-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BWUt/eN6e38az8vxcg3NzM4dwm1O27oVY3W6m4ef1xLJHr7hfNaL33a7fprgd/lQ kf+Jpqro4vEYfnmZny+ufA== 0000950152-98-000566.txt : 19980202 0000950152-98-000566.hdr.sgml : 19980202 ACCESSION NUMBER: 0000950152-98-000566 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980130 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL CITY CORP CENTRAL INDEX KEY: 0000069970 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 341111088 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07229 FILM NUMBER: 98517233 BUSINESS ADDRESS: STREET 1: 1900 E NINTH ST CITY: CLEVELAND STATE: OH ZIP: 44114 BUSINESS PHONE: 2165752000 MAIL ADDRESS: STREET 1: 1900 EAST NINTH STREET CITY: CLEVELAND STATE: OH ZIP: 44114 10-K 1 NATIONAL CITY CORPORATION 10-K 1 1997 Annual Report [NATIONAL CITY LOGO] FOLLOW YOUR OWN LEAD.(TM) 2 1997 Annual Report
CORPORATE PROFILE National City Corporation is a $55 billion A corporate-wide employee diversified financial services company based in program, Momentum Cleveland, Ohio. National City operates banks and encompasses everything we do other financial service subsidiaries principally at National City to enhance in Ohio, Kentucky, Indiana and Pennsylvania. our sales and marketing National City subsidiaries provide financial culture, services that meet a wide range of customer needs, which in turn adds value to our including commercial and retail banking, trust and stockholders. Our employees investment services, item processing and mortgage have embraced change - servicing. change that involves listening closely to the customer and On December 1, 1997, National City announced the understanding his or her signing of a definitive agreement to merge with individual needs. Using this First of America Bank Corporation, a $21 billion information, we can offer the bank holding company headquartered in Kalamazoo, products and services that Michigan. On January 12, 1998, National City help our customers meet announced the signing of a definitive agreement to their financial goals. acquire Fort Wayne National Corporation, a $3 billion bank holding company headquartered in Fort Wayne, Indiana. Both transactions are expected to close in the second quarter of 1998, subject to regulatory and stockholder approvals. National City can be found on the world wide web at www.national-city.com.
3 FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Amounts) 1997 1996 Percent Change - ------------------------------------------------------------------------------------------------ FOR THE YEAR: Net Income $807,433 $736,630 10% Preferred Dividend Requirements -- 4,028 -- Net Income Applicable to Common Stock 807,433 732,602 10 Net Income Per Common Share: Basic 3.73 3.34 12 Diluted 3.66 3.27 12 Dividends Paid Per Common Share 1.67 1.47 14 - ------------------------------------------------------------------------------------------------ Return on Average Common Equity 18.53% 17.69% Return on Average Assets 1.59 1.51 - ------------------------------------------------------------------------------------------------ Average Shares -- Basic 216,429,836 219,095,248 (1)% Average Shares -- Diluted 220,689,763 225,353,501 (2) - ------------------------------------------------------------------------------------------------ AT YEAR END: Assets $54,683,521 $50,855,835 8% Loans 39,573,125 35,830,068 10 Securities 8,865,063 8,923,482 (1) Deposits 36,861,136 35,999,747 2 Stockholders' Equity 4,281,351 4,432,063 (3) - ------------------------------------------------------------------------------------------------ Equity to Assets Ratio 7.83% 8.71% Tier 1 Capital Ratio 8.12 9.84 Total Risk-Based Capital Ratio 12.65 14.79 Leverage Ratio 7.01 8.16 - ------------------------------------------------------------------------------------------------ Book Value Per Common Share $20.28 $19.86 2% Market Value Per Common Share 65.75 44.88 47 - ------------------------------------------------------------------------------------------------ Common Shares Outstanding 211,097,837 223,198,494 (5)% Common Stockholders of Record 34,108 33,801 1 Full-Time Equivalent Employees 29,841 26,286 14 - ------------------------------------------------------------------------------------------------
Note: All prior-period per share data have been restated as necessary to reflect Statement of Financial Accounting Standards No. 128, Earnings Per Share. See Note 13 to the Consolidated Financial Statements.
TOTAL RETURN - NATIONAL CITY VS. S&P 500 (cumulative annual rates - assumes reinvestment of dividends) 20 15 10 15 1 National City Corporation 18.7 25.3 21.6 26.5 51.2 S&P 500 16.6 17.5 18 20.2 33.6
---------------------------------- To Our Stockholders..............2 ---------------------------------- Financial Review.................5 ---------------------------------- Financial Statements and Notes.........................22 ---------------------------------- Form 10-K.......................44 ---------------------------------- Board of Directors/Officers.....48 ----------------------------------
1 4 TO OUR STOCKHOLDERS: [PHOTO] (Standing, left) ROBERT G. SIEFERS Vice Chairman and Chief Financial Officer (Standing, right) VINCENT A. DIGIROLAMO Vice Chairman (Seated) DAVID A. DABERKO Chairman and Chief Executive Officer Nineteen ninety seven was another successful year for National City. Net income was a record $807.4 million or $3.66 per share, up 11.9% from 1996 - the sixth consecutive year of double-digit earnings per share growth on an originally reported basis. Return on equity reached 18.53% on a substantial capital base, and return on assets was 1.59%, among the best in the industry. Underlying this superior financial performance was the sound execution of strategic initiatives in all of the company's major lines of business. [QUOTEBOX -- Underlying this superior financial performance was the sound execution of strategic initiatives in all of the company's major lines of business.] In retail banking, our largest line of business, we continued to execute the strategy set forth over the past several years. The primary objective of this strategy is to capture the maximum value of each customer relationship by providing the right mix of products and services, appropriately priced, through each customer's preferred delivery channels. For instance, in 1997 we introduced a non-prime indirect auto lending product to reach a segment of the market traditionally served by finance companies. With a large network of automobile dealer relationships and sophisticated credit scoring techniques, we can be competitive in a business which offers terrific growth potential. To gain insight into customer preferences, we continue to make substantial investments in data warehouse technology to more effectively capture and manage customer information. This capability has already resulted in more effective cross-selling and has given us tools to better understand and predict customer needs and preferences. We know that customer demand for financial services transcends traditional time and place limitations. To that end, we initiated a multi-year plan to reconfigure our branch delivery system -- reducing traditional, full-service branches while expanding nontraditional alternatives such as in-store locations, limited-service facilities and off-site ATMs -- which, along with enhanced call center capability, makes it easier and more convenient for customers to do business with us. 2 5 In corporate banking, our second largest business, we have worked hard to retain our position as the number one middle-market lender in our region. Our markets continue to be economically vibrant as evidenced by low rates of unemployment and significant growth in small and medium size businesses over the past several years. Our decentralized system of credit approval permits quick responsiveness to customer needs, while our product capability is second to none. For example, we introduced an innovative lending product, Corporate Select, which utilizes built-in interest rate protection options inside a conventional loan to help companies manage risk in a seamless, straightforward manner. Corporate Select offers a competitive advantage in winning and strengthening customer relationships, since there is no comparable product currently available in the market. Through initiatives such as these and a strong team of relationship managers we have been able to maintain or increase market share in virtually all our markets. We have been particularly successful in western Pennsylvania, which we entered through the merger with Integra Financial Corporation in 1996. As we said at the time, one of the most notable opportunities in that transaction was the chance to increase share in middle-market corporate banking. [QUOTEBOX -- For the company as a whole, there is no time to rest on our laurels from 1997's excellent performance.] We also took decisive actions during the year with respect to the Corporation's fee-based businesses. In April, we launched a significant new initiative, Wealth Management, targeting the affluent and emerging affluent segments with a client-focused, customer-friendly approach. Combining retail brokerage, private banking, financial planning and personal trust under one umbrella, Wealth Management brings together resources from around the company to effectively meet the needs of these important and growing customer segments. The other fee-based businesses, Institutional Trust, Mortgage Banking, and National Processing all made substantial progress in 1997. Within Institutional Trust, fundamental improvements in investment performance and customer service have driven improved financial results. In Mortgage Banking, investments in new origination sources have strengthened an already-efficient servicing operation, and the business is now growing nicely. Finally, at National Processing, our 88%-owned item processing subsidiary, a new management team has taken steps to improve efficiency and broaden the customer base and business mix. After some disappointments early in 1997, National Processing enters 1998 with considerable momentum. For the company as a whole, there is no time to rest on our laurels from 1997's excellent performance. We retain a sense of urgency with the knowledge that National City, like virtually every other regional bank, has derived a significant percentage of its income over the years from gathering and maintaining "core" deposits; that is, customer checking, savings and money market accounts. Due to changing consumer preferences, technology, and deregulation, the traditional core deposit business is in long-term secular decline. Our challenge is to manage this decline and to increase the profitability of the total customer relationship even as core deposit profitability shrinks. The data warehouse and information management initiatives mentioned earlier are critical components of the strategy. We are advantaged in having all of our banking units on the same operating systems, which has also allowed us to address the "year 2000 problems" ahead of much of the rest of the competition. Having the right product array is also essential. Equally important is the fostering of a sales and marketing culture, so that serving customers truly becomes the focus of everything we do. 3 6 An additional challenge and exciting opportunity we will undertake in 1998 is the proposed merger with First of America Bank Corporation, which was announced in December 1997, and, subject to shareholder and regulatory approvals, is expected to be completed in the second quarter of 1998. First of America, which has $21 billion in assets and is based in Kalamazoo, Michigan, dramatically enhances the National City franchise through the addition of over three million customers in markets across Michigan, central Indiana and key Illinois cities outside Chicago. Although the one-time charges associated with the merger will temporarily disrupt National City's earnings per share growth record in 1998, we expect enhanced earnings growth in 1999 and beyond through the rollout of National City products and services to First of America's markets and customer base, and the realization of economies of scale. By integrating First of America quickly and decisively, following the same business model employed for the Integra acquisition in 1996, we will maintain momentum and continue the progress in the other critical initiatives underway throughout the rest of the company. [QUOTEBOX -- Management, employees and directors continued to increase their stock ownership during the year, underscoring and reinforcing our collective dedication to shareholder interests.] We also announced, on January 12, 1998, an agreement to acquire Fort Wayne National Corporation, a $3 billion in assets banking company which has the number one and two market share, respectively, in the attractive northern Indiana markets of Fort Wayne and South Bend. This franchise will significantly enhance our Indiana banking presence, and will be integrated on a similar timetable with the First of America merger. Some important management changes occurred in 1997. Following the mid-year retirement of Bill Robertson, who had been president, Bob Siefers was appointed vice chairman and became a member of the Office of the Chairman in October. Bob's 26-year career with National City has included a variety of assignments around the company, most recently as chief financial officer. Bob has been influential in virtually every major corporate decision at National City over at least the last 15 years, and this appointment formally recognizes his role in the management team. Finally, National City stock again proved to be a superb investment in 1997, providing stockholders with a total return (price appreciation plus dividends) of 51.2%, compared to 33.6% for the market as a whole as measured by the S&P 500. The dividend was increased twice during the year, as has been the case for each of the last five years, with a further boost, to $.46 per share, effective for the first quarter of 1998. Management, employees and directors continued to increase their stock ownership during the year, underscoring and reinforcing our collective dedication to shareholder interests. /s/ David A. Daberko David A. Daberko Chairman and Chief Executive Officer January 21, 1998 7 FINANCIAL REVIEW EARNINGS SUMMARY National City Corporation ("National City" or "the Corporation") reported record net income of $807.4 million in 1997, compared with $736.6 million in 1996 and $591.5 million in 1995. Diluted earnings per share increased 11.9% in 1997 to $3.66, compared with $3.27 in 1996 and $2.64 in 1995. Return on average common equity was 18.53% in 1997, up from 17.69% in 1996 and 16.18% in 1995 (Chart 2). Return on average assets was 1.59% in 1997 versus 1.51% in 1996 and 1.23% in 1995 (Chart 3). The 1997 results reflect growth in noninterest income, controlled operating expenses and stable net interest income. Excluding securities gains, noninterest income increased 14.2% to $1,292.4 million primarily as a result of growth in item processing fees, service charges on deposits, card-related fees and mortgage banking revenue. Excluding merger and restructuring expenses, noninterest expense increased 2.2% to $1,944.7 million as a result of increased business activity and acquisitions. For the full year, merger and restructuring expenses totaled $65.9 million. Of these expenses, $33.3 million represented costs associated with reorganizing six Ohio banking subsidiaries under a single statewide charter; $19.3 million represented costs incurred in connection with the pending First of America merger (see Note 3 to the Consolidated Financial Statements), and $13.3 million in severance and reorganization costs at National City's item processing subsidiary, National Processing, Inc. These charges were offset by securities gains of $83.5 million, generated primarily from National City's Bank Stock Fund, an internally managed corporate investment fund. The following table reconciles the major changes in diluted earnings per common share:
- --------------------------------------------------------- 1997 1996 vs vs 1996 1995 - --------------------------------------------------------- DILUTED EARNINGS PER SHARE, PRIOR YEAR $3.27 $2.64 Increase (decrease) from changes in: Net interest income -- .51 Provision for loan losses .03 (.15) Fees and other income .72 .57 Securities gains (.11) .22 Noninterest expense (.15) (.27) Shares outstanding and taxes (.10) (.25) - --------------------------------------------------------- DILUTED EARNINGS PER SHARE, CURRENT YEAR $3.66 $3.27 - ---------------------------------------------------------
"Tangible" or "cash" earnings per share were $3.78 in 1997 and $3.43 in 1996. This calculation adjusts net income for the non-cash impact of intangible amortization expense. "Return on tangible equity," which excludes the non-cash impact of intangible amortization from net income and intangibles from average common equity, was 21.2% in 1997 versus 20.4% in 1996. UNIT PROFITABILITY The financial performance of National City is monitored by an internal profitability measurement system which produces line-of-business results and key performance measures. National City's major business units include retail banking, corporate banking and fee-based businesses. The reported results reflect the underlying economics of the businesses. Expenses for centrally- provided services are allocated based on estimated usage of those services. Capital has been allocated among the businesses on a risk-adjusted basis. The
CHART 1: DILUTED NET INCOME AND DIVIDENDS PER COMMON SHARE (not restated for poolings) Diluted Net Income Dividends Paid Per Share Per Share 77 0.81 0.29 78 0.84 0.33 79 0.91 0.37 80 0.89 0.41 81 0.76 0.41 82 0.84 0.41 83 0.95 0.41 84 1.21 0.42 85 1.52 0.44 86 1.72 0.5 87 1.17 0.6 88 1.92 0.72 89 2.18 0.84 90 1.93 0.94 91 1.8 0.94 92 2.06 0.94 93 2.37 1.06 94 2.64 1.18 95 2.95 1.3 96 3.27 1.47 97 3.66 1.67
5 8 FINANCIAL REVIEW (continued) businesses are match-funded and interest rate risk is centrally managed by the investment/funding unit within the "Parent and other" line item in the contribution table below. The contribution of National City's major units to consolidated results for the past two years is summarized in the following table:
- ---------------------------------------------------------- 1997 1996 --------------- --------------- RETURN Return NET ON Net on (Dollars in Millions) INCOME EQUITY Income Equity - ---------------------------------------------------------- Corporate banking $200.6 22.72% $178.6 21.09% Retail banking 499.2 26.26 478.3 24.92 Fee-based businesses 70.4 15.55 59.9 16.34 Parent and other 37.2 -- 19.8 -- - ---------------------------------------------------------- Consolidated total $807.4 18.53% $736.6 17.69% - ----------------------------------------------------------
CORPORATE BANKING: Corporate banking includes commercial and middle-market corporate lending, commercial real estate, asset-based lending, commercial leasing, loan syndications, cash management and related services. The increase in corporate banking was due to increased loan volume, lower credit costs, and higher fee income. RETAIL BANKING: Retail banking includes the deposit gathering branch franchise, and lending to individuals and small businesses. Lending activities include residential mortgages, indirect and direct consumer installment loans, auto leases, home equity loans and credit card loans. Retail banking also includes the results of the Private Client Group which provides private banking, investment management, fiduciary and tax services to affluent and high net worth individuals. The increase in retail banking reflected strong fee income and lower overhead costs. FEE-BASED BUSINESSES: The fee-based businesses include item processing, mortgage banking, institutional trust and brokerage: - - Item processing is conducted by National City's majority-owned subsidiary, National Processing, Inc. ("National Processing") (NYSE: NAP), and includes merchant credit card processing, airline ticket processing, check guarantee services, and receivables and payables processing services. - - Mortgage banking includes the origination of mortgages through 108 retail mortgage origination offices, member bank branches, and wholesale/broker branches, as well as mortgage loan servicing. The servicing portfolio totaled $26.1 billion at December 31, 1997 compared to $22.8 billion in 1996. - - Institutional trust includes employee benefit administration, mutual fund management, charitable and endowment services, and custodial services. Trust assets under management totaled $44.0 billion at December 31, 1997, up from $38.3 billion at December 31, 1996. These assets include National City's ARMADA(TM) mutual fund family which had 18 funds and $6.3 billion in assets at December 31, 1997. The increase from $5.1 billion last year is due to new sales and a strong stock market. - - Full-service brokerage and investment banking services are conducted by National City's wholly-owned subsidiary, NatCity Investments, Inc. NatCity employs over 200 brokers and provides a full array of investment banking services, including debt and equity underwriting, trading and market making, and merger and acquisition advisory services. CHART 2: RETURN ON AVERAGE COMMON EQUITY (net income after preferred dividends, divided by average common equity)
92 13.63 93 18.75 94 17.31 95 16.18 96 17.96 97 18.53
CHART 3: RETURN ON AVERAGE ASSETS (net income divided by average assets) 92 0.99 93 1.45 94 1.35 95 1.23 96 1.51 97 1.59
6 9 The increase in net income in the fee-based businesses reflects revenue growth in all units which is further described in the Noninterest Income discussion beginning on page 8. The parent and other category includes general corporate expenses and unusual income or expense items not allocated to the business units, unallocated capital, interest expense on corporate debt, net securities gains and the results of the investment/funding unit. Parent and other net income increased primarily because of the higher contribution from the investment/funding unit. NET INTEREST INCOME On a tax equivalent basis, net interest income was $1,962.2 million in 1997, compared to $1,963.5 million in 1996, and $1,849.5 million in 1995 (Chart 4). Flat net interest income in 1997 reflects the increased use of non-deposit sources to fund loan growth, a change in loan composition as well as narrower spreads. Loan composition has been affected by National City's strategic decision to exit the private label credit card business in late 1996 which resulted in the November 1996 sale of $400 million in private label credit card outstandings. Although the outstandings sold were small relative to National City's total loan portfolio, the sale did have an impact on net interest income, the net interest margin and net loan charge-offs. The table below isolates the impact of the private label portfolio on the full year of 1996 by presenting pro forma results excluding the $400 million in outstandings (assumes investment yield of 7% on reinvested proceeds from the sale):
- --------------------------------------------------------------- 1996 PRO-FORMA 1997 1996 EXCLUDING (Dollars in Millions) ACTUAL ACTUAL PRIVATE LABEL - --------------------------------------------------------------- Net interest income $1,942.8 $1,942.6 $ 1,895.0 Net interest margin 4.25% 4.44% 4.33% Loan yield 8.63% 8.78% 8.63% Net charge-offs $ 139.0 $ 146.5 $ 125.5 Net charge-off ratio .37% .42% .36% - ---------------------------------------------------------------
To compare nontaxable asset yields to taxable yields on a similar basis, amounts are adjusted to pretax equivalents, based on the marginal corporate tax rate of 35%. The following table reconciles net interest income as shown in the financial statements to tax equivalent net interest income:
- -------------------------------------------------------------- (Dollars in Millions) 1997 1996 1995 - -------------------------------------------------------------- Net interest income - per financial statements $1,942.8 $1,942.6 $ 1,828.3 Tax equivalent adjustment 19.4 20.9 21.2 - -------------------------------------------------------------- Net interest income - tax equivalent $1,962.2 $1,963.5 $ 1,849.5 - -------------------------------------------------------------- Average earning assets $ 46,184 $ 44,227 $ 43,844 - -------------------------------------------------------------- Net interest margin 4.25% 4.44% 4.22% - --------------------------------------------------------------
CHART 4: NET INTEREST INCOME AND NET INTEREST MARGIN
Net Interest Margin Net Interest Margin 92 1714 4.54 93 1790 4.63 94 1811 4.5 95 1849 4.22 96 1963 4.44 97 1962 4.25
Net interest income was flat in 1997 as earning asset growth was offset by a decline in the margin. 7 10 FINANCIAL REVIEW (continued) The following table summarizes the contribution of derivatives to net interest income (amounts in brackets represent reductions of the related interest income or expense line, as applicable):
- ----------------------------------------------------------- (Dollars in Millions) 1997 1996 1995 - ----------------------------------------------------------- INTEREST ADJUSTMENT TO: Loans $ 9.2 $ 21.9 $(13.1) Securities (2.5) (1.0) (7.7) - ----------------------------------------------------------- Earning assets 6.7 20.9 (20.8) Interest-bearing liabilities (35.5) (21.8) (4.6) - ----------------------------------------------------------- EFFECT ON NET INTEREST INCOME $ 42.2 $ 42.7 $(16.2) - -----------------------------------------------------------
The effects of changing interest rates on corporate performance are more fully discussed in the Market Risk Management discussion starting on page 16. The following table shows changes in interest income, interest expense and net interest income due to volume and rate variances for major categories of assets and liabilities:
