Effective Amendment No. 2 (on Form S-8) to Form S-4 Registration Statement No. 333-46571), Amended and Restated First of America Bank Corporation Stock Compensation Plan (filed as Exhibit 4.5 to Registrant's Post-Effective Amendment No. 2 (on Form S-8) to Form S-4 Registration Statement No. 333-46571) and First of America Bank Corporation Directors Stock Compensation Plan (filed as Exhibit 4.6 to Registrant's Post-Effective Amendment No. 2 (on Form S-8 to Form S-4 Registration Statement No. 333-46571) and each incorporated herein by reference). 10.23 Fort Wayne National Corporation 1985 Stock Incentive Plan (filed as Exhibit 4.4 to Registrant's Post-Effective Amendment No. 1 (on Form S-8) to Form S-4 Registration Statement No. 333-45609), Fort Wayne National Corporation 1994 Stock Incentive Plan (filed as Exhibit 4.5 to Registrant's Post-Effective Amendment No. 1 (on Form S-8) to Form S-4 Registration Statement No. 333-45609) and Fort Wayne National Corporation 1994 Nonemployee Director Stock Incentive Plan (filed as Exhibit 4.6 to Registrant's Post-Effective Amendment No. 1 (on Form S-8 to Form S-4 Registration Statement No. 333-45609) and each incorporated herein by reference). 10.24 National City Corporation 1997 Stock Option Plan (filed as Exhibit 4.4 to Registrant's Form S-8 Registration Statement No. 333-58923, dated July 10, 1998, and incorporated herein by reference). 10.25 National City Corporation 1997 Restricted Stock Plan (filed as Exhibit 4.4 to Registrant's Form S-8 Registration Statement No. 333-60411, dated July 31, 1998, and incorporated herein by reference). 10.26 National City Corporation Long-Term Supplemental Incentive Compensation Plan for Executive Officers (filed as Exhibit 10.40 to National City Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference). 10.27 Integra Financial Corporation Employee Stock Option Plan (filed as Exhibit 4.3 to Registrant's Form S-8 Registration Statement No. 333-01697, dated April 30, 1996 and incorporated herein by reference). 10.28 Integra Financial Corporation Management Incentive Plan (filed as Exhibit 4.4 to Registrant's Form S-8 Registration Statement No. 333-01697, dated April 30, 1996 and incorporated herein by reference). 10.29 Integra Financial Corporation Non-Employee Directors Stock Option Plan (filed as Exhibit 4.5 to Registrant's Form S-8 Registration Statement No. 333-01697, dated April 30, 1996 and incorporated herein by reference). 10.30 National City Corporation Amended and Restated Long-Term Incentive Compensation Plan for Senior Officers as Amended and Restated Effective January 1, 2001 (filed as Exhibit 10.32 to Registrant's Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2000 and incorporated herein by reference). 10.31 National City Corporation Management Incentive Plan for Senior Officers as Amended and Restated Effective January 1, 2001 (filed as Exhibit 10.33 to Registrant's Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2000 and incorporated herein by reference). 10.32 National City Corporation Supplemental Cash Balance Pension Plan (filed as Exhibit 10.34 to Registrant's Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2000 and incorporated herein by reference). 10.33 The National City Corporation Deferred Compensation Plan, Effective January 1, 2001 (filed as Exhibit 10.36 to Registrant's Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2000 and incorporated herein by reference). 12.1 Computation of Ratio of Earnings to Fixed Charges (filed as Exhibit 12.1). 21.1 Subsidiaries (filed as Exhibit 21.1) 23.1 Consent of Ernst & Young LLP, Independent Auditors for National City Corporation (filed as Exhibit 23.1) 24.1 Power of Attorney (filed as Exhibit 24.1)