- ------------------------------------------------------------------------- 1997 VS. 1996 1996 vs. 1995 -------------------------- --------------------------- DUE TO CHANGE IN Due to Change in (Dollars in ---------------- NET ----------------- Net Millions) VOLUME RATE* CHANGE Volume Rate* Change - ------------------------------------------------------------------------- INCREASE (DECREASE) IN TAX EQUIVALENT INTEREST INCOME -- Loans $197.7 $(53.5) $144.2 $197.1 $ (51.4) $145.7 Securities (16.7) (6.4) (23.1) (102.6) 24.5 (78.1) Short-term investments (2.2) .3 (1.9) (12.6) (3.8) (16.4) - ------------------------------------------------------------------------- TOTAL $178.8 $(59.6) $119.2 $ 81.9 $ (30.7) $ 51.2 - ------------------------------------------------------------------------- (INCREASE) DECREASE IN INTEREST EXPENSE -- NOW and money market accounts $ (3.8) $(20.5) $(24.3) $(14.1) $ (9.1) $(23.2) Savings 9.8 5.3 15.1 8.9 4.8 13.7 Time deposits (2.8) 1.2 (1.6) (4.0) 15.7 11.7 Borrowed funds (120.2) 10.5 (109.7) 22.5 38.1 60.6 - ------------------------------------------------------------------------- TOTAL $(117.0) $ (3.5) $(120.5) $ 13.3 $ 49.5 $ 62.8 - ------------------------------------------------------------------------- INCREASE (DECREASE) IN TAX EQUIVALENT NET INTEREST INCOME $ (1.3) $114.0 - -------------------------------------------------------------------------
* Changes in interest income and interest expense not arising solely from rate or volume variances are included in rate variances. - ------------------------------------------------------------ NONINTEREST INCOME An analysis of noninterest income for the last three years follows:
- ------------------------------------------------------------ (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------- Item processing revenue $ 393,115 $ 364,512 $ 327,929 Service charges on deposits 228,986 214,659 196,474 Trust fees 195,815 177,124 167,224 Card-related fees 137,931 123,306 98,806 Mortgage banking revenue 124,538 81,145 66,821 Service fees - other 59,275 54,209 53,693 Brokerage revenue 49,784 47,546 29,502 Real estate owned income 8,712 7,474 5,188 Other 94,266 61,310 58,204 - ------------------------------------------------------------- TOTAL FEES AND OTHER INCOME $1,292,422 $1,131,285 $1,003,841 - ------------------------------------------------------------- Securities gains 83,514 108,146 42,365 - ------------------------------------------------------------- TOTAL NONINTEREST INCOME $1,375,936 $1,239,431 $1,046,206 - -------------------------------------------------------------
Total fees and other income increased 14.2% in 1997 to $1,292.4 million from $1,131.3 million in 1996. All categories increased in 1997, with the highest growth coming from item processing, card-related fees, service charges on deposits, trust fees and mortgage banking revenue. Item processing revenue generated by National Processing increased 7.8% in 1997 to $393.1 million as a result of acquisitions and increases in corporate outsourcing fee revenue. In 1997, National Processing acquired NTA, Inc. and Intracon, Inc., both freight processing companies; MRS Jamaica, a healthcare form processing company; Data Management Services, a data processing company; and Financial Alliance, an independent sales organization. These acquisitions added $26.6 million to 1997 revenues. Deposit service charges increased 6.7% in 1997 and 9.3% in 1996 primarily due to the implementation of a uniform fee structure across the National City franchise. Trust fees increased 10.6% in 1997 and 5.9% in 1996 primarily due to market-related increases in assets under management. Card-related fees increased 11.9% to $137.9 million in 1997. The increase reflects repricing of cardholder fees across the franchise, and higher ATM interchange fees. The 24.8% increase in 1996 card-related fees is due to the full year impact of excess servicing fees realized from the September 1995 $440 million credit card receivable securitization. Mortgage banking revenue increased 53.5% to $124.5 million in 1997. The increase was due to increased mortgage origination volume and higher mortgage servicing revenue. Loan originations nearly doubled to $7.0 billion in 1997 from $3.7 billion in 1996. Increased volume was due to the favorable interest rate environment and the February 1997 acquisition of Bank United's non-Texas mortgage origination business. Of the mortgages 8 11 originated in 1997, $6.1 billion were sold in the secondary market, compared to $2.6 billion last year. Gains on the sale of mortgages totaled $56.8 million in 1997, $27.6 million in 1996 and $2.8 million in 1995. The gains for 1997 and 1996 include amounts related to the capitalization of originated servicing rights under the provisions of Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. See Note 1 to the Consolidated Financial Statements for further discussion regarding mortgage servicing rights. In 1997, other income included $13.7 million in gains on the sale of branches and other assets, and $13.0 million of appreciation resulting from National City's investment in a private investment partnership. In 1996, other income included a $6.0 million gain on the sale of the private label credit card business and $9.2 million of gains on branch sales. In 1995, other income included a $9.2 million gain on the sale of credit card receivables. Net realized securities gains and losses are summarized as follows:
- ----------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - ----------------------------------------------------------- Net realized gains (losses) -- debt securities $(1,358) $ 5,838 $(8,279) Tax expense (benefit) (475) 2,043 (2,898) - ----------------------------------------------------------- After tax $ (883) $ 3,795 $(5,381) - ----------------------------------------------------------- Net realized gains -- equity securities $84,872 $102,308 $50,644 Tax expense 29,862 27,544 16,399 - ----------------------------------------------------------- After tax $55,010 $ 74,764 $34,245 - ----------------------------------------------------------- Effect on net income $54,127 $ 78,559 $28,864 - ----------------------------------------------------------- Effect on earnings per share $ .25 $ .35 $ .13 - -----------------------------------------------------------
As shown in the table, equity securities gains represent the majority of securities gains over the last three years. The primary source of these gains has been the Corporation's internally-managed Bank Stock Fund, an equity portfolio consisting primarily of bank and thrift common stock investments. At December 31, 1997, the market value of Bank Stock Fund equity investments totaled $612.2 million, including $407.4 million of unrealized gains. NONINTEREST EXPENSE The following table provides details of noninterest expense for the last three years:
------------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - -------------------------------------------------------------- Salaries $ 788,410 $ 736,439 $ 693,952 Benefits and other personnel 199,286 187,325 184,663 Equipment 144,459 135,139 127,612 Net occupancy 132,725 132,143 125,072 Third party services 125,422 139,928 147,595 Credit card fees 136,446 129,304 115,184 Postage and supplies 90,822 96,946 89,905 FDIC assessments 6,175 5,794 65,978 State and local taxes 39,066 38,561 39,027 Marketing and public relations 63,427 84,238 60,668 Transportation 34,738 34,377 31,293 Telephone 44,227 39,073 36,877 Other real estate owned 8,345 9,551 6,075 Amortization of intangibles 29,194 39,637 41,971 Merger and restructuring 65,902 74,745 24,200 Other 101,933 93,883 125,852 - -------------------------------------------------------------- TOTAL $2,010,577 $1,977,083 $1,915,924 - --------------------------------------------------------------
Noninterest expense increased 1.7% to $2,010.6 million in 1997, compared to $1,977.1 million in 1996. The overall increase was primarily due to increased operating CHART 5: OVERHEAD RATIO
92 55.25 93 47.47 94 45.68 95 48.01 96 39.27 97 33.24
The continued improvement in the overhead ratio is due to maintenance of flat overhead expenses at the banking level and the realization of cost savings in past acquisitions. The ratio excludes merger and restructuring expenses. 9 12 FINANCIAL REVIEW (continued) expenses associated with acquisitions and business activity. Merger and restructuring expenses in 1997 included $33.3 million in costs associated with reorganizing National City's six Ohio banking subsidiaries under a single statewide charter, $19.3 million of costs incurred in connection with the pending First of America merger, and $13.3 million in severance and reorganization costs at National Processing. Merger and restructuring expenses of $74.7 million in 1996 and $24.2 million in 1995 were incurred as a result of the Integra Financial Corporation merger. Salaries and other personnel increased primarily as a result of acquisitions in the mortgage banking and item processing subsidiaries. Third party service fees have decreased over the past two years due to vendor reductions resulting from the Integra Financial Corporation merger. Marketing and public relations expenses in 1997 decreased $20.8 million from 1996 due to the 1996 pre-funding of National City's Charitable Foundation. The overhead performance measures of National City's major business units for the past two years are summarized in the following table:
- ------------------------------------------------------------ Full-Time Overhead Efficiency Equivalent Staff Ratio Ratio - ------------------------------------------------------------ 1997 Corporate and retail banking 15,081 36.73% 51.59% Fee-based businesses 13,845 -- 83.10 Corporate 915 -- -- - ------------------------------------------------------------ TOTAL 29,841 36.60% 61.78% - ------------------------------------------------------------ Excluding merger and restructuring expenses 33.24% 59.76% - ------------------------------------------------------------ - ------------------------------------------------------------ Full-Time Overhead Efficiency Equivalent Staff Ratio Ratio - ------------------------------------------------------------ 1996 Corporate and retail banking 16,213 39.93% 52.76% Fee-based businesses 9,148 -- 83.25 Corporate 925 -- -- - ------------------------------------------------------------ TOTAL 26,286 43.08% 63.88% - ------------------------------------------------------------ Excluding merger and restructuring expenses 39.27% 61.47% - ------------------------------------------------------------
Full-time equivalent staff increased in 1997 primarily due to increased staffing as a result of acquisitions and business activity in the item processing and mortgage banking subsidiaries. The overhead ratio (noninterest expense less fee and other income as a percentage of tax equivalent net interest income) was 36.6% in 1997, compared with 43.1% in 1996 and 49.3% in 1995 (Chart 5). Excluding merger and restructuring expenses, the overhead ratio was 33.2% in 1997, 39.3% in 1996 and 48.0% in 1995. The efficiency ratio (noninterest expense as a percentage of fee and other income plus tax equivalent net interest income) was 61.8% in 1997 versus 63.9% in 1996 and 67.1% in 1995. Excluding merger and restructuring expenses, the efficiency ratio was 59.8% in 1997, 61.5% in 1996 and 66.3% in 1995. The fee-based businesses generally have lower gross margins than traditional banking. Therefore, growth in these businesses penalizes the efficiency ratio; conversely, strong fee income benefits the overhead ratio. EARNING ASSETS Average earning assets for 1997 were $46,184 million, compared with $44,227 million in 1996 and $43,844 million in 1995. The increase in 1997 over 1996 is primarily due CHART 6: AVERAGE LOANS
Consumer Residential Revolving Installment Real Estate Credit 92 5909 4237 1766 93 5906 4997 2106 94 6693 5888 2511 95 7617 7039 3058 96 8739 7486 3125 97 9607 7836 3061 Commercial Commercial Real Estate 92 10977 2621 93 10543 3129 94 10782 3281 95 11584 3473 96 12261 3368 97 13617 3116
National City's loan portfolio mix is approximately 45% corporate and 55% consumer loans. Although commercial loans outpaced consumer loan growth in 1997, over the longer term the consumer loan portfolio, which includes installment, residential real estate and revolving credit loans, has grown at a faster rate. 10 13 to a 6.4% increase in average loans, offset by the securities portfolio which decreased 2.9% to an average balance of $8,439 million. LOANS: At year-end 1997, loans were $39.6 billion, representing an increase of 10.4% from year-end 1996. Average loans are shown in Chart 6. Ending loan balances are summarized in the table below:
- ----------------------------------------------------------------- (Dollars in Millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------- Commercial $ 13,216 $10,935 $11,048 $ 9,888 $ 9,764 Nontaxable 248 283 282 344 343 Real estate construction 814 775 713 575 686 Commercial lease 633 516 358 297 310 Commercial real estate 3,021 3,441 3,332 3,195 3,058 Residential real estate 8,314 7,623 7,501 6,218 5,903 Consumer 10,128 9,252 8,149 7,161 6,325 Home equity 2,040 1,783 1,546 1,327 1,176 Credit card 1,159 1,222 1,537 1,696 1,037 - ----------------------------------------------------------------- TOTAL LOANS $ 39,573 $35,830 $34,466 $30,701 $28,602 - -----------------------------------------------------------------
Commercial: The majority of the commercial loan portfolio consists of loans made to middle-market customers in National City's four-state market area. The loan mix is diverse, covering a broad range of borrowers characteristic of the Midwest economy. As a matter of policy, concentrations within a particular industry or segment are continually monitored and controlled. Commercial loans grew at a solid pace throughout 1997 due to increased business activity in local markets and competitive product offerings. Future growth should be supplemented by increased emphasis on commercial leasing, asset-based lending and loan syndications. The commercial portfolio continues to have small international exposure. International loans totaled $37 million, down from $63 million in 1996. An analysis of the maturity and interest rate sensitivity of commercial and real estate construction loans at the end of 1997 follows:
- -------------------------------------------------------------- (Dollars in One Year One to Over Millions) or Less Five Years Five Years Total - -------------------------------------------------------------- Commercial* $6,430 $6,171 $1,496 $14,097 Real estate construction 210 383 221 814 - -------------------------------------------------------------- TOTAL $6,640 $6,554 $1,717 $14,911 - -------------------------------------------------------------- TOTAL VARIABLE RATE $5,830 $5,187 $1,295 $12,312 TOTAL FIXED RATE 810 1,367 422 2,599 - --------------------------------------------------------------
* Includes commercial, non-taxable and commercial lease. - -------------------------------------------------------------- Commercial Real Estate: Commercial real estate included $1,990 million of loans secured by income-producing real estate in 1997, down from $2,451 million in 1996 and $2,375 million in 1995. Activities in commercial real estate are based primarily on relationships with developers who are active in local markets. More than 85% of outstandings are in National City's primary markets of Ohio, Kentucky, Indiana and Pennsylvania. The portfolio consists predominantly of relatively small-scale office, retail and apartment buildings. Total commercial real estate loans made up 7.6% of the total loan portfolio at December 31, 1997, compared to 9.6% in 1996. At year-end, there were no concentrations of real estate loans in any deteriorating economic areas. The following table shows a breakdown of commercial mortgage loans at year-end 1997 by state and by project type:
- ---------------------------------------------------------- (Dollars in Millions) - ---------------------------------------------------------- BY STATE: BY PROJECT: Ohio $1,672 Retail $ 749 Pennsylvania 363 Land 141 Kentucky 299 Apartments 767 Indiana 267 Office 456 Florida 43 Industrial 156 Michigan 25 Other 611 Other 211 - ---------------------------------------------------------- TOTAL $2,880 TOTAL $2,880 - ----------------------------------------------------------
Consumer: During 1997, consumer installment loans increased 9.5% from year-end 1996. Approximately 70% of the portfolio is comprised of auto-related installment loans of which more than 65% are indirect and 75% are at fixed rates. Following the introduction of a new consumer lease product in 1995, the lease portfolio grew more than $400 million in 1997 to $979 million at December 31, 1997. Student loans comprise the remainder of the portfolio with $1,951 million in balances at December 31, 1997. Home Equity: Home equity loans increased 14.4% due to aggressive marketing and promotion of this product through all marketing channels. Credit Card: The decline in credit card outstandings in 1997 reflects the sale of the remaining $94 million of private label credit card outstandings. The decline in credit card outstandings in 1996 reflects the sale of the $400 million of private label credit card outstandings in November 1996. The decline in credit card receivables from 1994 to 1995 reflects the securitization of $440 million of credit card receivables in September 1995. The managed card portfolio, which includes both on-balance sheet receivables and securitized balances, totaled $1,530 million at December 31, 1997. 11 14 FINANCIAL REVIEW (continued) SECURITIES: On a cost basis, the securities portfolio decreased from $8.7 billion at December 31, 1996 to $8.4 billion at December 31, 1997. The decrease was primarily due to the maturity and sale of U.S. Treasury and Federal agency debentures. Summary information with respect to the securities portfolio at December 31 follows:
- --------------------------------------------------------------- 1997 1996 1995 (Dollars in AMORTIZED 1997 Amortized Amortized Millions) COST YIELD* Cost Cost - --------------------------------------------------------------- U.S. TREASURY AND FEDERAL AGENCY DEBENTURES: Under 1 year $ 31 7.40% $ 527 $ 50 1 to 5 years 656 5.95 1,382 1,427 5 to 10 years 554 6.02 321 504 Over 10 years -- -- -- 95 - --------------------------------------------------------------- TOTAL 1,241 6.02 2,230 2,076 - --------------------------------------------------------------- MORTGAGE-BACKED SECURITIES: Under 1 year 388 6.29 122 104 1 to 5 years 3,277 6.87 2,619 2,826 5 to 10 years 1,210 6.81 1,635 811 Over 10 years 15 7.47 14 2,255 - --------------------------------------------------------------- TOTAL 4,890 6.81 4,390 5,996 - --------------------------------------------------------------- ASSET-BACKED AND CORPORATE DEBT SECURITIES: Under 1 year 453 5.79 93 2 1 to 5 years 812 6.86 591 159 5 to 10 years 222 6.06 221 75 Over 10 years 51 6.99 85 581 - --------------------------------------------------------------- TOTAL 1,538 6.59 990 817 - --------------------------------------------------------------- STATES AND POLITICAL SUBDIVISIONS: Under 1 year 29 11.99 58 69 1 to 5 years 63 10.71 91 115 5 to 10 years 88 9.04 89 122 Over 10 years 65 9.12 87 130 - --------------------------------------------------------------- TOTAL 245 9.84 325 436 - --------------------------------------------------------------- OTHER SECURITIES: Under 1 year -- -- 183 25 1 to 5 years -- -- 2 172 5 to 10 years -- -- 3 93 Over 10 years 469 -- 573 401 - --------------------------------------------------------------- TOTAL 469 -- 761 691 - --------------------------------------------------------------- TOTAL SECURITIES $ 8,383 6.61% $ 8,696 $10,016 - ---------------------------------------------------------------
* Yield on debt securities only; equity securities excluded. - ------------------------------------------------------------ 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 over 10 years. The portfolio yield at December 31, 1997 was 6.61%, compared to 6.57% at December 31, 1996. The increase in yield is attributable to an increased portfolio allocation to higher yielding mortgage and asset-backed securities. Investments in collateralized mortgage obligations (CMOs) totaled $2.6 billion and $1.6 billion at December 31, 1997 and 1996, respectively. At December 31, 1997, CMOs with book values of $95 million and market values of $96 million were considered "high risk" under regulatory definitions. These securities are classified as "high risk" because either their price sensitivity or average life extension is potentially beyond the limits for CMOs not classified as "high risk" by regulatory definitions. These securities and all CMOs are continually monitored and subjected to stress tests for price and average life sensitivity. The amount of mortgage-backed securities that are either variable or adjustable rate totaled $1.1 billion at December 31, 1997, or 22% of total mortgage-backed securities. ASSET QUALITY Credit quality further improved during 1997. Continuing the trend of the past several years, nonperforming assets decreased $1.1 million to $166.5 million at December 31, 1997 versus $167.6 million at December 31, 1996. Net charge-offs as a percentage of average loans declined to .37% versus .42% in 1996. NONPERFORMING ASSETS: A summary of nonaccrual and restructured loans and other nonperforming assets at December 31 follows:
- ---------------------------------------------------------------- (Dollars in Millions) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------- COMMERCIAL: Nonaccrual $ 80.5 $ 82.7 $108.2 $ 66.1 $102.1 Restructured -- -- .1 2.4 4.1 - ---------------------------------------------------------------- TOTAL COMMERCIAL 80.5 82.7 108.3 68.5 106.2 - ---------------------------------------------------------------- REAL ESTATE RELATED: Nonaccrual 64.5 57.2 75.0 104.6 156.7 Restructured 2.5 3.2 4.1 4.4 6.5 - ---------------------------------------------------------------- TOTAL REAL ESTATE RELATED 67.0 60.4 79.1 109.0 163.2 - ---------------------------------------------------------------- TOTAL NONPERFORMING LOANS 147.5 143.1 187.4 177.5 269.4 Other real estate owned (OREO) 19.0 24.5 21.4 48.7 114.0 - ---------------------------------------------------------------- TOTAL NONPERFORMING ASSETS $166.5 $167.6 $208.8 $226.2 $383.4 - ---------------------------------------------------------------- Loans 90 days past due accruing interest $110.9 $107.1 $ 64.7 $ 51.3 $ 68.1 - ---------------------------------------------------------------- NONPERFORMING LOANS AND OREO AS A PERCENT OF: Loans and OREO .4% .5% .6% .7% 1.3% Assets .3 .3 .4 .5 .8 Equity 3.9 3.8 5.1 6.5 10.1 Loan loss allowance to nonperforming loans 473% 493% 377% 398% 254% - ----------------------------------------------------------------
12 15 All loans considered impaired under SFAS No. 114 are included in non-performing loans. Commercial and residential real estate loans and securities are designated as nonperforming when payments are 90 or more days past due, when credit terms are renegotiated below market levels, or when individual analysis of a borrower's creditworthiness indicates that a credit should be placed on nonaccrual status, unless the loan is adequately collateralized and is in the process of collection. Consumer loans are reported as "90 days past due accruing interest" once the 90-day criterion has been met, and are charged off in the month in which the loan becomes 120 days past due. Generally, when loans are classified as nonperforming or impaired, unpaid accrued interest is written off and future income may be recorded only as cash payments are received. Although loans may be classified as nonperforming, many continue to pay interest irregularly or at less than original contractual rates. A summary of actual income booked on nonperforming loans versus their full contractual yields for each of the past five years follows:
- --------------------------------------------------------------------- (Dollars in Millions) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------- Income potential based on original contract $17.3 $20.6 $21.3 $22.6 $27.6 Actual income 5.5 9.0 12.1 10.3 8.6 - ---------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES: The following table presents a reconciliation of the allowance for loan losses:
- -------------------------------------------------------------- (Dollars in Millions) 1997 1996 1995 1994 1993 - -------------------------------------------------------------- BALANCE AT BEGINNING OF YEAR $705.9 $705.8 $706.5 $685.3 $622.7 Provision 139.7 146.5 113.5 109.4 143.1 Reserves (sold) acquired (8.1) .1 11.5 9.7 50.7 CHARGE-OFFS: Commercial 46.3 58.0 52.3 54.9 84.7 Real estate mortgage 11.3 10.2 27.5 27.3 29.4 Consumer 105.8 95.9 57.1 47.2 50.0 Credit card 58.5 67.9 63.1 49.1 44.8 Home equity 3.9 4.6 2.5 1.7 4.5 - -------------------------------------------------------------- TOTAL CHARGE-OFFS 225.8 236.6 202.5 180.2 213.4 - -------------------------------------------------------------- RECOVERIES: Commercial 23.7 35.0 25.7 36.1 40.1 Real estate mortgage 4.9 5.7 9.9 5.2 3.9 Consumer 43.9 35.5 27.8 27.9 26.2 Credit card 12.7 12.7 11.7 12.1 8.5 Home equity 1.5 1.2 1.7 1.0 3.5 - -------------------------------------------------------------- TOTAL RECOVERIES 86.7 90.1 76.8 82.3 82.2 - -------------------------------------------------------------- Net charge-offs 139.1 146.5 125.7 97.9 131.2 - -------------------------------------------------------------- BALANCE AT END OF YEAR $698.4 $705.9 $705.8 $706.5 $685.3 - -------------------------------------------------------------- Ratio of ending allowance to ending loans 1.76% 1.97% 2.05% 2.30% 2.40% - --------------------------------------------------------------
The commercial category includes real estate construction net recoveries of $1.4 million in 1997, $10.4 million in 1996 and $2.4 million in 1995. The real estate mortgage category includes commercial real estate net charge-offs of $1.3 million in 1997, $.02 million in 1996 and $15.8 million in 1995. CHART 7: CREDIT QUALITY MEASURES
Nonperforming Assets Allowance for Loan Loss Net Charge-offs as a % of Average Loans 92 594 623 0.75 93 383 686 0.49 94 226 707 0.34 95 209 706 0.38 96 168 706 0.42 97 167 698 0.37
Nonperforming assets totaled $166.5 million at December 31, 1997, and the allowance for loan losses represented 1.76% of total loans and 473% of nonperforming assets. Net charge-offs as a percentage of loans were .37% in 1997, down from .42% in 1996 and .38% in 1995. 13 16 FINANCIAL REVIEW (continued) Net charge-offs as a percentage of average loans by portfolio type are shown in the following table:
- --------------------------------------------------------------- 1997 1996 1995 1994 1993 - --------------------------------------------------------------- Commercial .17% .19% .23% .17% .42% Real estate mortgage .06 .04 .17 .24 .31 Consumer .64 .69 .38 .29 .40 Credit card 3.99 3.73 3.66 3.32 4.45 Home equity .13 .20 .05 .05 .08 TOTAL NET CHARGE-OFFS TO AVERAGE LOANS .37% .42% .38% .34% .49% - ---------------------------------------------------------------
Net charge-offs as a percentage of average loans decreased 5 basis points from 1996, and 1 basis point from 1995. Consumer and credit card loans are charged off within industry norms, while commercial loans are evaluated individually. The adequacy of the allowance for loan losses is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two components, allocated and unallocated. The allocated component of the allowance for loan losses reflects expected losses resulting from the analysis of individual loans, 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 and commitments over a fixed dollar amount where the internal credit rating is at or below a predetermined classification. The historical loan loss element represents a projection of future credit problems and is determined statistically using a loss migration analysis that examines loss experience and the related internal gradings of loans charged off. The allocated component of the allowance for loan losses also includes management's determination of the amounts necessary for concentrations, economic uncertainties, change in mix of the portfolio and other subjective factors. Since banking is a cyclical business, National City's allocation methodology gives consideration to potential losses in the portfolio over a two year period of time. An allocation of the ending allowance for loan losses by major loan type follows:
- ----------------------------------------------------------------- (Dollars in Millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------- Commercial and commercial mortgage $193.2 $205.2 $261.3 $272.5 $311.8 Consumer and residential mortgage 103.0 100.1 93.5 88.2 82.7 Revolving credit 48.6 48.9 40.9 43.3 22.1 Unallocated 353.6 351.7 310.1 302.5 268.7 - ----------------------------------------------------------------- TOTAL $698.4 $705.9 $705.8 $706.5 $685.3 - -----------------------------------------------------------------
The allocations are made for analytical purposes. The total allowance is available to absorb losses from any segment of the portfolio. The following table shows the percentage of loans in each category to total loans at year-end:
- --------------------------------------------------------------- 1997 1996 1995 1994 1993 - --------------------------------------------------------------- Commercial and commercial mortgage 45.3% 44.5% 45.6% 46.6% 49.5% Consumer and residential mortgage 46.6 47.1 45.5 44.3 43.5 Revolving credit 8.1 8.4 8.9 9.1 7.0 - --------------------------------------------------------------- TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% - ---------------------------------------------------------------
INTEREST-BEARING LIABILITIES Average balances in interest-bearing transaction accounts, which include savings, negotiable order of withdrawal (NOW) and money market accounts, totaled $12,909 million. Average time deposits totaled $14,819 million in 1997. Borrowed funds include all interest-bearing liabilities that are not core deposits. Average borrowed funds totaled $11,316 million in 1997. A maturity distribution of certificates of deposit of $100,000 or more at year-end follows:
- ---------------------------------------------------------- (Dollars in Millions) 1997 1996 - ---------------------------------------------------------- DUE IN: 3 months or less $1,225 $1,107 3 to 6 months 339 349 6 to 12 months 438 450 Over 1 year 2,092 1,507 - ---------------------------------------------------------- TOTAL $4,094 $3,413 - ----------------------------------------------------------
Details regarding federal funds borrowed and security repurchase agreements follow:
- ---------------------------------------------------------- (Dollars in Millions) 1997 1996 1995 - ---------------------------------------------------------- Balance at December 31 $4,425 $4,277 $5,300 Maximum outstanding at any month-end 4,970 4,512 5,300 Daily average amount outstanding 4,079 3,959 4,394 Weighted daily average interest rate 5.07% 5.40% 5.43% Weighted daily interest rate for amounts outstanding at December 31 5.52% 5.89% 4.90% - ----------------------------------------------------------
CAPITAL Total stockholders' equity was $4,281 million at December 31, 1997, representing a 3.4% decrease from $4,432 million at December 31, 1996. The Corporation has consistently maintained capital ratios at or above the "well capitalized" standards. For further detail on capital ratios, see Note 11 to the Consolidated Financial Statements. Total equity was 7.83% of total assets at year-end 1997, compared to 8.71% a year ago. Tangible equity, which excludes intangible assets and servicing rights, was 6.75% of tangible assets at December 31, 1997, versus 7.81% at December 31, 1996. 14 17 Book value per common share at December 31, 1997 was $20.28, compared to $19.86 at December 31, 1996 (Chart 8). The 1997 book value included $1.49 related to unrealized market appreciation in the securities available for sale portfolio, compared to $.66 at year-end 1996. Cash dividend payout is continually reviewed by management and the Board of Directors. For the past three- and five-year periods, the dividend payout has averaged 46.61% and 45.23%, respectively. In December 1997, the Board of Directors declared a first quarter dividend of $.46 per common share, representing an 8.2% increase from the preceding quarterly dividend of $.425 per share. The dividend is payable February 1 to stockholders of record on January 9, 1998. This continues National City's pattern of increasing the dividend twice per year since 1992. National City Corporation's common stock trades on the New York Stock Exchange under the symbol NCC. As of December 31, 1997, there were 34,108 common stockholders of record. The total market capitalization of the Corporation was approximately $13.9 billion at December 31, 1997. Quarterly dividends paid per share and common stock prices follow:
- ----------------------------------------------------------------- NYSE: NCC First Second Third Fourth Year 1997 Dividends paid $ .41 $ .41 $ .425 $ .425 $ 1.67 High 54.63 55.25 64.88 67.56 67.56 Low 42.50 44.63 52.25 54.13 42.50 Close 46.63 52.50 61.56 65.75 65.75 1996 Dividends paid $ .36 $ .36 $ .375 $ .375 $ 1.47 High 35.38 37.75 42.75 47.25 47.25 Low 30.63 33.25 33.75 41.50 30.63 Close 35.13 35.13 42.13 44.88 44.88 - -----------------------------------------------------------------
LIQUIDITY MANAGEMENT Effective liquidity management ensures that 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 from its subsidiaries, the commercial paper market, a revolving credit agreement and access to the capital markets. The main source for parent company cash requirements has been dividends from its subsidiaries. At January 1, 1998, $471.1 million was available within the bank subsidiaries to pay parent company dividends without prior regulatory approval, versus $378.0 million at January 1, 1997. During 1997, subsidiary banks declared $422.0 million in dividends to the parent company. As discussed in Item 1 of Form 10-K (page 45), 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 available to National City Corporation's stockholders. Funds raised in the commercial paper market through the Corporation's subsidiary, National City Credit Corporation, are primarily used to support the activities of National City Mortgage Co., the Corporation's mortgage banking subsidiary, as well as other occasional short-term cash needs. Commercial paper outstandings at CHART 8: BOOK VALUE AND STOCK PRICE HISTORY (adjusted for stock splits; not restated for poolings) Book High Low Year-end Value Stock Stock Stock Price Price Price 77 5.31 6.67 6.08 6.13 78 5.81 7.19 5.71 5.95 79 6.34 6.82 5.89 6.39 80 6.83 6.41 4.41 5.08 81 7.18 5.56 4.26 4.52 82 7.69 5.41 3.45 4.78 83 8.24 6.89 4.49 6.89 84 8.65 8.61 5.78 8.47 85 8.74 11.28 8.39 10.97 86 10.40 16.46 10.95 15.29 87 10.58 19.13 11.94 14.56 88 10.92 16.82 13.88 16.44 89 12.43 20.75 15.38 19.56 90 13.39 19.94 11.32 15.63 91 14.24 21.13 14.07 18.63 92 14.54 24.82 17.94 24.81 93 16.15 28.06 23.13 24.50 94 16.36 29.00 23.75 25.88 95 18.8 33.75 25.25 33.13 96 19.86 47.25 30.63 44.88 97 20.28 67.563 42.5 65.75 National City's common stock price at December 31, 1997 was $65.75. Over the past 20 years, the total return on an annualized basis of an investment in National City common stock, assuming reinvestment of dividends, was 18.7%, compared to 16.6% for the S&P 500. 15 18 FINANCIAL REVIEW (continued) December 31, 1997 were $795.9 million, compared to $556.1 million at year-end 1996. National City Corporation 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 $250 million shelf registration with the Securities and Exchange Commission permitting ready access to the public debt and preferred stock markets. On June 2, 1997, National City issued $500 million in Reset Asset Capital Securities which are classified as subordinated debt. The Reset Asset Capital Securities represent an economical source of funding, with the added benefit of qualifying as Tier 1 capital following optional redemption on June 1, 1999. FORWARD-LOOKING STATEMENTS The sections that follow, MARKET RISK MANAGEMENT and OTHER, contain certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements may involve significant risks and uncertainties. Although National City believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. 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. National City's market risk is composed primarily of interest rate risk. The Corporation's Asset/Liability Committee (ALCO) 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 the interest rate risk limits set by ALCO. Interest Rate Risk Measurement: Interest rate risk is monitored through the use of three complementary measures: static gap analysis, earnings simulation modeling and net present value estimation. While each of the 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. Static Gap: Gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities, adjusted for off-balance sheet instruments, which reprice within a specified time period. The cumulative one-year gap, at year-end, was (8.8%) of total earning assets adjusted for off-balance sheet investment surrogates. The policy limit for the one-year gap is plus or minus 15% of adjusted total earning assets. Core deposits and loans with noncontractual maturities are included in the gap repricing distributions based upon historical patterns of balance attrition and pricing behavior which are reviewed at least annually. The gap repricing distributions include principal cash flows from residential mortgage loans and mortgage-backed securities in the timeframes in which they are expected to be received. Mortgage prepayments are estimated by applying industry median projections of prepayment speeds to portfolio segments based on coupon range and loan age. Earnings Simulation: The earnings simulation model forecasts one- and two-year net 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. Management evaluates the effects on income of alternative interest rate scenarios against earnings in a stable interest rate environment. This type of analysis is also most useful in determining the short-run earnings exposures to changes in customer behavior involving loan payments and deposit additions and withdrawals. The most recent earnings simulation model projects net income would increase by approximately 1.7% of stable-rate net income if rates fall gradually by two percentage points over the next year. It projects a decrease of approximately 1.8% if the rates rise gradually by two percentage points, well within the (5.0%) policy 16 19 limit. Management believes this reflects a slight liability-sensitive rate risk position for the one-year horizon. Within a two-year horizon and assuming an additional 200 basis point move in rates, the model forecasts that net income would fall below that earned in a stable rate environment by 2.7% in a falling rate scenario and fall by 7.2% in a rising rate scenario. Both of these forecasts are within the two-year policy guideline of (15.0%). Net income is projected to fall below the level associated with stable rates if the yield curve flattens. If short-term rates are assumed to be stable, while two-year rates fall by 50 basis points and ten-year rates fall by 100 basis points over the next year, then net income is projected to fall short of that earned in the stable case by .9%. Alternatively, if short-term rates are assumed to increase by 200 basis points over the next year, with two-year rates rising by 150 basis points and ten-year rates increasing by 100 basis points, then net income is expected to fall by 2.2% relative to stable-rate income. Earnings are also affected by changes in spread relationships. For example, a 50 basis point contraction in the relationship between the prime rate and the Federal funds rate is projected to cause a 2.6% reduction in net income over a 12-month period. This dynamic simulation 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. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in two-year assets, as are the portion of derivatives used as off-balance sheet investment alternatives. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Noncontractual deposit growth rates and pricing are assumed to follow historical patterns. The sensitivities of key assumptions are analyzed at least annually and reviewed by ALCO. Net Present Value: The Net Present Value (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. At year-end, a 150 basis point immediate increase in rates is estimated to reduce NPV by 3.9%. Additionally, NPV is projected to decrease by 3.5% if rates fall by 150 basis points. Policy limits restrict this amount to (10.0%) of NPV. Analysis of the average quarterly change in the Treasury yield curve over the past ten years indicates that a parallel curve shift of 150 basis points or more is an event that has less than a .1% chance of occurrence. As with gap analysis and 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 attrition of the core deposit portfolios. These assumptions are applied consistently across the different rate risk measures. Summary information about each of the three interest-rate risk measures is presented below:
- -------------------------------------------------------------------------------------------------------------------------- Year-end Average Minimum Maximum Year-end ALCO 1997 1997 1997 1997 1996 Guidelines - -------------------------------------------------------------------------------------------------------------------------- Static 1-Year Cumulative Gap -8.8% -6.6% -3.7% -8.8% -4.7% -15.0% 1-Year Net Income Simulation Projection -200 bp Ramp vs. Stable Rate 1.7% 1.1% 0.5% 1.8% 1.1% -5.0% +200 bp Ramp vs. Stable Rate -1.8% -1.2% -0.5% -1.8% -1.2% -5.0% 2-Year Net Income Simulation Projection -200 bp Ramp vs. Stable Rate -2.7% -2.8% -0.6% -4.8% -4.8% -15.0% +200 bp Ramp vs. Stable Rate -7.2% -6.0% -3.1% -9.4% -3.9% -15.0% Static Net Present Value Change -150 bp Shock vs. Stable Rate -3.5% -4.2% -2.8% -5.8% -4.3% -10.0% +150 bp Shock vs. Stable Rate -3.9% -4.2% -3.0% -5.2% -4.2% -10.0% - -----------------------------------------------------------------------------------------------------------
17 20 FINANCIAL REVIEW (continued) Interest Rate Risk Management: A variety of financial instruments are used to manage interest rate sensitivity. These include the securities in the investment portfolio, interest rate swaps, interest rate caps and floors, and, to a lesser extent, exchange-traded futures and options contracts. Frequently called interest rate derivatives, interest rate swaps, caps and floors 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 and 19 to the Consolidated Financial Statements for further discussion on derivative financial instruments. Due to borrowers' preferences for floating-rate loans and depositors' preferences for fixed-rate deposits, National City's balance sheet tends to move toward less liability sensitivity with the passage of time. The earnings simulation model indicates that if all prepayments, calls and maturities of the securities and derivatives portfolios expected over the next year were to remain uninvested, then the current liability sensitivity position would be lessened. The simulation model projects that in a 200 basis point rising interest rate environment, with no reinvestment, the resulting net income would be .9% less than that earned in a stable rate environment. Purchases of fixed-rate securities or interest rate derivative instruments have been made to offset the natural tendency toward a less liability sensitive interest rate risk position. Management expects interest rates to be relatively stable during 1998 and believes that the current modest level of liability sensitivity is appropriate. TRADING RISK MANAGEMENT: The Corporation maintains a trading account primarily to provide investment products and risk management services to its customers as well as to take proprietary risk positions. Trading risk is monitored on a regular basis through the use of the value-at-risk methodology (VAR). 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 1997, the maximum month-end measured VAR was $.5 million, well within the limit established by ALCO of $2.6 million. Month-end VAR estimates are reported monthly to ALCO. Trading income for 1997 totaled $7.9 million. OTHER YEAR 2000: National City initiated the process of preparing its computer systems and applications for the Year 2000 in January 1995. This process involves modifying or replacing certain hardware and software maintained by the Corporation as well as communicating with external service providers to ensure that they are taking the appropriate action to remedy their Year 2000 issues. Management expects to have substantially all of the system and application changes completed by the end of 1998 and believes that its level of preparedness is appropriate. National City estimates that the total cumulative cost of the project will be approximately $40 million, which includes both internal and external personnel costs related to modifying the systems as well as the cost of purchasing or leasing certain hardware and software. Purchased hardware and software will be capitalized in accordance with normal policy. Personnel and all other costs related to the project are being expensed as incurred. The costs of the project and the expected completion dates are based on management's best estimates. 18 21 STATISTICAL DATA CONSOLIDATED SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
For the Calendar Year - ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Millions Except Per Share Amounts and Ratios) 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Loans $ 3,205 $ 3,059 $ 2,910 $ 2,386 $ 2,195 $ 2,249 $ 2,651 $ 2,922 $ 2,868 $ 2,444 $ 2,104 Securities 544 567 648 582 640 720 721 699 619 553 508 Other interest income 27 29 46 35 33 72 131 122 142 117 114 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 3,776 3,655 3,604 3,003 2,868 3,041 3,503 3,743 3,629 3,114 2,726 INTEREST EXPENSE Deposits 1,252 1,216 1,250 911 887 1,153 1,631 1,821 1,748 1,426 1,197 Other interest expense 581 497 526 326 238 228 308 395 400 323 305 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 1,833 1,713 1,776 1,237 1,125 1,381 1,939 2,216 2,148 1,749 1,502 - ------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 1,943 1,942 1,828 1,766 1,743 1,660 1,564 1,527 1,481 1,365 1,224 PROVISION FOR LOAN LOSSES 140 146 113 110 143 226 323 439 254 231 318 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 1,803 1,796 1,715 1,656 1,600 1,434 1,241 1,088 1,227 1,134 906 FEES AND OTHER INCOME 1,292 1,131 1,004 976 911 840 748 700 607 596 500 SECURITIES GAINS 84 108 42 30 42 85 49 6 13 19 22 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 1,376 1,239 1,046 1,006 953 925 797 706 620 615 522 NONINTEREST EXPENSE 2,011 1,977 1,916 1,803 1,761 1,787 1,643 1,575 1,376 1,270 1,171 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes and cumulative effect of accounting changes 1,168 1,058 845 859 792 572 395 219 471 479 257 INCOME TAXES 361 321 254 261 235 164 96 84 108 110 34 - ------------------------------------------------------------------------------------------------------------------------------ Income before cumulative effect of accounting changes 807 737 591 598 557 408 299 135 363 369 223 Cumulative effect of accounting changes, net -- -- -- -- 60 -- -- -- -- -- -- NET INCOME $ 807 $ 737 $ 591 $ 598 $ 617 $ 408 $ 299 $ 135 $ 363 $ 369 $ 223 - ------------------------------------------------------------------------------------------------------------------------------ PER SHARE MEASURES Diluted net income per common share $ 3.66 $ 3.27 $ 2.64 $ 2.60 $ 2.59 $ 1.76 $ 1.39 $ .65 $ 1.74 $ 1.77 $ 1.06 Average common shares -- diluted 220.69 225.35 223.94 229.76 238.25 231.61 214.48 207.70 208.45 208.47 210.29 Dividends paid per common share 1.67 1.47 1.30 1.18 1.06 .94 .94 .94 .84 .72 .60 FINANCIAL RATIOS Return on average common equity 18.53% 17.69% 16.18% 17.31% 18.75% 13.63% 11.02% 5.14% 14.60% 16.19% 10.59% Return on average assets 1.59 1.51 1.23 1.35 1.46 .99 .73 .34 .99 1.08 .70 Average equity to average assets 8.57 8.61 7.80 8.05 8.11 7.47 6.78 6.76 6.91 6.70 6.76 Dividends paid to net income 45.63 44.95 49.24 45.38 40.93 53.41 67.63 144.62 48.28 40.68 56.60 Net interest margin 4.25 4.44 4.22 4.50 4.63 4.54 4.39 4.50 4.71 4.69 4.68 AT YEAR-END Assets $54,684 $50,856 $50,542 $45,869 $45,165 $42,322 $41,973 $40,627 $39,126 $37,162 $33,984 Loans 39,573 35,830 34,466 30,701 28,602 25,952 25,495 26,264 25,510 23,717 21,634 Securities 8,865 8,923 10,345 9,637 11,323 10,898 10,066 8,228 7,618 7,507 6,728 Deposits 36,861 36,000 35,581 34,555 33,144 33,192 32,887 32,521 30,412 29,363 26,686 Long-term debt 4,810 2,994 3,025 2,012 1,261 1,010 520 395 397 382 414 Common equity 4,281 4,432 3,878 3,272 3,597 3,008 2,654 2,505 2,602 2,343 2,129 Total equity 4,281 4,432 4,064 3,460 3,795 3,245 2,891 2,543 2,639 2,380 2,171 Common shares outstanding 211.10 223.20 211.57 213.21 225.69 224.08 207.96 209.70 211.62 208.00 209.16 - ------------------------------------------------------------------------------------------------------------------------------
19 22 STATISTICAL DATA (continued) DAILY AVERAGE BALANCE SHEETS/NET INTEREST INCOME/RATES
Daily Average Balance - --------------------------------------------------------------------------------------------------------------------------- (Dollars in Millions) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Earning assets: Loans: Commercial $13,618 $12,261 $11,584 $10,782 $10,543 Real estate mortgage 10,952 10,854 10,512 9,169 8,126 Consumer 9,601 8,739 7,617 6,693 5,906 Revolving credit 3,060 3,125 3,058 2,511 2,106 - --------------------------------------------------------------------------------------------------------------------------- Total loans 37,231 34,979 32,771 29,155 26,681 Securities: Taxable 8,155 8,323 9,788 9,544 10,358 Tax-exempt 284 367 515 633 757 - --------------------------------------------------------------------------------------------------------------------------- Total securities 8,439 8,690 10,303 10,177 11,115 Federal funds sold 63 135 87 79 90 Security resale agreements 281 285 404 470 274 Other short-term investments 170 138 279 316 480 - --------------------------------------------------------------------------------------------------------------------------- Total earning assets/ 46,184 44,227 43,844 40,197 38,640 Total interest income/rates Allowance for loan losses (713) (708) (720) (706) (651) Market value appreciation of securities available for sale 300 165 31 23 -- Cash and demand balances due from banks 2,344 2,434 2,385 2,420 2,352 Properties and equipment 637 592 582 553 521 Customers' acceptance liability 72 65 91 69 51 Accrued income and other assets 2,010 1,955 1,867 1,655 1,482 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $50,834 $48,730 $48,080 $44,211 $42,395 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: NOW and money market accounts $ 9,169 $ 9,031 $ 8,507 $ 9,054 $ 9,365 Savings accounts 3,740 4,118 4,446 4,977 4,562 Time deposits of individuals 13,906 13,856 13,786 11,066 11,125 Other time deposits 913 645 521 493 564 Deposits in overseas offices 1,053 859 1,365 1,026 263 Federal funds borrowed 1,341 1,011 1,404 1,398 1,501 Security repurchase agreements 2,738 2,948 2,990 2,003 2,336 Borrowed funds 2,116 1,510 1,916 1,853 1,325 Long-term debt 4,068 3,166 2,435 1,892 1,332 - --------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities/ 39,044 37,144 37,370 33,762 32,373 Total interest expense/rates Noninterest bearing deposits 6,449 6,398 6,090 6,216 5,971 Acceptances outstanding 72 65 91 69 51 Accrued expenses and other liabilities 911 925 780 603 563 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 46,476 44,532 44,331 40,650 38,958 Preferred stock -- 56 186 191 200 Common stock 4,358 4,142 3,563 3,370 3,237 - --------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 4,358 4,198 3,749 3,561 3,437 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50,834 $48,730 $48,080 $44,211 $42,395 - --------------------------------------------------------------------------------------------------------------------------- Net interest income - --------------------------------------------------------------------------------------------------------------------------- Interest spread Contribution of noninterest bearing sources of funds - --------------------------------------------------------------------------------------------------------------------------- Net interest margin - ---------------------------------------------------------------------------------------------------------------------------
Tax equivalent basis computed using a 35% marginal tax rate. Average loan balances include nonperforming loans. 20 23
Interest Daily Average Rate - -------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- $1,150.7 $1,034.9 $1,000.9 $ 841.4 $ 777.9 8.45% 8.44% 8.64% 7.80% 7.38% 885.3 895.6 868.5 712.0 651.1 8.08 8.25 8.26 7.77 8.01 846.9 764.1 697.0 554.2 532.1 8.82 8.74 9.15 8.28 9.01 330.9 375.0 357.6 287.9 243.5 10.81 12.00 11.69 11.47 11.56 - -------------------------------------------------------------------------------------------------------------- 3,213.8 3,069.6 2,924.0 2,395.5 2,204.6 8.63 8.78 8.92 8.22 8.26 526.9 540.4 608.4 558.9 604.9 6.46 6.49 6.22 5.86 5.84 27.5 37.1 47.2 58.7 72.5 9.68 10.11 9.17 9.27 9.58 - -------------------------------------------------------------------------------------------------------------- 554.4 577.5 655.6 617.6 677.4 6.57 6.65 6.36 6.07 6.09 3.6 7.4 5.3 3.4 4.9 5.71 5.48 6.09 4.30 5.44 15.6 15.4 23.9 20.0 8.8 5.55 5.40 5.92 4.26 3.21 8.1 6.4 16.4 11.5 19.7 4.76 4.64 5.88 3.64 4.10 - -------------------------------------------------------------------------------------------------------------- $3,795.5 $3,676.3 $3,625.2 $3,048.0 $2,915.4 8.22% 8.31% 8.27% 7.58% 7.55% $ 276.9 $ 252.6 $ 229.4 $ 199.3 $ 210.9 3.02% 2.80% 2.70% 2.20% 2.25% 92.3 107.4 121.1 130.6 126.7 2.47 2.61 2.72 2.62 2.78 781.5 779.9 791.6 518.2 522.9 5.62 5.63 5.74 4.68 4.70 46.8 31.6 28.3 18.6 20.1 5.13 4.90 5.43 3.77 3.56 54.9 44.6 79.2 44.1 6.9 5.21 5.19 5.80 4.30 2.62 75.5 65.9 87.2 59.3 47.4 5.63 6.52 6.21 4.24 3.16 131.2 147.7 151.3 110.7 65.7 4.79 5.01 5.06 5.53 2.81 116.7 85.8 127.3 44.7 47.7 5.52 5.68 6.64 2.41 3.60 257.5 197.3 160.3 111.5 77.3 6.33 6.23 6.58 5.89 5.80 - -------------------------------------------------------------------------------------------------------------- $1,833.3 $1,712.8 $1,775.7 $1,237.0 $1,125.6 4.70% 4.61% 4.75% 3.66% 3.48% ============================================================================================================== ============================================================================================================== $1,962.2 $1,963.5 $1,849.5 $1,811.0 $1,789.8 - -------------------------------------------------------------------------------------------------------------- 3.52% 3.70% 3.52% 3.92% 4.07% .73 .74 .70 .58 .56 - -------------------------------------------------------------------------------------------------------------- 4.25% 4.44% 4.22% 4.50% 4.63% - --------------------------------------------------------------------------------------------------------------
21 24 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 generally accepted accounting principles 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, 1997 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, 1997, its system of internal control met those criteria. Cleveland, Ohio January 21, 1998 /s/ David A. Daberko /s/ Robert G. Siefers DAVID A. DABERKO ROBERT G. SIEFERS Chairman and Chief Vice Chairman and Executive Officer Chief Financial Officer
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, 1997 and 1996, 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, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Cleveland, Ohio January 21, 1998 /s/ Ernst & Young LLP 22 25 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
December 31 - ------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ ASSETS Loans: Commercial $13,464,069 $11,217,815 Real estate construction 782,972 774,991 Lease financing 632,949 515,576 Commercial real estate 3,020,668 3,440,696 Residential real estate 7,214,385 7,288,677 Mortgage loans held for sale 1,130,899 334,742 Consumer 10,127,696 9,251,982 Credit card 1,159,777 1,222,129 Home equity 2,039,710 1,783,460 - ------------------------------------------------------------------------------------------------------------------------ Total loans 39,573,125 35,830,068 Allowance for loan losses (698,405) (705,893) - ------------------------------------------------------------------------------------------------------------------------ Net loans 38,874,720 35,124,175 Securities available for sale, at market 8,865,063 8,923,482 Federal funds sold and security resale agreements 535,576 493,733 Trading account assets 15,060 102,493 Other short-term investments 48,914 281,563 Cash and demand balances due from banks 2,967,181 2,935,282 Properties and equipment 660,057 616,426 Customers' acceptance liability 45,243 66,767 Accrued income and other assets 2,671,707 2,311,914 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $54,683,521 $50,855,835 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Demand deposits (noninterest bearing) $ 7,378,009 $ 7,436,403 NOW and money market accounts 9,443,638 9,162,353 Savings accounts 3,469,598 3,896,234 Time deposits of individuals 13,754,972 13,896,667 Other time deposits 1,078,500 721,647 Deposits in overseas offices 1,736,419 886,443 - ------------------------------------------------------------------------------------------------------------------------ Total deposits 36,861,136 35,999,747 Federal funds borrowed and security repurchase agreements 4,425,346 4,276,722 Borrowed funds 3,096,042 1,994,009 Long-term debt 4,810,417 2,994,418 Acceptances outstanding 45,243 66,767 Accrued expenses and other liabilities 1,163,986 1,092,109 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES $50,402,170 $46,423,772 - ------------------------------------------------------------------------------------------------------------------------ Stockholders' Equity: Preferred stock -- -- Common stock, par value $4 per share, authorized 700,000,000 shares, outstanding 211,097,837 shares in 1997 and 223,198,494 shares in 1996 844,391 892,794 Capital surplus 618,841 622,543 Retained earnings 2,818,119 2,916,726 - ------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 4,281,351 4,432,063 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,683,521 $50,855,835 - ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 23 26 CONSOLIDATED FINANCIAL STATEMENTS (continued) CONSOLIDATED STATEMENTS OF INCOME
For the Calendar Year - -------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Amounts) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $3,204,969 $3,059,041 $2,910,070 Securities: Taxable 524,761 543,006 617,635 Exempt from Federal income taxes 19,187 24,114 30,675 Federal funds sold and security resale agreements 19,201 22,831 30,228 Other short-term investments 8,022 6,343 15,423 - -------------------------------------------------------------------------------------------------------------------------- Total interest income 3,776,140 3,655,335 3,604,031 INTEREST EXPENSE Deposits 1,252,467 1,216,089 1,249,698 Federal funds borrowed and security repurchase agreements 206,711 213,554 238,484 Borrowed funds 116,744 85,781 127,250 Long-term debt 257,390 197,335 160,254 - -------------------------------------------------------------------------------------------------------------------------- Total interest expense 1,833,312 1,712,759 1,775,686 - -------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 1,942,828 1,942,576 1,828,345 PROVISION FOR LOAN LOSSES 139,660 146,480 113,482 - -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,803,168 1,796,096 1,714,863 NONINTEREST INCOME Item processing revenue 393,115 364,512 327,929 Service charges on deposit accounts 228,986 214,659 196,474 Trust fees 195,815 177,124 167,224 Card-related fees 137,931 123,306 98,806 Mortgage banking revenue 124,538 81,145 66,821 Brokerage revenue 49,784 47,546 29,502 Other 162,253 122,993 117,085 - -------------------------------------------------------------------------------------------------------------------------- Total fees and other income 1,292,422 1,131,285 1,003,841 Securities gains 83,514 108,146 42,365 - -------------------------------------------------------------------------------------------------------------------------- Total noninterest income 1,375,936 1,239,431 1,046,206 NONINTEREST EXPENSE Salaries and other personnel 987,696 923,764 878,615 Equipment 144,459 135,139 127,612 Net occupancy 132,725 132,143 125,072 Assessments and taxes 45,241 44,355 105,005 Merger and restructuring 65,902 74,745 24,200 Other 634,554 666,937 655,420 - -------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 2,010,577 1,977,083 1,915,924 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,168,527 1,058,444 845,145 Income tax expense 361,094 321,814 253,685 - -------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 807,433 $ 736,630 $ 591,460 - -------------------------------------------------------------------------------------------------------------------------- NET INCOME APPLICABLE TO COMMON STOCK $ 807,433 $ 732,602 $ 576,630 - -------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic $3.73 $3.34 $2.71 Diluted 3.66 3.27 2.64 AVERAGE COMMON SHARES OUTSTANDING Basic 216,429,836 219,095,248 212,392,355 Diluted 220,689,763 225,353,501 223,936,996 - --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 24 27 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------ Unallocated Preferred Common Capital Retained Shares Held by (Dollars in Thousands Except Per Share Amounts) Stock Stock Surplus Earnings ESOP Trust Total - ------------------------------------------------------------------------------------------------------------------------------ BALANCE JANUARY 1, 1995 $187,540 $852,835 $291,091 $2,137,202 $ (9,018) $3,459,650 Net income 591,460 591,460 Common dividends declared, National City, $1.30 per share (191,907) (191,907) Common dividends declared of pooled company, prior to merger (64,006) (64,006) Preferred dividends, $4.00 per depositary share (14,910) (14,910) Issuance of 2,279,422 common shares under corporate stock and dividend reinvestment plans 9,116 37,015 (1,246) 44,885 Purchase of 8,215,284 common shares and 30,000 depositary shares of preferred stock (1,500) (32,860) (22,479) (184,414) (241,253) Issuance of 4,267,760 common shares pursuant to acquisitions 17,071 93,668 110,739 Conversion of 12,800 depositary shares of preferred stock to 30,515 common shares (640) 122 518 -- Shares distributed by ESOP trust and tax benefit on dividends 544 6,277 6,821 Change in unrealized market value adjustment on securities available for sale, net of tax 362,367 362,367 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 31, 1995 $185,400 $846,284 $399,813 $2,635,090 $ (2,741) $4,063,846 Net income 736,630 736,630 Common dividends declared, National City, $1.88 per share (363,999) (363,999) Common dividends declared of pooled company, prior to merger (36,009) (36,009) Preferred dividends, $2.00 per depositary share (6,458) (6,458) Issuance of 2,787,765 common shares under corporate stock and dividend reinvestment plans 11,151 47,612 58,763 Issuance of common stock by subsidiary 25,077 25,077 Conversion of 3,708,000 depositary shares of preferred stock to 8,839,650 common shares (185,400) 35,359 150,041 -- Shares distributed by ESOP trust and tax benefit on dividends 189 2,741 2,930 Change in unrealized market value adjustment on securities available for sale, net of tax (48,717) (48,717) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 31, 1996 $ -- $892,794 $622,543 $2,916,726 $ -- $4,432,063 Net income 807,433 807,433 Common dividends declared, $1.72 per share (369,370) (369,370) Issuance of 3,154,343 common shares under corporate stock and dividend reinvestment plans 12,617 67,761 80,378 Purchase of 15,255,000 common shares (61,020) (71,463) (702,585) (835,068) Change in unrealized market value adjustment on securities available for sale, net of tax 165,915 165,915 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE DECEMBER 31, 1997 $ -- $844,391 $618,841 $2,818,119 $ -- $4,281,351 - ------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 25 28 CONSOLIDATED FINANCIAL STATEMENTS (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Calendar Year - -------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 807,433 $ 736,630 $ 591,460 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 139,660 146,480 113,482 Depreciation and amortization 105,319 92,710 87,355 Amortization of intangibles and servicing rights 54,985 61,838 65,232 Amortization of securities discount and premium 1,092 3,502 18,728 Securities gains (83,514) (108,146) (42,365) Other gains, net (80,861) (40,146) (23,271) Net decrease (increase) in trading account assets 87,433 (78,778) (6,671) Originations and purchases of mortgage loans held for sale (5,827,672) (2,610,000) (2,075,968) Proceeds from sales of mortgage loans held for sale 5,064,963 2,421,252 1,878,381 Deferred income taxes 114,700 (16,801) 2,672 Increase in interest receivable (4,146) (40,479) (89,851) (Decrease) increase in interest payable (18,808) 4,837 156,582 Net change in other assets/liabilities (379,318) (322,864) (105,767) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities (18,734) 250,035 569,999 LENDING AND INVESTING ACTIVITIES Net (increase) decrease in short-term investments 190,806 65,261 (20,553) Purchases of securities (3,952,924) (3,439,159) (7,269,362) Proceeds from sales of securities 3,202,047 3,416,044 5,589,865 Proceeds from maturities and prepayments of securities 1,122,804 1,401,079 1,932,384 Net increase in loans (3,206,753) (1,696,785) (3,043,087) Proceeds from sales of loans 136,057 400,558 61,225 Net increase in properties and equipment (140,841) (115,630) (101,676) Acquisitions (108,643) -- (16,498) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by lending and investing activities (2,757,447) 31,368 (2,867,702) DEPOSIT AND FINANCING ACTIVITIES Net increase (decrease) in Federal funds borrowed and security repurchase agreements 148,624 (1,022,844) 1,457,409 Net increase in borrowed funds 1,102,033 431,505 278,464 Net increase (decrease) in demand, savings, NOW, money market accounts, and deposits in overseas offices 646,231 436,612 (1,530,940) Net increase (decrease) in time deposits 215,158 (17,832) 1,668,121 Repayment of long-term debt (353,407) (528,261) (72,935) Proceeds from issuance of long-term debt, net 2,167,916 497,086 1,123,360 Dividends paid, net of tax benefit of ESOP shares (363,785) (314,762) (270,279) Issuance of common stock 80,378 58,763 44,885 Repurchase of common and preferred stock (835,068) -- (241,253) Proceeds from issuance of common stock by subsidiary -- 114,966 -- ESOP trust repayment -- 2,741 6,277 - -------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by deposit and financing activities 2,808,080 (342,026) 2,463,109 - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and demand balances due from banks 31,899 (60,623) 165,406 Cash and demand balances due from banks, January 1 2,935,282 2,995,905 2,830,499 - -------------------------------------------------------------------------------------------------------------------------- Cash and demand balances due from banks, December 31 $2,967,181 $ 2,935,282 $ 2,995,905 - -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES Interest paid $1,852,120 $ 1,707,922 $ 1,619,204 Income taxes paid 171,814 392,247 238,400 Common stock issued in purchase acquisitions -- -- 110,739 - --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 26 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS National City Corporation ("National City" or "the Corporation") is a multi-bank holding company headquartered in Cleveland, Ohio. The Corporation's principal banking subsidiaries are located in Ohio, Indiana, Kentucky and Pennsylvania. In addition to retail and commercial banking, the Corporation and its subsidiaries are engaged in trust and investment management, mortgage banking, investment banking, leasing, item processing, venture capital, insurance and other financial-related businesses. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of National City conform with generally accepted accounting principles and prevailing industry practices. 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. A description of the significant accounting policies is presented below: PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All material intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation. BUSINESS COMBINATIONS: Business combinations which have been accounted for under the purchase method of accounting include the results of operations of the acquired businesses from the date of acquisition. Net assets of the companies acquired were recorded at their estimated fair value as of the date of acquisition. Other business combinations have been accounted for under the pooling-of-interests method of accounting which requires the assets, liabilities and shareholders' equity of the merged entity to be retroactively combined with the Corporation's respective accounts at recorded value. Prior period financial statements have been restated to give effect to business combinations accounted for under this method. CASH FLOWS: Cash and cash equivalents are defined as those amounts included in the balance sheet caption "Cash and demand balances due from banks." LOANS: Loans are generally reported at the principal amount outstanding, net of unearned income. Loans held for sale are valued at the lower of cost or market, as calculated on an aggregate basis. Loan origination fees and certain direct costs are amortized into interest or other income using a method which approximates the interest method over the estimated life of the related loan. Loans are classified as nonaccrual or restructured based on management's judgment and requirements established by bank regulatory agencies. Subsequent receipts on nonaccrual loans, including those considered impaired under the provisions of Statement of Financial Accounting Standards No. 114, are recorded as a reduction of principal, and interest income is recorded once principal recovery is reasonably assured. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is that amount believed adequate to absorb estimated credit losses in the portfolio based on management's evaluation of various factors including overall growth in the portfolio, an analysis of individual credits, adverse situations that could affect a borrower's ability to repay (including the timing of future payments), prior and current loss experience, and current and anticipated economic conditions. A provision for loan losses is charged to operations based on management's periodic evaluation of these and other pertinent factors. Certain loans are accounted for under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures. These standards require an allowance to be established as a component of the allowance for loan losses for certain loans 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 the fair value. Fair value is measured using either the present value of expected future cash flows based on the initial effective interest rate on the loan, the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. SECURITIES AND TRADING ACCOUNT ASSETS: Trading account assets are held for resale in anticipation of short-term market movements and are carried at market value. Gains and losses, both realized and unrealized, are included in other income. Securities are classified as held to maturity when management has the 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 retained earnings, net of tax. Interest and dividends on securities, including amortization of premiums and accretion of discounts, is included in interest income. Realized gains and losses are recorded as net securities gains (losses). The adjusted cost of specific securities sold is used to compute gains or losses on sales. EQUITY-RELATED INVESTMENTS: Equity investments of the Corporation's venture capital and small business invest- 27 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ment subsidiaries are included in other assets. These investments are carried at 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 adjusted for sales restrictions or market illiquidity. 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 amount at which the securities were acquired or sold plus accrued interest. It is the Corporation's policy to take possession of securities purchased under resale agreements, which are primarily U.S. Government and Federal agency securities. The market value of the collateral is monitored and additional collateral obtained when deemed appropriate. The Corporation also monitors its exposure with respect to securities borrowed transactions and requests the return of excess collateral as required. INTANGIBLES: The excess of the purchase price over net identifiable tangible and intangible assets acquired in a purchase business combination (goodwill) is included in other assets. Goodwill related to bank acquisitions is amortized over varying periods not exceeding 25 years. Goodwill related to nonbank acquisitions is amortized over varying periods not exceeding 40 years, based on industry practice within the respective nonbank industry. Other identified intangibles are amortized over periods ranging from 4 to 15 years. MORTGAGE SERVICING RIGHTS: Mortgage servicing rights are accounted for under the provisions of SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which became effective January 1, 1997. SFAS No. 125 superseded SFAS No. 122, Accounting for Mortgage Servicing Rights, but did not significantly change the methodology used to account for servicing rights. The Corporation had adopted SFAS No. 122 as of January 1, 1996 and at that time began capitalizing originated servicing rights. The adoption did not have a material impact on financial position or results of operations. Prior to 1996, capitalization was limited to purchased servicing. The total cost of loans originated or purchased is allocated between loans and servicing rights based on the relative fair values of each. The servicing rights capitalized are amortized in proportion to and over the period of estimated servicing income. Management stratifies servicing rights based on origination period and interest rate and evaluates the recoverability in relation to the impact of actual and anticipated loan portfolio prepayment, foreclosure and delinquency experience. The Corporation did not have a valuation allowance associated with the mortgage servicing rights portfolio as of December 31, 1997. The Corporation hedges its exposure to the prepayment risk associated with the servicing rights by using off-balance sheet derivative financial instruments. Further discussion regarding this activity is provided in Note 19. DEPRECIABLE ASSETS: Properties and equipment are stated at cost less accumulated depreciation and amortization. Buildings and equipment 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 hedge market values and to alter the cash flow characteristics of certain on-balance sheet instruments. The derivative financial instruments used primarily consist of interest rate swaps and interest rate caps and floors, and, to a lesser extent, interest rate futures, forwards and options. 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 at the inception of the derivative contract and have a high degree of correlation with the associated balance sheet item during the hedge period. Net interest income or expense on derivative contracts used for interest rate risk management is accrued. 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 market value, net of interest accruals, recorded as a component of stockholders' equity, net of tax. Mortgage Servicing Rights Risk Management: The market value of the Corporation's mortgage servicing rights portfolio is adversely affected when mortgage interest rates decline and mortgage loan prepayments 28 31 increase. To hedge the market value of the servicing rights portfolio the Corporation uses interest rate swaps, principal-only swaps and interest rate caps and floors. Net cash flows related to these contracts are recognized as adjustments to the carrying value of the mortgage servicing rights and are amortized over the life of the derivative instrument. This adjusted carrying value is the basis used for evaluating the recoverability of the servicing rights as described in the Mortgage Servicing Rights accounting policy. Unrealized gains and losses are not recognized on the balance sheet but are considered when evaluating the recoverability of the servicing rights. Trading: The Corporation also enters into derivative financial agreements for trading purposes. 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 include interest rate swaps, interest rate caps and floors, and interest rate and foreign exchange futures, forwards and options. Changes in market value (both realized and unrealized) are recorded in other income. STOCK-BASED COMPENSATION: The Corporation's stock-based compensation plans are accounted for under the provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations. SFAS No. 123, Stock-Based Compensation, issued in 1995, allows a company to recognize stock-based compensation using a fair-value based method of accounting if it so elects. The Corporation has elected not to adopt the recognition provisions of SFAS No. 123. INCOME TAXES: Deferred income taxes reflect the temporary tax consequences on future years of differences between the tax bases and financial statement amounts of assets and liabilities at each year-end. 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, surplus and retained earnings. 2. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES: In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities which provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The statement also extends the treatment of mortgage servicing rights to all servicing assets. The provisions of SFAS No. 125 were adopted by the Corporation prospectively as of January 1, 1997 for the following types of transactions: securitizations, recognition of servicing assets and liabilities, transfers of receivables with recourse, loan participations, and extinguishments of liabilities. Certain provisions of SFAS No. 125, relating to repurchase agreements, securities lending and other similar transactions, and pledged collateral, were deferred for one year by SFAS No. 127, and were adopted prospectively as of January 1, 1998. The adoption of these statements did not have a material impact on financial position or results of operations. REPORTING COMPREHENSIVE INCOME: In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting the components of comprehensive income and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be included in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income as well as certain items that are reported directly within a separate component of stockholders' equity and bypass net income. The provisions of this statement are effective beginning with 1998 interim reporting. These disclosure requirements will have no impact on financial position or results of operations. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION: In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The provisions of this statement require disclosure of financial and descriptive information about an enterprise's operating segments in annual and interim financial reports issued to shareholders. The statement defines an operating segment as a component of an enterprise that engages in business activities that generate revenue and incur expense, whose operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance, and for which discrete financial information is available. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement is effective for fiscal years beginning after December 15, 1997, however, it is not required to be applied for interim reporting in the initial year of application. The Corporation is currently evaluating the impact of this statement on the disclosures included in its annual and interim period financial statements. 3. MERGERS AND ACQUISITIONS On December 1, 1997, National City announced the signing of a definitive merger agreement with First of America Bank Corporation, a $21.1 billion asset bank holding company headquartered in Kalamazoo, Michigan. The merger agreement calls for an exchange of 1.2 shares of National City common stock for each outstanding share of First of America common stock. 29 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Based on the number of shares of First of America common stock outstanding as of December 31, 1997, National City expects to issue approximately 105 million common shares to effect the merger. The transaction will be accounted for as a pooling-of-interests and is anticipated to close in the second quarter of 1998, subject to regulatory and stockholder approvals. In connection with their approval of this transaction, the boards of directors of both companies have rescinded prior authorizations to repurchase common shares. On January 12, 1998, National City agreed to acquire Fort Wayne National Corporation, a $3.3 billion asset bank holding company headquartered in Fort Wayne, Indiana. Under the terms of the agreement, shareholders of Fort Wayne National will receive .75 shares of National City common stock for each share of Fort Wayne National common stock outstanding. Based on the number of shares of Fort Wayne National common stock outstanding as of December 31, 1997, National City expects to issue approximately 13 million common shares in connection with the acquisition. The acquisition will be accounted for as a purchase and is expected to close in the second quarter of 1998, subject to regulatory and stockholder approvals. In January 1997, the Corporation's mortgage banking subsidiary, National City Mortgage Company, acquired certain assets of the mortgage loan origination business owned by Bank United, a federal bank and its subsidiaries doing business principally under the name Commonwealth United Mortgage. The purchase price of the assets acquired was not material to the Corporation. During 1997, the Corporation's item-processing subsidiary, National Processing, Inc., acquired several processing services companies. The combined purchase price of these acquisitions totaled $128 million. Goodwill generated as a result of these purchases totaled $104 million. The pro forma effects of the 1997 acquisitions were deemed not material to historical results of operations or financial condition. On May 3, 1996, National City merged with Integra Financial Corporation, a $14 billion asset bank holding company headquartered in Pittsburgh, Pennsylvania, in a transaction accounted for as a pooling-of-interests. National City issued 66.6 million shares of common stock to effect the merger. 4. LOANS AND ALLOWANCE FOR LOAN LOSSES Total loans outstanding were recorded net of unearned income of $435.9 million in 1997 and $325.6 million in 1996. The following table summarizes the activity in the allowance for loan losses:
For the Calendar Year - ------------------------------------------------------------ (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------ BALANCE AT BEGINNING OF YEAR $ 705,893 $ 705,846 $ 706,452 Reserves (sold) acquired (8,133) 94 11,643 Provision 139,660 146,480 113,482 Charge-offs (225,703) (236,615) (202,547) Recoveries 86,688 90,088 76,816 - ------------------------------------------------------------ Net charge-offs (139,015) (146,527) (125,731) - ------------------------------------------------------------ BALANCE AT END OF YEAR $ 698,405 $ 705,893 $ 705,846 - ------------------------------------------------------------
The financial review section provides detail regarding nonperforming loans. At December 31, 1997, and December 31, 1996, loans that were considered to be impaired under SFAS No. 114 totaled $10.4 million and $13.9 million, respectively. All impaired loans are included in nonperforming assets. Management does not individually evaluate certain smaller-balance loans for impairment. These loans are evaluated on an aggregate basis using a formula-based approach in accordance with the Corporation's policy. 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 1997 and 1996 was $4.2 million and $9.6 million, respectively. The contractual interest due and actual interest recognized on impaired loans, as well as on total nonperforming assets, for the twelve months ended December 31, 1997, was $17.3 million and $5.5 million, compared to $20.6 million and $9.0 million, respectively, for the twelve months ended December 31, 1996. At December 31, 1997, nonaccrual and restructured loans were $147.5 million and other real estate owned was $19.0 million. At December 31, 1996, the corresponding amounts were $143.1 million and $24.5 million, respectively. 5. SECURITIES The following is a summary of securities available for sale:
DECEMBER 31, 1997 - ------------------------------------------------------------ (Dollars in AMORTIZED UNREALIZED UNREALIZED MARKET Thousands) COST GAINS LOSSES VALUE - ------------------------------------------------------------ U.S. Treas. and Fed. agency debentures $1,240,779 $ 4,040 $ (4,691) $1,240,128 Mortgage-backed securities 4,889,618 68,405 (15,978) 4,942,045 Asset-backed and corporate debt securities 1,538,165 7,207 (1,894) 1,543,478 States and political subdivisions 244,909 12,116 (276) 256,749 Other 469,035 413,743 (115) 882,663 - ------------------------------------------------------------ TOTAL SECURITIES $8,382,506 $505,511 $(22,954) $8,865,063 - ------------------------------------------------------------
30 33
December 31, 1996 - ------------------------------------------------------------ (Dollars in Amortized Unrealized Unrealized Market Thousands) Cost Gains Losses Value - ------------------------------------------------------------ U.S. Treas. and Fed. agency debentures $2,230,328 $ 5,330 $(22,903) $2,212,755 Mortgage-backed securities 4,390,066 32,417 (30,968) 4,391,515 Asset-backed and corporate debt securities 990,014 6,171 (2,453) 993,732 States and political subdivisions 324,520 13,351 (915) 336,956 Other 761,169 230,555 (3,200) 988,524 - ------------------------------------------------------------ TOTAL SECURITIES $8,696,097 $287,824 $(60,439) $8,923,482 - ------------------------------------------------------------
At December 31, 1997, the unrealized appreciation of securities available for sale included in retained earnings totaled $313.7 million, net of tax, compared to unrealized appreciation of $147.8 million, net of tax, at December 31, 1996. The Corporation's securities portfolio consists mainly of financial instruments that pay back par value upon maturity. Market value fluctuations occur over the lives of the instruments due to changes in market interest rates. Management has concluded that current declines in value are temporary and accordingly, no valuation adjustments have been included as a charge to income. The following table shows the amortized cost and market value (carrying value) of securities at December 31, 1997 by maturity:
- ---------------------------------------------------------- Available for Sale ------------------------------ (Dollars in Thousands) Amortized Cost Market Value - ---------------------------------------------------------- Due in 1 year or less $ 900,230 $ 901,063 Due in 1 to 5 years 4,807,651 4,843,179 Due in 5 to 10 years 2,075,185 2,104,593 Due after 10 years 599,440 1,016,228 TOTAL $ 8,382,506 $8,865,063 - ----------------------------------------------------------
Mortgage-backed securities and other securities which have prepayment provisions are assigned to maturity categories based on estimated average lives. Equity securities are included in the Due after 10 years category. At December 31, 1997, 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 $6.2 billion. At December 31, 1997, 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. The following table represents the segregation of cash flows between securities available for sale and securities held to maturity:
- ------------------------------------------------------------ Available Held to (Dollars in Thousands) for Sale Maturity Total - ------------------------------------------------------------ 1997: Purchases of securities $ 3,952,924 -- $ 3,952,924 Proceeds from sales of securities 3,202,047 -- 3,202,047 Proceeds from maturities and prepayments of securities 1,122,804 -- 1,122,804 1996: Purchases of securities $ 3,439,159 -- $ 3,439,159 Proceeds from sales of securities 3,416,044 -- 3,416,044 Proceeds from maturities and prepayments of securities 1,401,079 -- 1,401,079 1995: Purchases of securities $ 6,058,386 $ 1,210,976 $ 7,269,362 Proceeds from sales of securities 5,589,865 -- 5,589,865 Proceeds from maturities and prepayments of securities 916,138 1,016,246 1,932,384 - ------------------------------------------------------------
On November 15, 1995, the FASB staff issued a special report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities. In accordance with provisions in that special report, management chose to reclassify all securities classified as held to maturity to available for sale. At December 1, 1995, the date of the transfer, the amortized cost of those securities was $3.0 billion. In 1997, 1996, and 1995, gross gains of $94.1 million, $122.3 million, and $71.4 million and gross losses of $10.6 million, $14.2 million, and $29.0 million were realized, respectively. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value disclosures of financial instruments are made to comply with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The market value of securities is primarily based upon quoted market prices. For substantially all other financial instruments, the fair values are management's estimates of the values at which the instruments could be exchanged in a transaction between willing parties. Fair values are based on estimates using present value and other valuation techniques in instances where quoted market prices are not available. 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. 31 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SFAS No. 107 also excludes certain items from its disclosure requirements. These items include non-financial assets, intangibles, and future business growth, as well as certain liabilities such as pension and other post-retirement benefits, deferred compensation arrangements, and leases. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. Portions of the unrealized gains and losses inherent in the valuation are a result of management's program to manage overall interest rate risk and represent a point in time valuation. It is not management's intention to immediately dispose of a significant portion of its financial instruments and, thus, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows. The following table presents the estimates of fair value of financial instruments at December 31, 1997 and 1996. Bracketed amounts in the carrying value columns represent either reduction of asset accounts, liabilities, or commitments representing potential cash outflows. Bracketed amounts in the fair value columns represent estimated cash outflows required to settle the obligations at current market rates.
- ------------------------------------------------------------ 1997 1996 ------------------ ------------------ CARRYING FAIR Carrying Fair (Dollars in Millions) VALUE VALUE Value Value - ------------------------------------------------------------ ASSETS: Cash and cash equivalents $ 4,142 $ 4,142 $ 4,318 $ 4,318 Loans held for sale 1,131 1,131 335 335 Loans receivable 38,442 39,020 35,495 35,578 Allowance for loan losses (698) -- (706) -- Securities 8,865 8,865 8,923 8,923 Trading account assets 15 15 102 102 Other assets 105 105 74 74 - ------------------------------------------------------------ LIABILITIES: Demand deposits $(7,378) $ (7,378) $(7,436) $ (7,436) Savings and time deposits (29,483) (29,821) (28,563) (28,763) Short-term borrowings (7,521) (7,521) (6,271) (6,271) Long-term debt (4,810) (5,044) (2,994) (3,231) Other liabilities (434) (434) (475) (475) - ------------------------------------------------------------ OFF-BALANCE SHEET INSTRUMENTS: Interest rate swaps $ (2) $ 75 $ (4) $ 15 Interest rate caps, floors, corridors and futures 18 4 21 24 Commitments to extend credit (13) (13) (12) (12) Standby letters of credit (2) (2) (2) (2) - ------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of each class of financial instrument: CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. For purposes of this disclosure only, cash equivalents include Federal funds sold, security resale agreements, Eurodollar time deposits, customers' acceptance liability, accrued interest receivable, and other short-term investments. LOANS RECEIVABLE AND LOANS HELD FOR SALE: For performing variable rate loans that reprice frequently and loans held for sale, estimated fair values are based on carrying values. 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 market values of securities are based upon quoted market prices, where available, and on quoted market prices of comparable instruments when specific quoted prices are not available. DEPOSIT LIABILITIES: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, 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 purchased, borrowings under 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 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). 32 35 7. CASH AND DEMAND BALANCES DUE FROM BANKS The Corporation's subsidiary banks are required to maintain noninterest bearing reserve balances with the Federal Reserve Bank. The consolidated average reserve balance was $239.8 million for 1997. 8. PROPERTIES AND EQUIPMENT A summary of properties and equipment follows:
December 31 - ------------------------------------------------------------ (Dollars in Thousands) 1997 1996 - ------------------------------------------------------------ Land $ 84,019 $ 87,060 Buildings and leasehold improvements 552,243 585,838 Equipment 816,778 701,477 - ------------------------------------------------------------ 1,453,040 1,374,375 Less accumulated depreciation and amortization 792,983 757,949 - ------------------------------------------------------------ NET PROPERTIES AND EQUIPMENT $ 660,057 $ 616,426 - ------------------------------------------------------------
The Corporation and certain of its subsidiary banks occupy their respective headquarters offices under long-term operating leases and, in addition, lease certain data processing equipment. The aggregate minimum annual rental commitments under these leases total approximately $59.4 million in 1998, $53.2 million in 1999, $49.3 million in 2000, $45.2 million in 2001, $42.5 million in 2002, and $240.8 million thereafter. Total expense recorded under all operating leases in 1997, 1996 and 1995 was $82.0 million, $79.8 million and $73.3 million, respectively. 9. OTHER BORROWINGS The composition of other borrowings follows:
December 31 - ----------------------------------------------------------- (Dollars in Thousands) 1997 1996 - ----------------------------------------------------------- U.S. Treasury demand notes and Federal funds borrowed-term $1,861,090 $1,056,499 Notes payable to Student Loan Marketing Association 300,000 300,000 Other 138,763 79,648 - ----------------------------------------------------------- Total bank subsidiaries 2,299,853 1,436,147 Commercial paper 795,895 556,100 Other 294 1,762 - ----------------------------------------------------------- Total parent company and other subsidiaries 796,189 557,862 - ----------------------------------------------------------- TOTAL $3,096,042 $1,994,009 - -----------------------------------------------------------
U.S. Treasury demand notes represent secured borrowings from the U.S. Treasury. These borrowings are collateralized with securities or 1-4 family residential mortgage loans. The funds are placed with the banks at the discretion of the U.S. Treasury and may be called at any time. The $300 million floating rate note payable to Student Loan Marketing Association is secured by and provides funding for student loan receivables. 10. LONG-TERM DEBT The composition of long-term debt, net of unamortized discount, if applicable, follows:
December 31 - ----------------------------------------------------------- (Dollars in Thousands) 1997 1996 - ----------------------------------------------------------- Floating Rate Subordinated Notes due 1997 $ -- $ 74,998 Floating Rate Notes due 1997 -- 49,983 9 7/8% Subordinated Notes due 1999 64,918 64,872 6.50% Subordinated Notes due 2000 99,881 99,820 8.50% Subordinated Notes due 2002 99,896 99,881 6 5/8% Subordinated Notes due 2004 249,201 249,072 7.20% Subordinated Notes due 2005 249,785 249,756 Other 939 1,794 - ----------------------------------------------------------- TOTAL PARENT COMPANY 764,620 890,176 6.50% Subordinated Notes due 2003 199,600 199,525 7.25% Subordinated Notes due 2010 222,944 222,779 6.30% Subordinated Notes due 2011 200,000 200,000 7.25% Subordinated Notes due 2011 197,278 197,080 Other 3,133 2,103 - ----------------------------------------------------------- TOTAL SUBSIDIARY SUBORDINATED NOTES 822,955 821,487 - ----------------------------------------------------------- TOTAL LONG-TERM DEBT QUALIFYING FOR TIER II CAPITAL 1,587,575 1,711,663 Senior Bank Notes 2,019,229 754,582 Federal Home Loan Bank Advances 703,721 528,173 Reset Asset Capital Securities of National City Capital Trust I 499,892 -- - ----------------------------------------------------------- TOTAL OTHER LONG-TERM DEBT 3,222,842 1,282,755 - ----------------------------------------------------------- TOTAL $4,810,417 $2,994,418 - -----------------------------------------------------------
All of the subordinated notes of the parent and bank subsidiaries pay interest semi-annually and may not be redeemed prior to maturity. In June 1997, National City Capital Trust I (the Trust), a Delaware statutory business trust of which 100% of the common equity is owned by the Corporation, issued $500 million of Reset Asset Capital Securities (Capital Securities). In connection with this issuance, the Trust invested the proceeds in 6.75% Junior Subordinated Debt Securities of the Corporation. The Junior Subordinated Debt Securities are the sole assets of the Trust and have a stated maturity of June 1, 2029. Distributions on the Capital Securities are payable semiannually at a rate per annum equal to the interest rate being earned by the Trust on the Junior Subordinated Debt Securities 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 Junior Subordinated Debt Securities. The Junior Subordinated Debt Securities are first redeemable on June 1, 1999. If the Junior Subordinated Debt Securities are not redeemed on June 1, 1999, the interest rate per annum will be reset based on current market rates at that time. The Capital Securities currently do not qualify for Tier I Capital of the Corporation. Long-term advances from the Federal Home Loan Bank (FHLB) are at fixed and variable rates ranging up to 33 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8.40% and mature at various dates through 2023. Advances from the FHLB are collateralized by qualifying securities and loans. The Senior Bank Notes are at fixed and variable rates and mature at various dates through 2012. The weighted average interest rate of the notes as of December 31, 1997 and 1996 was 6.14% and 6.07%, respectively. The majority of the Corporation's fixed rate debt has been effectively converted to variable rate debt through the use of off-balance sheet derivatives. Information regarding derivative contracts is included in Note 19. 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, 1997. Long-term debt maturities for the next five years are as follows: $402.1 million in 1998; $229.7 million in 1999; $677.5 million in 2000; $126.8 million in 2001; and $501.7 million in 2002. 11. CAPITAL RATIOS The following table reflects various measures of capital at year-end:
1997 1996 (Dollars in ------------------ ------------------ Millions) AMOUNT RATIO Amount Ratio - ------------------------------------------------------------ Total equity(1) $4,281.4 7.83% $4,432.1 8.71% Tangible equity(2) 3,651.5 6.75 3,932.7 7.81 Tier 1 capital(3) 3,609.8 8.12 3,976.5 9.84 Total risk-based capital(4) 5,622.5 12.65 5,980.6 14.79 Leverage(5) 3,609.8 7.01 3,976.5 8.16 - ------------------------------------------------------------
(1) Computed in accordance with generally accepted accounting principles, including unrealized market value adjustment of securities available for sale. (2) Stockholders' equity less all intangible assets and servicing rights; computed as a ratio to total assets less intangible assets and servicing rights. (3) Stockholders' equity less certain intangibles and the unrealized market value adjustment of securities available for sale; computed as a ratio to risk-adjusted assets, as defined. (4) Tier 1 capital plus qualifying loan loss allowance and subordinated debt; computed as a ratio to risk-adjusted assets, as defined. (5) 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 are well above the required minimum levels of 4.00%, 8.00%, and 4.00%, 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 I capital, total risk-based capital and leverage ratios, respectively. Intangible asset and mortgage servicing right totals used in the capital ratio calculations are summarized below:
December 31 - ---------------------------------------------------------- (Dollars in Millions) 1997 1996 - ---------------------------------------------------------- Goodwill $394.9 $307.8 Other intangibles 18.1 50.4 ------ ------ Total intangibles $413.0 $358.2 Mortgage servicing rights $218.2 $141.2 - ----------------------------------------------------------
12. OTHER CAPITAL TRANSACTIONS The Corporation is authorized to issue 5,000,000 shares of no par value preferred stock. At December 31, 1995, the Corporation had 741,600 shares of 8% Cumulative Convertible Preferred Stock outstanding in the form of 3,708,000 depositary shares. The depositary shares had a stated value of $50.00 per share and each share represented a one-fifth interest in a preferred share. The preferred shares were convertible at the option of the holder into 2.384 common shares per depositary share. On March 5, 1996, the Corporation called the preferred stock for redemption, effective May 1, 1996, at the fixed redemption price of $52.00 per depositary share. Prior to the redemption date, all of the outstanding depositary shares were converted into common stock. The final 613,429 shares in the Employee Stock Ownership Plan (ESOP) were allocated to benefit plan participants during 1996. The ESOP, which was part of the National City Savings and Investment Plan, earned dividends on company shares of $.4 million and $1.4 million in 1996 and 1995, respectively. Company contributions of $2.8 million and $6.8 million in 1996 and 1995, respectively, were used with dividends to service the loan which was fully paid during 1996. In August 1996, National Processing, Inc. (NPI), a subsidiary of National City, issued 7,475,000 shares of common stock in an underwritten public offering. Subsequent to the issuance, National City continued to own 85.2% of NPI. In 1997, National City increased its investment in NPI by approximately 2.5% through the purchase of 1.3 million shares of NPI's common stock on the open market. Amounts related to the minority shareholders' interest in the equity of NPI are not material to the consolidated financial statements. 13. NET INCOME PER COMMON SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share, which became effective for the Corporation for reporting periods ending after December 15, 1997. Under the provisions of SFAS No. 128, primary and fully-diluted earnings per share were replaced with basic and diluted earnings per share in an effort to simplify the computation of these measures and align them more closely with 34 37 the methodology used internationally. Basic earnings per share is arrived at by dividing net income available to common stockholders by the weighted-average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. The diluted earnings per share calculation method is similar to, but slightly different from, the previously required fully-diluted earnings per share method and is arrived at by dividing net income by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding stock options and the conversion impact of convertible equity securities. Diluted earnings per share for 1997 equates to what would have been reported as fully-diluted earnings per share. For purposes of comparability, all prior-period earnings per share data has been restated. The calculation of net income per common share follows:
For the Calendar Year - --------------------------------------------------------------- (Dollars in Thousands Except Per Share Amounts) 1997 1996 1995 - --------------------------------------------------------------- BASIC: Net income $807,433 $736,630 $591,460 Less preferred dividends -- 4,028 14,830 - --------------------------------------------------------------- Net income applicable to common stock $807,433 $732,602 $576,630 - --------------------------------------------------------------- Average common shares outstanding 216,429,836 219,095,248 212,392,355 - --------------------------------------------------------------- Net income per common share -- basic $3.73 $3.34 $2.71 - --------------------------------------------------------------- DILUTED: Net income $807,433 $736,630 $591,460 - --------------------------------------------------------------- Average common shares outstanding 216,429,836 219,095,248 212,392,355 Stock option adjustment 4,259,927 3,579,078 2,704,769 Preferred stock adjustment -- 2,679,175 8,839,872 - --------------------------------------------------------------- Average common shares outstanding -- diluted 220,689,763 225,353,501 223,936,996 - --------------------------------------------------------------- Net income per common share -- diluted $3.66 $3.27 $2.64 - ---------------------------------------------------------------
14. PARENT COMPANY AND REGULATORY RESTRICTIONS At December 31, 1997, retained earnings of the parent company included $2,360.8 million of equity in undistributed earnings of subsidiaries. Dividends paid by the Corporation's subsidiary banks are subject to various legal and regulatory restrictions. In 1997, subsidiary banks declared $422.0 million in dividends to the parent company. The subsidiary banks can initiate dividend payments in 1998, without prior regulatory approval, of $471.1 million, plus an additional amount equal to their net profits for 1998, as defined by statute, up to the date of any such dividend declaration. Under Section 23A of the Federal Reserve Act, as amended, loans from subsidiary banks to nonbank affiliates, including the parent company, are required to be collateralized. Commercial paper borrowings of a subsidiary ($795.9 million outstanding at December 31, 1997) are guaranteed by the parent company. Condensed parent company financial statements, which include transactions with subsidiaries, follow: BALANCE SHEETS
December 31 - ---------------------------------------------------------- (Dollars in Thousands) 1997 1996 - ---------------------------------------------------------- ASSETS Cash and demand balances due from banks $ 84,497 $ 14,355 Loans to and accounts receivable from subsidiaries 732,664 1,014,375 Securities 1,010,956 747,644 Investments in: Subsidiary banks 3,385,638 3,149,276 Nonbank subsidiaries 498,220 442,711 Goodwill, net of accumulated amortization of $37,318 and $34,897, respectively 49,292 47,793 Other assets 66,110 184,015 - ---------------------------------------------------------- TOTAL ASSETS $5,827,377 $5,600,169 - ---------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Corporate long-term debt $1,264,512 $ 890,176 Accrued expenses and other liabilities 281,514 277,930 - ---------------------------------------------------------- Total liabilities 1,546,026 1,168,106 Stockholders' equity 4,281,351 4,432,063 - ---------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,827,377 $5,600,169 - ----------------------------------------------------------
STATEMENTS OF INCOME
For the Calendar Year - ----------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - ----------------------------------------------------------- INCOME Dividends from: Subsidiary banks $422,000 $579,500 $329,751 Nonbank subsidiaries 4,318 10,420 12,676 Interest on loans to subsidiaries 23,153 10,810 11,686 Interest and dividends on securities 22,959 21,997 9,268 Securities gains 65,929 93,720 19,764 Other income 25,031 2,851 1,046 - ----------------------------------------------------------- TOTAL INCOME 563,390 719,298 384,191 - -----------------------------------------------------------
35 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Calendar Year - ------------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------- EXPENSE Interest on debt and other borrowings 76,851 67,280 68,578 Goodwill amortization 2,329 2,588 2,360 Other expense 110,887 153,487 118,909 - ------------------------------------------------------------- TOTAL EXPENSE 190,067 223,355 189,847 - ------------------------------------------------------------- Income before taxes and equity in undistributed income of subsidiaries 373,323 495,943 194,344 Income tax (benefit) (46,988) (81,357) (79,474) - ------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 420,311 577,300 273,818 Equity in undistributed net income of subsidiaries 387,122 159,330 317,642 - ------------------------------------------------------------- NET INCOME $807,433 $736,630 $591,460 - -------------------------------------------------------------
STATEMENTS OF CASH FLOWS
For the Calendar Year - ----------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - ----------------------------------------------------------- OPERATING ACTIVITIES Net income $807,433 $736,630 $591,460 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (387,122) (159,330) (317,642) Amortization of goodwill 2,329 2,588 2,360 Depreciation of premises and equipment 1,596 5,447 4,339 Decrease (increase) in dividends receivable from subsidiaries 223,820 (114,820) (89,500) Securities gains (65,929) (93,720) (19,764) Other, net 44,830 (114,604) (79,879) - ----------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 626,957 262,191 91,374 - ----------------------------------------------------------- INVESTING ACTIVITIES Net change in short-term money market investments (155,861) 29,065 (35,613) Purchases of securities (161,758) (260,765) (144,259) Sales and maturities of securities 139,251 199,324 93,129 Net sales of premises and equipment -- 11,513 19,266 Principal collected on loans to subsidiaries 594,820 8,524 7,800 Loans to subsidiaries (737,049) (49,167) (24,975) Investment in subsidiaries 9,948 -- (72,961) Return of investment from subsidiaries 495,000 198,000 286,000 - ----------------------------------------------------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 184,351 136,494 128,387 - ------------------------------------------------------------- For the Calendar Year - ------------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------- FINANCING ACTIVITIES Repayment of corporate long-term debt (125,885) (100,000) (556) Proceeds from issuance of long-term debt 500,000 -- 249,710 Increase (decrease) in other borrowings 3,194 (43,730) (7,115) Common and preferred dividends (363,785) (314,762) (270,279) Issuance of common stock 80,378 58,763 44,885 Repurchase of stock (835,068) -- (241,253) Shares distributed by ESOP -- 2,741 6,277 - ------------------------------------------------------------- NET CASH (USED) BY FINANCING ACTIVITIES (741,166) (396,988) (218,331) - ------------------------------------------------------------- Increase in cash and demand balances due from banks 70,142 1,697 1,430 Cash and demand balances due from banks, January 1 14,355 12,658 11,228 - ------------------------------------------------------------- Cash and demand balances due from banks, December 31 $ 84,497 $ 14,355 $ 12,658 - ------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 76,212 $ 64,764 $ 65,106 Securities transferred to (from) subsidiaries -- (248,234) 89,400 Shares issued in purchase acquisitions and additional investment in subsidiaries -- -- 110,739 - -------------------------------------------------------------
15. 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 for officers and key employees authorize the issuance of up to 15,000,000 options to purchase shares of common stock at the market price of the shares at the date of grant. These options generally become exercisable to the extent of either 25% or 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 market price 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, the Corporation was authorized to grant up to 3,500,000 options to purchase common stock to virtually all employees in commemoration of National City's 150th anniversary. One-third of these options become exercisable in each of the years 1998, 1999, and 2000. 36 39 RESTRICTED STOCK PLAN: The restricted stock plan provides for the issuance of up to 1,500,000 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 over a four-year period. The Corporation generally recognizes compensation expense over the restricted period. Compensation expense recognized in 1997, 1996 and 1995 totaled $3.2 million, $2.0 million and $1.9 million, respectively, related to shares issued under this plan. OPTION AND RESTRICTED STOCK AWARD ACTIVITY: A summary of stock option and restricted stock award activity follows:
------------------------------------------------------------- Shares ----------------------------------- Available Weighted- for Grant Average ----------- Outstanding Option Awards & --------------------- Price Per Options Awards Options Share ------------------------------------------------------------- January 1, 1995 8,893,415 327,800 10,079,579 $ 22.84 Authorized 3,500,000 Cancelled 95,577 (8,950) (793,767) 29.12 Acquired 88,418 Exercised (139,250) (1,822,509) 20.40 Granted (5,849,640) 111,090 5,738,550 30.10 - --------------------------------------------------------------- December 31, 1995 6,639,352 290,690 13,290,271 25.86 Cancelled 125,368 (11,300) (820,718) 29.35 Exercised (49,532) (2,999,388) 19.83 Granted (3,649,117) 162,977 4,105,003 35.20 - --------------------------------------------------------------- December 31, 1996 3,115,603 392,835 13,575,168 29.89 Authorized 16,500,000 Cancelled 116,615 (23,059) (139,199) 36.43 Exercised (77,803) (2,821,205) 23.04 Granted (2,895,679) 215,579 3,132,668 56.98 - --------------------------------------------------------------- DECEMBER 31, 1997 16,836,539 507,552 13,747,432 $ 35.05 - ---------------------------------------------------------------
At December 31, 1997, 1996 and 1995, options exercisable under National City option plans totaled 6,623,140, 6,975,620, and 6,160,826 shares, respectively, and had a weighted average option price per share of $26.88, $22.45, and $20.71, respectively. For options outstanding at December 31, 1997, the option price per share ranged from $5.31 to $67.00 and the weighted-average remaining contractual life of the options was 7.2 years. PRO FORMA DISCLOSURES: For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair value of stock options granted in 1995, 1996 and 1997 was 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 that the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options. The following weighted-average assumptions were used in the option pricing model: a risk-free interest rate of 5.69%, 6.04% and 5.64% for 1997, 1996 and 1995, respectively; an expected life of the option of 3.9 years, 4.2 years and 5.4 years for 1997, 1996 and 1995, respectively; an expected dividend yield of 3.50% for 1997 and 3.80% for 1996 and 1995; and a volatility factor of .194 for 1997 and .206 for 1996 and 1995. The weighted-average grant-date fair value of options granted during 1997, 1996 and 1995 was $9.46, $6.08 and $5.24, 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-based compensation plans been determined consistent with SFAS No. 123, net income and earnings per share would have been as summarized below:
- ------------------------------------------------------------ (In Thousands, Except Per Share Amounts) 1997 1996 1995 - ------------------------------------------------------------ Pro forma net income $791,261 $725,726 $588,122 Pro forma earnings per share: Basic $3.66 $3.29 $2.70 Diluted 3.59 3.22 2.63 - ------------------------------------------------------------
Due to the inclusion of only 1995, 1996 and 1997 option grants, the effects of applying SFAS No. 123 to the years presented above may not be representative of the pro forma impact in future years. 16. PENSION PLANS National City has a noncontributory, defined benefit retirement plan covering substantially all employees. Retirement benefits are based upon the employees' length of service and salary levels. 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. 37 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The defined benefit pension plan's funded status (at its year-end September 30) follows:
- --------------------------------------------------------- (Dollars in Thousands) 1997 1996 - --------------------------------------------------------- Projected benefit obligation: Vested benefits $452,958 $422,876 Nonvested benefits 21,888 21,121 - --------------------------------------------------------- Accumulated benefit obligation 474,846 443,997 Effect of projected future compensation levels 69,928 84,875 - --------------------------------------------------------- Projected benefit obligation 544,774 528,872 Plan's assets at fair value, primarily stocks and bonds, including $33.5 million and $22.7 million in the common stock of the Corporation for 1997 and 1996, respectively 697,571 561,133 - --------------------------------------------------------- Funded status - plan assets in excess of projected benefit obligation $152,797 $ 32,261 - --------------------------------------------------------- Comprised of: Unrecognized net gains (losses) $148,832 $ 31,626 Unrecognized net assets being recognized over 15 years 16,013 20,787 Less accrued pension liability on balance sheet 12,048 20,152 - --------------------------------------------------------- $152,797 $ 32,261 - ---------------------------------------------------------
Assumptions used in the valuation of the defined benefit pension plan at its year-end (September 30) follow:
- ------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------- Weighted average discount rate 7.25% 7.50% 7.50% Average assumed rate of compensation increase 2.75-7.50 5.00 4.75-5.00 Long-term rate of return on assets 10.00 10.00 10.00 - -------------------------------------------------------------
The Corporation adopted an age-graded rate of compensation increase assumption in 1997. This change did not have a material impact on the projected benefit obligation. Net defined benefit pension plan costs include the following components:
For the Calendar Year - -------------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - -------------------------------------------------------------- Service cost - benefits earned during year $ 24,333 $ 20,306 $ 19,871 Interest cost on projected benefit obligation 40,480 36,033 36,324 Actual return on plan assets (176,344) (78,548) (74,411) Net amortization and deferral 120,427 30,577 29,732 - -------------------------------------------------------------- Net periodic pension cost $ 8,896 $ 8,368 $ 11,516 - --------------------------------------------------------------
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, 1997 and 1996 approximately $28.5 million and $32.6 million, respectively, were included in accrued expenses and other liabilities for these plans. For the years ended December 31, 1997, 1996 and 1995, expense related to these plans was $6.7 million, $17.6 million, and $5.6 million, respectively. The expense for 1996 includes a $11.4 million charge relating to the curtailment of a supplemental executive retirement plan for former key employees of Integra. Substantially all employees with one or more years of service are eligible to contribute a portion of their pre-tax 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 1997, 1996 and 1995, the expense related to this plan was $35.2 million, $10.7 million, and $17.8 million, respectively. Contributions made in the form of Company shares by an ESOP served to reduce expense in 1996 and prior. 17. OTHER POSTRETIREMENT BENEFIT PLANS The Corporation has a benefit plan which offers postretirement medical and life insurance benefits to all employees who have attained the age of 55 and have at least 10 years of service (five years of service if age 65 or older). The medical portion is contributory and the life insurance coverage is noncontributory to the participants. For any employee who retired on or after April 1, 1989, the Corporation's medical contribution is fixed, based on years of service and age at retirement. The accounting for the medical portion anticipates contributions for retirees prior to April 1, 1989, to continue to increase as a proportion of the total costs of the plan. The Corporation reserves the right to terminate or make plan changes at any time. The Corporation has no plan assets attributable to the plan and funds the benefits as the claims arise. Postretirement benefit costs are recognized during the periods in which employees provide service for such benefits. The following table presents the Plan's status at 38 41 December 31, reconciled with amounts recognized in the consolidated balance sheet:
- ----------------------------------------------------------- (Dollars in Thousands) 1997 1996 - ----------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 43,586 $ 40,704 Fully eligible active plan participants 11,108 10,826 Other active plan participants 16,709 15,573 - ----------------------------------------------------------- Accumulated postretirement benefit obligation 71,403 67,103 Unrecognized net (loss) (10,651) (9,585) Unrecognized transition obligation (25,286) (27,210) - ----------------------------------------------------------- Accrued postretirement benefit cost $ 35,466 $ 30,308 - -----------------------------------------------------------
Net periodic postretirement benefit costs include the following components:
- ------------------------------------------------------------ For the Calendar Year (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------ Service cost $1,581 $1,270 $ 983 Interest cost 5,169 4,805 4,406 Net amortization and deferral 2,378 2,231 1,822 - ------------------------------------------------------------ Net periodic postretirement benefit cost $9,128 $8,306 $7,211 - ------------------------------------------------------------
Assumptions used in the valuation of the accumulated postretirement benefit obligation at December 31 follow:
- ---------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------- Weighted average discount rate 7.50% 7.75% 7.75% Average salary scale 5.00 5.00 5.00 - ----------------------------------------------------------
The health care trend rate assumption only affects those participants retired under the plan prior to April 1, 1989. The 1997 health care trend rate is projected to be 10 percent for participants under 65 and 7 percent for participants over 65. These rates are assumed to decrease incrementally by .5 percentage point per year until they reach 5 percent and remain at that level thereafter. The health care trend rate assumption does not have a significant effect on the medical plan, therefore, a 1 percentage point change in the trend rate is not material in the determination of the accumulated postretirement benefit obligation or the ongoing expense. 18. INCOME TAXES The composition of income tax expense (benefit) follows:
- ------------------------------------------------------------- For the Calendar Year (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------- Current: Federal $245,889 $320,696 $234,809 State 505 17,919 16,204 - ------------------------------------------------------------- Total current 246,394 338,615 251,013 Deferred: Federal 108,804 (15,682) 1,733 State 5,896 (1,119) 939 - ------------------------------------------------------------- Total deferred 114,700 (16,801) 2,672 - ------------------------------------------------------------- Tax expense $361,094 $321,814 $253,685 - ------------------------------------------------------------- Tax expense applicable to securities transactions $ 29,387 $ 29,587 $ 13,501 - -------------------------------------------------------------
The effective tax rate differs from the statutory rate applicable to corporations as a result of permanent differences between accounting and taxable income as shown below:
- --------------------------------------------------------- For the Calendar Year 1997 1996 1995 - --------------------------------------------------------- Statutory rate 35.0% 35.0% 35.0% Life insurance (1.7) (2.2) (3.0) Tax-exempt income (1.2) (1.5) (2.3) Other (1.2) (.9) .3 - --------------------------------------------------------- EFFECTIVE TAX RATE 30.9% 30.4% 30.0% - ---------------------------------------------------------
Significant components of deferred tax liabilities and assets as of December 31 are as follows:
- ----------------------------------------------------------- (Dollars in Thousands) 1997 1996 - ----------------------------------------------------------- Deferred tax liabilities: Lease accounting $ 214,901 $ 98,707 Depreciation 21,036 23,210 Mark to market adjustments 164,479 83,452 Other - net 115,713 77,925 - ----------------------------------------------------------- Total deferred tax liabilities 516,129 283,294 Deferred tax assets: Provision for losses 247,910 248,462 Employee benefits 27,070 33,308 Other - net 105,516 76,553 - ----------------------------------------------------------- Total deferred tax assets 380,496 358,323 - ----------------------------------------------------------- Net deferred tax (liability) asset $ (135,633) $ 75,029 - -----------------------------------------------------------
39 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. 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 efficiently 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. The credit exposure to counterparties is managed by limiting the aggregate amount of net unrealized gains in agreements outstanding, monitoring the size and the maturity structure of the derivative portfolio, applying uniform credit standards maintained for all activities with credit risk and by 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, 1997, these collateral agreements covered 93% of the notional amount of the derivative portfolio, and the Corporation was holding net U.S. government and agency securities with a market value of $41 million from various counterparties to collateralize unrealized gains. The Corporation has never experienced a credit loss associated with any interest rate derivative. INTEREST RATE RISK MANAGEMENT: On December 31, 1997, the total notional amount of the interest rate swap portfolio used to manage interest rate sensitivity was $8.4 billion, which is an increase of $383 million from December 31, 1996. The Corporation uses receive fixed interest rate swaps, receive fixed cancelable interest rate swaps and receive fixed indexed amortizing interest rate swaps to convert variable rate loans and securities into synthetic fixed rate instruments and to convert fixed rate funding sources into synthetic variable rate funding instruments. The Corporation increased its use of cancelable interest rate swaps during the year to facilitate its interest rate risk management process and its wholesale funding activities. During 1997, the Corporation entered into $527 million of receive fixed cancelable interest rate swaps to hedge the issuance of fixed rate callable funding products and $3.1 billion of receive fixed cancelable interest rate swaps to convert portions of its variable rate loan portfolios into synthetic fixed rate loans. During 1997, $486 million of receive fixed interest rate swaps matured or amortized, $1.3 billion of indexed amortizing receive fixed interest rate swaps matured or amortized and $2.3 billion of indexed amortizing or cancelable interest rate swaps were terminated prior to maturity. These terminations generated pre-tax net losses of $.6 million, recognized as an adjustment to the carrying value of the loan portfolio. The Corporation uses pay fixed interest rate swaps to convert fixed rate loans and securities into synthetic variable rate instruments and to convert variable rate funding sources into synthetic fixed rate funding instruments. During 1997, the Corporation entered into $869 million of pay fixed interest rate swaps, primarily to hedge fixed rate commercial loans and investment securities. During 1997, $555 million of pay fixed interest rate swaps matured or amortized and $294 million of pay fixed interest rate swaps were terminated prior to maturity. These terminations generated pre-tax net losses of $.2 million, recognized as an adjustment to the carrying value of the securities portfolio. The Corporation uses interest rate cap and floor contracts to help protect its interest margin in periods of extremely high or low interest rates. During 1997, the Corporation purchased $500 million three-month Eurodollar caps with maturities of 3 years and an average strike rate of 7.5%. The Corporation uses interest rate corridors to help protect its net interest margin in various interest rate environments. These interest rate corridors pay 1.0% of the notional amount per annum over their lives only when the three-month Eurodollar rate is between the corridor strike rates. There are no payments due to the Corporation when three-month Eurodollar rates are outside of the corridor strike rates. On December 31, 1997, the Corporation had $8.2 million of net deferred gains on terminated derivative contracts and had no material derivative contracts outstanding that were hedging anticipated transactions. Summary information with respect to the interest rate derivative portfolio used for risk management purposes follows: 40 43
- ------------------------------------------------------------------------------------------------------------------------------ December 31, 1997 --------------------------------------------------------------------------------- Weighted Average ----------------------------------------- December 31, 1996 Notional Unrealized Unrealized Receive Pay Strike Life ----------------- (Dollars in Thousands) Amount Gains Losses Rate Rate Rate (Years) Notional Amount - ------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE SWAPS: Receive fixed indexed amortizing swaps $ 1,034,493 $ 479 $ (4,916) 5.91% 5.77% -- 1.3 $ 3,107,448 Receive fixed callable swaps 2,842,000 21,296 (3,816) 6.72 5.87 -- 1.8 905,000 Receive fixed swaps 3,241,000 58,076 (3,800) 6.47 5.85 -- 3.5 3,047,370 Pay fixed callable swaps 53,588 551 (1,909) 5.97 6.35 -- 8.4 -- Pay fixed swaps 895,754 52 (11,605) 4.93 6.45 -- 5.6 874,145 Basis swaps 325,000 447 (543) 5.91 5.88 -- 2.5 75,000 - ------------------------------------------------------------------------------------------------------------------------------ Total interest rate swaps 8,391,835 80,901 (26,589) 8,008,963 INTEREST RATE CAPS AND FLOORS: Three-month Eurodollar floors purchased 1,400,000 12,826 (10,821) -- -- 5.71% 2.9 1,400,000 One-month Eurodollar caps purchased 3,971 -- (1,498) -- -- 9.0 14.2 -- Three-month Eurodollar caps purchased 500,000 352 -- -- -- 7.50 2.1 100,000 Other 182,000 - ------------------------------------------------------------------------------------------------------------------------------ Total interest rate caps and floors 1,903,971 13,178 (12,319) 1,682,000 INTEREST RATE CORRIDORS PURCHASED: 1% Payout corridors 500,000 62 (531) -- -- 6.5%-7.5% .7 1,250,000 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE FUTURES: Futures purchased 212,000 12 -- -- -- -- -- -- Futures sold 749,000 1 (288) -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ Total interest rate futures 961,000 13 (288) -- - ------------------------------------------------------------------------------------------------------------------------------ Total interest rate swaps, caps, floors, corridors & futures $11,756,806 $ 94,154 $(39,727) $10,940,963 - ------------------------------------------------------------------------------------------------------------------------------
The variable rates in the interest rate swap contracts are primarily based on the three-month Eurodollar rate. The average variable rates included in the table above are those in effect in the specific contracts at December 31, 1997. The following table details the expected notional maturities of off-balance sheet instruments used for interest-rate risk management at December 31, 1997:
- ------------------------------------------------------------------------------------------------------------------------------ Greater Less than 1 to 3 3 to 5 5 to 10 than 10 (Dollars in Thousands) 1 Year Years Years Years Years - ------------------------------------------------------------------------------------------------------------------------------ Receive fixed swaps $2,848,948 $2,605,545 $ 828,000 $ 385,000 $450,000 Pay fixed swaps -- 258,644 249,709 409,279 31,710 Basis swaps 100,000 50,000 175,000 -- -- Floors purchased 435,000 300,000 300,000 365,000 -- Caps purchased -- 500,000 -- -- 3,971 Interest rate corridors 500,000 -- -- -- -- Futures purchased -- 212,000 -- -- -- Futures sold 139,000 39,000 223,000 348,000 -- - ------------------------------------------------------------------------------------------------------------------------------ TOTAL $4,022,948 $3,965,189 $1,775,709 $1,507,279 $485,681 - ------------------------------------------------------------------------------------------------------------------------------
Indexed amortizing interest rate swaps are contracts where the notional amount amortizes after a predetermined lock-out period. The rate of amortization is determined by formula and is based upon movements of short-term interest rates, usually three-month Eurodollar rates. The indexed amortizing interest rate swap portfolio contains no imbedded options that have multiplicative impacts affecting valuations or expected notional maturities. The table at the right shows the estimated impact on valuation, average life, and the expected notional amortization schedule of the indexed amortizing swap portfolio if interest rates immediately increase or decrease 100 basis points from December 31, 1997 levels:
- ------------------------------------------------------------------------- (unaudited) Expected Notional Net Amortization Unrealized Average Less than 1 to 2 2 to 5 (Dollars in Millions) Gain/(Loss) Life(Years) 1 Year Years Years - ------------------------------------------------------------------------- Interest rates at year end $ (5) 1.3 $ 429 $167 $438 Interest rates +100bp (20) 1.5 334 13 687 Interest rates -100bp 1 1.0 526 395 114 - -------------------------------------------------------------------------
41 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MORTGAGE SERVICING RISK MANAGEMENT: The Corporation uses off-balance sheet derivative contracts to hedge the market value of a portion of its mortgage servicing portfolio. The market 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, purchased and sold interest rate floors (net purchased options) and purchased interest rate caps. 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 with respect to the interest rate derivative portfolio used for hedging mortgage servicing assets is summarized in the table below:
- ------------------------------------------------------------------------------------------------------------------------------ December 31, 1997 -------------------------------------------------------------------------------- Weighted Average ----------------------------------------- December 31, 1996 Notional Unrealized Unrealized Receive Pay Strike Life ----------------- (Dollars in Thousands) Amount Gains Losses Rate Rate Rate (Years) Notional Amount - ------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE SWAPS: Receive fixed swaps $ 708,000 $ 3,677 $ (3,776) 5.97% 5.84% -- 3.0 $ 630,000 Principal only swaps 141,715 14,792 (114) -- 6.15 -- 2.4 34,251 - ------------------------------------------------------------------------------------------------------------------------------ Total interest rate swaps 849,715 18,469 (3,890) 664,251 INTEREST RATE CAPS AND FLOORS: Ten-year U.S. Treasury caps purchased 225,000 402 -- -- -- 8.66% 4.0 85,000 Ten-year U.S. Treasury floors purchased 1,015,662 3,362 -- -- -- 5.45 2.2 1,015,662 Ten-year U.S. Treasury floors sold -- -- -- -- -- -- -- 400,000 - ------------------------------------------------------------------------------------------------------------------------------ Total interest rate caps and floors 1,240,662 3,764 -- 1,500,662 - ------------------------------------------------------------------------------------------------------------------------------ Total interest rate swaps, caps and floors $2,090,377 $ 22,233 $ (3,890) $ 2,164,913 - ------------------------------------------------------------------------------------------------------------------------------
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. The trading portfolio consists 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 market value fluctuations in the portfolio caused by changes in market conditions. At December 31, 1997, the total notional amount of interest rate derivative contracts held for trading was $3.2 billion with a net market value of $5.5 million compared to $2.9 billion in notional and a net market value of $3.2 million at December 31, 1996. Trading revenue from derivatives totaled $2.4 million and $3.4 million in 1997 and 1996, respectively. Trading activity in 1995 was not significant. 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, 1997. OTHER OFF-BALANCE SHEET COMMITMENTS: The Corporation also enters into forward contracts related to its mortgage banking business. At December 31, 1997 and 1996, the Corporation had commitments to sell mortgages and mortgage-backed securities totaling $1.6 billion and $613 million, respectively. These contracts mature in less than one year. 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 - --------------------------------------------------------- (Dollars in Millions) 1997 1996 - --------------------------------------------------------- Commitments to extend credit $12,058 $11,160 Standby letters of credit 1,965 1,781 - ---------------------------------------------------------
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 assessment of the customer. 42 45 QUARTERLY DATA FOURTH QUARTER RESULTS Net income for the fourth quarter of 1997 was $209.0 million, or $.96 per diluted common share, up from $191.1 million, or $.85 per diluted common share for the same period in 1996. The increase in earnings was primarily due to higher noninterest income, well controlled operating expenses and a lower provision for loan losses. Annualized return on average common equity for the fourth quarter of 1997 was 19.11%, compared to 17.53% for the fourth quarter of 1996. Annualized return on average assets for the fourth quarter was 1.58% in 1997 versus 1.55% in 1996. Net overhead decreased 5.2% from the fourth quarter of 1996 as a result of higher fee-based business revenues and relatively flat noninterest expense. - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL INFORMATION The following is a summary of unaudited quarterly results of operations for the years 1997, 1996 and 1995:
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Amounts) First Second Third Fourth Full Year - ------------------------------------------------------------------------------------------------------------------------------ 1997 Interest income $ 900,290 $ 942,902 $ 958,208 $ 974,740 $ 3,776,140 Interest expense 427,244 452,979 466,875 486,214 1,833,312 Net interest income 473,046 489,923 491,333 488,526 1,942,828 Provision for loan losses 35,881 36,164 36,370 31,245 139,660 Securities gains 15,964 31,189 2,112 34,249 83,514 Net overhead 162,328 197,010 160,133 198,684 718,155 Income before income taxes 290,801 287,938 296,942 292,846 1,168,527 Net income 196,142 198,276 204,009 209,006 807,433 Basic net income per common share .88 .92 .95 .98 3.73 Diluted net income per common share .87 .90 .93 .96 3.66 Dividends paid per common share .41 .41 .425 .425 1.67 - ------------------------------------------------------------------------------------------------------------------------------ 1996 Interest income $ 914,284 $ 919,421 $ 910,414 $ 911,216 $ 3,655,335 Interest expense 439,062 429,563 420,475 423,659 1,712,759 Net interest income 475,222 489,858 489,939 487,557 1,942,576 Provision for loan losses 32,039 37,353 38,608 38,480 146,480 Securities gains 12,735 68,617 (114) 26,908 108,146 Net overhead 196,749 258,092 181,358 209,599 845,798 Income before income taxes 259,169 263,030 269,859 266,386 1,058,444 Net income 176,864 182,832 185,822 191,112 736,630 Net income applicable to common stock 173,375 182,293 185,822 191,112 732,602 Basic net income per common share .82 .83 .83 .86 3.34 Diluted net income per common share .79 .81 .82 .85 3.27 Dividends paid per common share .36 .36 .375 .375 1.47 - ------------------------------------------------------------------------------------------------------------------------------ 1995 Net income $ 150,925 $ 152,522 $ 158,884 $ 129,129 $ 591,460 Basic net income per common share .69 .70 .73 .59 2.71 Diluted net income per common share .67 .69 .71 .57 2.64 Dividends paid per common share .32 .32 .33 .33 1.30 - ------------------------------------------------------------------------------------------------------------------------------
43 46 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 1997 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 [Fee Required] For the fiscal year ended December 31, 1997. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required]. 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: Title of each class: Name of each exchange on which registered: Securities registered pursuant to Section 12(g) of the Act: National City Corporation Common Stock, $4.00 Per Share - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ 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 stocks held by nonaffiliates of the registrant as of December 31, 1997 - $13,642,576,777 The number of shares outstanding of each of the registrant's classes of common stock, as of December 31, 1997. Common Stock, $4.00 Per Share -- 211,097,837 Documents Incorporated By Reference: Portions of the registrant's Proxy Statement (to be dated approximately February 23, 1998) 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. 44 47 FORM 10-K CROSS REFERENCE INDEX
Pages - -------------------------------------------------------------- PART I Item 1 -- Business Description of Business 45 Average Balance Sheets/Interest/Rates 20-21 Volume and Rate Variance Analysis 8 Securities 12 Loans 11 Risk Elements of Loan Portfolio 12-14 Loan Loss Experience 12-14 Allocation of Allowance for Loan Losses 12-14 Deposits 14, 20-21 Financial Ratios 19 Short-Term Borrowings 14, 33 Item 2 -- Properties 46 Item 3 -- Legal Proceedings 46 Item 4 -- Submission of Matters to a Vote of Security Holders - None - -------------------------------------------------------------- PART II Item 5 -- Market for the Registrant's Common Equity and Related Stockholder Matters 14-15 Item 6 -- Selected Financial Data 19 Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations 5-17 Item 7A -- Quantitative and Qualitative Disclosures About Market Risk 16-17, 28 Item 8 -- Financial Statements and Supplementary Data 22-43 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 46 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 Financial Statements: Consolidated Balance Sheets - December 31, 1997 and 1996 23 Consolidated Statements of Income - Calendar Years 1997, 1996 and 1995 24 Consolidated Statements of Changes in Stockholders' Equity - Calendar Years 1997, 1996, and 1995 25 Consolidated Statements of Cash Flows - Calendar Years 1997, 1996 and 1995 26 Notes to Financial Statements 27-42 Signatures 47
Reports on Form 8-K filed in the fourth quarter of 1997: Form 8-K, dated November 24, 1997, announced that National City's Board of Directors had authorized the purchase of up to 20 million shares of the Corporation's issued and outstanding common stock subject to a total purchase limit of $1.4 billion. Form 8-K, dated December 9, 1997, announced that on December 1, 1997 National City had issued a press release stating that the Corporation had entered into a definitive Agreement and Plan of Merger with First of America Bank Corporation. The release also stated that the boards of directors of both companies had rescinded their respective stock repurchase authorizations. Exhibits -- The index of exhibits has been filed as separate pages of the 1997 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 February 23, 1998. - -------------------------------------------------------------- BUSINESS At December 31, 1997, National City Corporation ("National City" or "the Corporation") was the third largest bank holding company headquartered in the State of Ohio and approximately the 20th largest in the United States on the basis of total assets. National City owns and operates 8 commercial banks with a total of 833 banking offices in Ohio, Kentucky, Indiana and Pennsylvania. The five largest subsidiary banks (and only significant subsidiaries) are National City Bank of Pennsylvania; National City Bank (Cleveland), National City Bank of Columbus; National City Bank of Indiana; and National City Bank of Kentucky. The banks and other subsidiaries and divisions are engaged in a variety of financial services businesses. In addition to a general commercial banking business, National City or its subsidiaries are engaged in trust and investment management, mortgage banking, investment banking, leasing, item processing, venture capital, insurance, and other financial-related businesses. National City and its subsidiaries had 29,841 full-time equivalent employees at December 31, 1997. COMPETITION The banking business is highly competitive. The banking subsidiaries of National City compete actively with national and state banks, savings and loan associations, securities dealers, mortgage bankers, finance companies, insurance companies and other financial service entities. 45 48 FORM 10-K (continued) SUPERVISION AND REGULATION National City is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "Act"). The Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank, and restricts interstate banking activities. On September 29, 1994, the Act was amended by The Interstate Banking and Branch Efficiency Act of 1994 which authorizes interstate bank acquisitions anywhere in the country, effective one year after the date of enactment and interstate branching by acquisition and consolidation, effective June 1, 1997 in those states that have not opted out by that date. The Act restricts National City's nonbanking activities to those which are determined by the Federal Reserve Board to be closely related to banking and a proper incident thereto. The Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies. National City's banking subsidiaries are subject to limitations with respect to transactions with affiliates. A substantial portion of National City'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. 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 state 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 and bank holding companies located in other states. Ohio, Kentucky, Indiana 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 or any FDIC-assisted transaction involving an affiliated insured bank or savings association. The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Improvement Act") covers a wide expanse of banking regulatory issues. The FDIC Improvement Act deals with the recapitalization of the Bank Insurance Fund, with deposit insurance reform, including requiring the FDIC to establish a risk-based premium assessment system, and with a number of other regulatory and supervisory matters. The monetary policies of regulatory authorities, including the Federal Reserve Board, have a significant effect on the operating results of banks and bank 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 subsidiary banks cannot be predicted. PROPERTIES National City and its significant subsidiaries occupy their headquarter offices under long-term leases. The Corporation also owns freestanding operations centers in Columbus and Cleveland and leases an operations center in Pittsburgh. Branch office locations are variously owned or leased. LEGAL PROCEEDINGS National City and its subsidiaries are parties (either as plaintiff or defendant) to a number of lawsuits incidental to their businesses and, in certain lawsuits, claims or counterclaims have been asserted. Although litigation is subject to many uncertainties and the ultimate exposure with respect to many of these matters cannot be ascertained, management does not believe the ultimate outcome of these matters will have a material adverse effect on the financial condition or the liquidity of the Corporation. EXECUTIVE OFFICERS The Executive Officers of National City (as of January 21, 1998) are as follows:
Name Age Position - --------------------------------------------------------------- David A. Daberko 52 Chairman and Chief Executive Officer Vincent A. DiGirolamo 60 Vice Chairman Robert G. Siefers 52 Vice Chairman and Chief Financial Officer James R. Bell III 41 Executive Vice President Gary A. Glaser 53 Executive Vice President Thomas W. Golonski 55 Executive Vice President Jon L. Gorney 47 Executive Vice President Christopher Graffeo 50 Executive Vice President Jeffrey D. Kelly 44 Executive Vice President William E. MacDonald III 51 Executive Vice President Herbert R. Martens, Jr. 45 Executive Vice President Robert J. Ondercik 51 Executive Vice President Harold B. Todd, Jr. 56 Executive Vice President James P. Gulick 39 Senior Vice President and General Auditor Thomas A. Richlovsky 46 Senior Vice President and Treasurer David L. Zoeller 48 Senior Vice President, General Counsel and Secretary
46 49 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 on the previous page has been an executive officer of the Corporation or one of its subsidiaries during the past five years. Mr. Martens was promoted to Executive Vice President in 1997. Prior to that time he was chairman of NatCity Investments, Inc. since 1995 and president and chief executive officer of Raffensperger, Hughes & Co. from 1993 to 1995 and president of Reserve Capital Group from 1990 to 1993. Mr. Bell was elected president and chief executive officer of National City Bank of Kentucky in 1996. Prior to that time he was an executive vice president since 1994 and a senior vice president of National City Bank in Cleveland from 1990 to 1993. Mr. Golonski was elected executive vice president in 1996. Prior to that time he was the president of Integra Bank since 1995, chairman and director of Altegra Credit Company and Integra Mortgage Company from 1994 to 1995, executive vice president of Integra Bank from 1994 to 1995, and chairman and chief executive officer of Integra Bank/North from 1991 to 1993. Mr. Graffeo was appointed an executive vice president in 1995. Prior to that time he was president and chief executive officer of National City Bank, Northeast since 1992 and an executive vice president of that Bank from 1991 to 1992. Mr. Gulick was appointed a senior vice president in 1995. Prior to that time he was a vice president since 1992 and an audit manager with Coopers & Lybrand LLP from 1987 to 1992. Mr. Kelly was appointed an executive vice president in 1994. Prior to that time he was a senior vice president since 1990 and a senior vice president of National City Bank in Cleveland from 1987 to 1990. Mr. Ondercik was appointed an executive vice president in 1994. Prior to that time he was a senior vice president since 1991 and a senior vice president of National City Bank in Cleveland from 1989 to 1991. Mr. Gorney was appointed an executive vice president in 1993. Prior to that time he was a senior vice president since 1991 and senior vice president of National City Bank in Cleveland from 1988 to 1991. 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 21, 1998. 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 21, 1998. /s/ David A. Daberko - --------------------------------------- David A. Daberko Chairman and Chief Executive Officer /s/ Vincent A. DiGirolamo /s/ Robert G. Siefers - ---------------------------- -------------------------- Vincent A. DiGirolamo Robert G. Siefers Vice Chairman Vice Chairman and Chief Financial Officer /s/ Thomas A. Richlovsky - ---------------------------- Thomas A. Richlovsky Senior Vice President and Treasurer
The Directors of National City Corporation (listed below) executed a power of attorney appointing David L. Zoeller their attorney-in-fact, empowering him to sign this report on their behalf. Sandra H. Austin Bernadine P. Healy, M.D. Charles H. Bowman Joseph H. Lemieux Edward B. Brandon W. Bruce Lunsford John G. Breen Robert A. Paul James S. Broadhurst William R. Robertson Duane E. Collins William F. Roemer David A. Daberko Michael A. Schuler Daniel E. Evans Stephen A. Stitle Otto N. Frenzel III Morry Weiss
/s/ David L. Zoeller ------------------------------------------------------------ By David L. Zoeller Attorney-in-fact 47 50 BOARD OF DIRECTORS/OFFICERS BOARD OF DIRECTORS DAVID A. DABERKO (2,3,4) Chairman & CEO National City Corporation SANDRA H. AUSTIN (3,7) President & CEO Sedona Health Care Group, Inc. CHARLES H. BOWMAN (1,3,6,7) Head, Petroleum Engineering Department Texas A&M University EDWARD B. BRANDON (2,3,4) Retired Chairman National City Corporation JOHN G. BREEN (3,4,5) Chairman & CEO The Sherwin-Williams Company JAMES S. BROADHURST (1,5) Chairman & CEO Eat'n Park Restaurants DUANE E. COLLINS (2,5) President & CEO Parker Hannifin Corporation DANIEL E. EVANS (1,5) Chairman & CEO Bob Evans Farms, Inc. OTTO N. FRENZEL III (3,4) Retired Chairman National City Bank of Indiana BERNADINE P. HEALY, M.D. (6,7) Dean, College of Medicine The Ohio State University JOSEPH H. LEMIEUX (2,3,5) Chairman & CEO Owens-Illinois, Inc. W. BRUCE LUNSFORD (1,3,6) Chairman, President & CEO Vencor, Inc. ROBERT A. PAUL (2,3,7) President & CEO Ampco-Pittsburgh Corporation WILLIAM R. ROBERTSON (6,7) Managing Partner Kirtland Capital Partners WILLIAM F. ROEMER (3,4) Chairman National City Bank of Pennsylvania MICHAEL A. SCHULER (1,6) Chairman, President & CEO Zippo Manufacturing Company STEPHEN A. STITLE (4,6,7) Chairman National City Bank of Indiana MORRY WEISS (1,3,4) Chairman & CEO American Greetings Corporation HONORARY DIRECTORS CLAUDE M. BLAIR Retired Chairman National City Corporation JULIEN L. MCCALL Retired Chairman National City Corporation COMMITTEES: (1) Audit Committee (2) Dividend Committee (3) Executive Committee (4) Nominating Committee (5) Compensation & Organization Committee (6) Public Policy Committee (7) Investment Committee - -------------------------------------------------------------------------------- OFFICERS Office of the Chairman DAVID A. DABERKO Chairman & CEO VINCENT A. DIGIROLAMO Vice Chairman ROBERT G. SIEFERS Vice Chairman & CFO Executive Vice Presidents JAMES R. BELL III Kentucky Banking GARY A. GLASER Ohio Banking THOMAS W. GOLONSKI Pennsylvania Banking JON L. GORNEY Information Services & Operations CHRISTOPHER GRAFFEO Indiana Banking JEFFREY D. KELLY Investments WILLIAM E. MACDONALD III Ohio Banking HERBERT R. MARTENS, JR. Wealth Management ROBERT J. ONDERCIK Credit Administration HAROLD B. TODD, JR. Institutional Trust & Investment Services Senior Vice Presidents W. DOUGLAS BANNERMAN Corporate Banking JEFFREY M. BIGGAR Private Client Group J. ANDREW DUNHAM Investments MARY H. GRIFFITH Marketing Communications JAMES P. GULICK General Auditor JOSEPH J. HERR Loan Review JAMES A. HUGHES Information Services & Operations J. MICHAEL KEARNEY Strategic Sourcing JANIS E. LYONS Corporate Accounting GARY P. OBERS Corporate Services A. JOSEPH PARKER Retail Business Line Management J. ARMANDO RAMIREZ Strategic Planning and Mergers & Acquisitions EDWARD B. REILLY Corporate Business Line Management THOMAS A. RICHLOVSKY Treasurer WILLIAM H. SCHECTER Merchant Banking THOMAS H. SCHROTH Corporate Operations SHELLEY J. SEIFERT Human Resources THEODORE H. TUNG Economist ALLEN C. WADDLE Public Affairs DAVID L. ZOELLER General Counsel & Secretary 48 51 INVESTOR INFORMATION 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 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, March 30, 1998 at 10:30 a.m. Eastern Standard Time. National City Bank of Pennsylvania Pittsburgh Hilton and Towers Gateway Center 600 Commonwealth Place Pittsburgh, Pennsylvania 15222 DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Common stockholders participating in the Plan receive a three percent discount from market price when they reinvest their National City dividends in additional shares. Participants may also make optional cash purchases of common stock at a three percent discount from market price and pay no brokerage commissions. To obtain our Plan prospectus and authorization card, 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 corporate 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. INTERNET Information about National City Corporation is available on the Internet at www.national-city.com.
DEBT RATINGS - -------------------------------------------------------------------------------------- Moody's Standard Duff Thomson Investors Service & Poor's & Phelps BankWatch - -------------------------------------------------------------------------------------- National City Corporation A/B Commercial paper (short-term debt) P-1 A-1 D-1+ TBW1 Senior debt A1 A AA- Subordinated debt A2 A- A+ A - -------------------------------------------------------------------------------------- Bank Subsidiaries Certificates of deposit Aa3 A+ AA Subordinated bank notes A1 A AA- A+
CORPORATE HEADQUARTERS National City Center 1900 East Ninth Street Cleveland, Ohio 44114-3484 (216) 575-2000 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 Julie I. Sabroff, Vice President Investor Relations Department 2145 P.O. Box 5756 Cleveland, Ohio 44101-0756 1-800-622-4204 52 [NATIONAL CITY LOGO] -------------- FOLLOW YOUR OWN LEAD (TM) Bulk Rate U.S. Postage PAID 1900 East Ninth Street National City Cleveland, Ohio 44114-3484 Corporation -------------- [PHOTO]
53 NATIONAL CITY CORPORATION PART IV, ITEM 14: EXHIBIT INDEX
PAGE NUMBER IN EXHIBIT SEQUENTIALLY NUMBERED NUMBER EXHIBIT DESCRIPTION COPY - ----- ------------------------------------------------------------------------------------------------ 2.1 Agreement and Plan of Merger dated as of August 27, 1995 by and between National City Corporation and Integra Financial Corporation (filed as Exhibit 2.1 to Form 8-K dated August 30, 1995, and incorporated herein by reference). 2.2 Agreement and Plan of Merger dated as of January 12, 1998 by and between National City Corporation and Fort Wayne National Corporation (filed as Exhibit 2.2). 2.3 Agreement and Plan of Merger dated as of November 30, 1997 by and between National City Corporation and First of America Bank Corporation (filed as Exhibit 2.1 to Form 8-K dated December 9, 1997 and incorporated herein by reference). 3.1 Restated Certificate of Incorporation of NCC, as amended (filed as Exhibit 3.1). 3.2 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 Instruments defining the rights of holders of certain long-term debt of NCC and its consolidated subsidiaries are not filed as exhibits because the amount of debt under such instruments is less than 10% of the total consolidated assets of NCC. NCC undertakes to file these instruments with the Commission upon request. 4.2 Credit Agreement dated as of February 2, 1996, by and between NCC and the banks named therein (filed as Exhibit 4.2 to Registrants' Proxy Statement Form 14A #001-10074 dated February 6, 1996 and incorporated herein by reference). 4.3 Certificate of Stock Designation dated April 18, 1991, designating NCC's 8% Cumulative Convertible Preferred Stock, without par value, and fixing the powers, preferences rights, and qualifications, limitations and restrictions thereof in addition to those set forth in NCC's Restated Certificate of Incorporation, as amended (incorporated herein by reference to Exhibit 4.4 to NCC's Annual Report on Form 10-K for the year ended December 31, 1991). 10.1 National City Corporation Short Term Incentive Compensation Plan for Senior Officers As Amended and Restated Effective January 1, 1995 (filed as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 10.2 National City Corporation Long Term Incentive Compensation Plan for Senior Officers as Amended and Restated Effective January 1, 1995 (filed as Exhibit 10.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 10.3 National City Corporation Annual Corporate Performance Incentive Plan Effective January 1, 1995 (filed as Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 10.4 National City Savings and Investment Plan, As Amended and Restated Effective July 1, 1992 (filed as Exhibit 10.24 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 10.5 The National City Savings and Investment Plan No. 2, As Amended and Restated Effective January 1, 1992 (filed as Exhibit 10.25 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 10.6 National City Corporation's Amended and Restated 1973 Stock Option Plan, as amended (filed as Exhibit 10.4 to Registration Statement No. 2-91434) and amended 1984 Stock Option Plan (filed as Exhibit 10.2 to NCC's Annual Report on Form 10-K for the fiscal year ended December 31, 1987); both incorporated herein by reference.
49 54
PAGE NUMBER IN EXHIBIT SEQUENTIALLY NUMBERED NUMBER EXHIBIT DESCRIPTION COPY - ----- ------------------------------------------------------------------------------------------------ 10.7 National City Corporation 1989 Stock Option Plan (filed as Exhibit 10.7 to NCC's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, and incorporated herein by reference). 10.8 National City Corporation's 1993 Stock Option Plan as Amended and Restated (filed as Appendix F to Registration Statement No. 333-01697 and incorporated herein by reference). 10.9 National City Corporation 150th Anniversary Stock Option Plan (filed as Exhibit 10.9 to Registration Statement No. 33-59487 and incorporated herein by reference). 10.10 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). 10.11 National City Corporation Supplemental Executive Retirement Plan, as Amended and Restated effective January 1, 1995 (filed as Exhibit 10.5 to NCC's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference). 10.12 National City Corporation Executive Savings Plan As Amended and Restated Effective January 1, 1995 (filed as Exhibit 10.9 to NCC's Annual Report on Form 10-K for its fiscal year ended December 31, 1994, and incorporated herein by reference). 10.13 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). 10.14 First Kentucky National Corporation 1985 Stock Option Plan (filed as Exhibit 10.2 to First Kentucky National Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, and incorporated herein by reference). 10.15 First Kentucky National Corporation 1982 Stock Option Plan (filed as Exhibit 10.3 to First Kentucky National Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, and incorporated herein by reference). 10.16 Form of grant made under National City Corporation 1991 Restricted Stock Plan made in connection with National City Corporation Supplemental Executive Retirement Plan as amended (filed as Exhibit 10.10 to NCC's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference). 10.17 Amended Employment Agreement dated July 21, 1989 by and between Merchants National Corporation or a subsidiary and Otto N. Frenzel, III (filed as Exhibit 10(21) to Merchants National Corporation Annual Report of Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference). 10.18 Split Dollar Insurance Agreement dated January 4, 1988 between Merchants National Corporation and Otto N. Frenzel, III Irrevocable Trust II (filed as Exhibit 10(26) to Merchants National Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference). 10.19 Merchants National Corporation Director's Deferred Compensation Plan, as amended and restated August 16, 1983 (filed as Exhibit 10(3) to Merchants National Corporation Registration Statement as Form S-2 filed June 28, 1985, incorporated herein by reference). 10.20 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 31, 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).
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PAGE NUMBER IN EXHIBIT SEQUENTIALLY NUMBERED NUMBER EXHIBIT DESCRIPTION COPY - ----- ------------------------------------------------------------------------------------------------ 10.21 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, incorporated herein by reference). 10.22 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 by 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). 10.23 Merchants National Corporation 1987 Non-qualified Stock Option Plan, effective November 17, 1987, and the First Amendment to Merchants National Corporation 1987 Non-qualified Stock Option Plan, effective October 16, 1990, (filed respectively as Exhibit 10(30) to Merchants National Corporation Annual Report on Form 10-K by 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). 10.24 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). 10.25 Central Indiana Bancorp Option Plan effective March 15, 1991 (filed as Exhibit 10.26 to Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 10.26 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). 10.27 Forms of contracts with David A. Daberko, Vincent A. DiGirolamo, William E. MacDonald III, Jon L. Gorney, Harold B. Todd, Jr., Robert G. Siefers, Robert J. Ondercik, Jeffrey D. Kelly, David L. Zoeller, Thomas A. Richlovsky, James P. Gulick, Gary A. Glaser, J. Christopher Graffeo, Herbert R. Martens, Jr, Robert E. Showalter, Thomas W. Golonski and James R. Bell (filed as Exhibit 10.22 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference). 10.28 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). 10.29 National City Corporation Short-Term Incentive Compensation Plan for Senior Officers--Corporate Results As Amended and Restated Effective January 1, 1996 (filed as Exhibit 10.31 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference). 10.30 Consulting Agreement dated as of August 27, 1995 by and between Integra Financial Corporation and William F. Roemer, (filed as Exhibit 10.30 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference). 21.1 Subsidiaries (filed as Exhibit 21.1). 23.1 Consent of Ernst & Young LLP, Independent Auditors for NCC (filed as Exhibit 23.1). 24.1 Powers of Attorney (filed as Exhibit 24.1). 27.1 Financial Data Schedule (filed as Exhibit 27.1).
51 EX-2.2 2 EXHIBIT 2.2 1 EXHIBIT 2.2 AGREEMENT AND PLAN OF MERGER BY AND BETWEEN NATIONAL CITY CORPORATION, AND FORT WAYNE NATIONAL CORPORATION DATED AS OF JANUARY 12, 1998 2 TABLE OF CONTENTS
PAGE ---- I. THE MERGER 1.1 Merger.......................................................................... 1 1.2 Effective Time.................................................................. 1 1.3 Effect of Merger................................................................ 2 1.4 Certificate of Incorporation and By-laws........................................ 2 1.5 Directors and Officers of Surviving Corporation................................. 2 1.6 Additional Actions.............................................................. 2 II. CONVERSION OF SHARES 2.1 Conversion of Shares............................................................ 2 2.2 Assumption of Employee and Director Stock Options............................... 3 2.3 Exchange of Certificates........................................................ 3 (a) Exchange Agent.............................................................. 3 (b) Notice of Exchange.......................................................... 4 (c) Transfer.................................................................... 4 (d) Right to Merger Consideration............................................... 4 (e) Distribution with Respect to Unexchanged Certificates....................... 5 (f) Lost or Destroyed Exchanged Certificates................................... 5 (g) Voting With Respect to Unexchanged Certificates............................. 5 (h) No Fractional Shares........................................................ 5 2.4 Closing of the Company's Transfer Books......................................... 5 2.5 Changes in National City Common Stock........................................... 6 III. REPRESENTATIONS AND WARRANTIES OF NATIONAL CITY 3.1 Corporate Organization.......................................................... 6 3.2 Authority....................................................................... 6 3.3 Capitalization.................................................................. 6 3.4 Subsidiaries.................................................................... 7 3.5 Information in Disclosure Documents, Registration Statement, Etc................ 7 3.6 Consents and Approvals; No Violation............................................ 7 3.7 Reports and Financial Statements................................................ 8 3.8 Taxes........................................................................... 8 3.9 Employee Plans.................................................................. 9 3.10 Material Contracts.............................................................. 10 3.11 Absence of Certain Changes or Events............................................ 10 3.12 Litigation...................................................................... 10 3.13 Compliance with Laws and Orders................................................. 10 3.14 Agreements with Bank Regulators, Etc............................................ 11 3.15 National City Ownership of Stock................................................ 11 3.16 Tax Treatment................................................................... 11 3.17 Fees............................................................................ 11 3.18 National City Action............................................................ 11 3.19 Material Interests of Certain Persons........................................... 11 3.20 Environmental Matters........................................................... 11 IV. REPRESENTATIONS AND WARRANTIES OF COMPANY 4.1 Corporate Organization.......................................................... 13 4.2 Authority....................................................................... 13 4.3 Capitalization.................................................................. 13 4.4 Subsidiaries.................................................................... 14 4.5 Information in Disclosure Documents, Registration Statement, Etc................ 14
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PAGE ---- 4.6 Consent and Approvals; No Violation............................................. 14 4.7 Reports and Financial Statements................................................ 14 4.8 Taxes........................................................................... 15 4.9 Employee Plans.................................................................. 15 4.10 Material Contracts.............................................................. 16 4.11 Absence of Certain Changes or Events............................................ 17 4.12 Litigation...................................................................... 17 4.13 Compliance with Laws and Orders................................................. 17 4.14 Agreements with Bank Regulators, Etc............................................ 17 4.15 Tax Treatment................................................................... 17 4.16 Fees............................................................................ 18 4.17 Company Action.................................................................. 18 4.18 Vote Required................................................................... 18 4.19 Material Interests of Certain Persons........................................... 18 4.20 Environmental Matters........................................................... 18 V. COVENANTS 5.1 Acquisition Proposals........................................................... 18 5.2 Interim Operations of Company................................................... 19 (a) Conduct of Business......................................................... 19 (b) Articles and By-laws........................................................ 19 (c) Capital Stock............................................................... 19 (d) Dividends................................................................... 19 (e) Employee Plans, Compensation, Etc........................................... 20 (f) Certain Policies........................................................... 20 5.3 Interim Operations of National City............................................. 20 5.4 Employee Matters................................................................ 20 (a) Benefit Agreements.......................................................... 20 (b) Retirement and Benefit Plans................................................ 20 (c) Transition.................................................................. 21 (d) General..................................................................... 21 5.5 Access and Information.......................................................... 21 5.6 Certain Filings, Consents and Arrangements...................................... 21 5.7 State Takeover Statutes......................................................... 21 5.8 Indemnification and Insurance................................................... 21 (a) Indemnification............................................................. 21 (b) Insurance................................................................... 22 5.9 Additional Agreements........................................................... 22 5.10 Publicity....................................................................... 22 5.11 Registration Statement.......................................................... 22 5.12 Stock Exchange Listings......................................................... 22 5.13 Proxy........................................................................... 22 5.14 Shareholders' Meeting........................................................... 23 5.15 Tax-Free Reorganization Treatment............................................... 23 5.16 Provision of Shares............................................................. 23 5.17 Adverse Action.................................................................. 23 VI. CLOSING MATTERS 6.1 The Closing..................................................................... 23 6.2 Documents and Certificates...................................................... 23
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PAGE ---- VII. CONDITIONS 7.1 Conditions to Each Party's Obligations to Effect the Merger..................... 24 7.2 Conditions to Obligation of Company to Effect the Merger........................ 25 7.3 Conditions to Obligation of National City to Effect the Merger.................. 25 VIII. MISCELLANEOUS 8.1 Termination..................................................................... 25 8.2 Non-Survival of Representations, Warranties and Agreements...................... 26 8.3 Waiver and Amendment............................................................ 26 8.4 Entire Agreement................................................................ 27 8.5 Applicable Law; Consent to Jurisdiction......................................... 27 8.6 Certain Definitions; Headlines.................................................. 27 8.7 Notices......................................................................... 28 8.8 Counterparts.................................................................... 28 8.9 Parties in Interest; Assignment................................................. 28 8.10 Expenses........................................................................ 29 8.11 Enforcement of the Agreement.................................................... 29 8.12 Severability.................................................................... 29 Signatures................................................................................ Index to Definitions...................................................................... i
III 5 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of January 12, 1998 ("Agreement"), is made by and between National City Corporation, a Delaware corporation ("National City") and Fort Wayne National Corporation , an Indiana corporation ("Company"). WHEREAS, National City and Company have each determined that it is in the best interests of their respective stockholders and shareholders for Company to merge with and into National City upon the terms and subject to the conditions set forth in this Agreement; WHEREAS, the respective Boards of Directors of National City and Company have each approved this Agreement and the consummation of the transactions contemplated hereby and approved the execution and delivery of this Agreement; WHEREAS, for Federal income tax purposes, it is intended that the merger shall qualify as a reorganization under the provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, as a condition to, and contemporaneously with the execution of this Agreement, the parties are entering into a stock option agreement, with the Company as issuer and National City as grantee (the "Option Agreement") in the form attached hereto as Exhibit A (as hereinafter defined); and NOW, THEREFORE, in consideration of the foregoing premises and the representations, warranties and agreements contained herein, the parties hereto hereby agree as follows: I. THE MERGER 1.1 Merger. Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3), Company will be merged with and into National City and the separate corporate existence of the Company will thereupon cease (the "Merger") in accordance with the applicable provisions of Title 23 of the Indiana Code ("IC") and the Delaware General Corporation Law ("DGCL"). National City may at any time change the method of effecting the combination with the Company (including without limitations the provisions of this Article I) if and to the extent it deems such change to be desirable, including without limitation to provide for a merger of the Company into a wholly-owned subsidiary of National City; provided, however, that no such change shall (A) alter or change the amount or kind of consideration to be issued to holders of shares of common stock, without par value, of Company ("Company Common Stock") and holders of shares of 6% Cumulative Convertible Class B Preferred Stock, Series 1, without par value, of Company ("Company Series 1 Stock"), in each case as provided for in this Agreement, (B) adversely affect the tax treatment of the Company's stockholders as a result of receiving the Merger Consideration (as hereinafter defined) or (C) materially impede or delay consummation of the transactions contemplated by this Agreement. 1.2 Effective Time. As soon as practicable after satisfaction or waiver of all conditions to the Merger and immediately prior to the Closing which shall occur at the time set forth in Section 6.1, National City and Company (the "Constituent Corporations") shall cause a certificate of merger complying with the requirements of the DGCL (the "Certificate of Merger") and the Certificate of Designation (as hereinafter defined) to be filed with the Secretary of State of the State of Delaware and the Plan of Merger complying with the requirements of the IC to be filed with Secretary of State of the State of Indiana ("Plan of Merger"). The Merger will become effective at the time the later of the following to occur: (a) the filing of the Certificate of Merger and (b) the filing of the Plan of Merger or such later time as shall be specified in such filings ("Effective Time"). 1 6 1.3 Effect of Merger. The Merger will have the effects specified in IC and DGCL. Without limiting the generality of the foregoing, National City will be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation") and will continue to be governed by the laws of the State of Delaware, and the separate corporate existence of National City and all of its rights, privileges, powers and franchises, public as well as private, and all its debts, liabilities and duties as a corporation organized under the DGCL, will continue unaffected by the Merger. 1.4 Certificate of Incorporation and By-laws. The Certificate of Incorporation and By-laws of National City in effect immediately prior to the Effective Time, which shall be in the form set forth in a disclosure letter executed by National City and dated and delivered by National City to Company as of the date hereof ("National City Disclosure Letter"), shall be the Certificate of Incorporation and By-laws of the Surviving Corporation, until amended in accordance with applicable law. 1.5 Directors and Officers of Surviving Corporation. The directors and officers of National City immediately prior to the Effective Time will be the directors and officers, respectively, of the Surviving Corporation, from and after the Effective Time, until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the terms of the Surviving Corporation's Certificate of Incorporation and By-laws and the DGCL. 1.6 Additional Actions. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any further deeds, assignments or assurances in law or any other acts are necessary or desirable to (i) vest, perfect or confirm, of record or otherwise, in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of Company, or (ii) otherwise carry out the purposes of this Agreement, Company and its officers and directors shall be deemed to have granted to the Surviving Corporation an irrevocable power of attorney to execute and deliver all such deeds, assignments or assurances in law or any other acts as are necessary or desirable to (i) vest, perfect or confirm, of record or otherwise, in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of Company or (ii) otherwise carry out the purposes of this Agreement, Company and its officers and directors shall be deemed to have granted to the Surviving Corporation an irrevocable power of attorney to execute and deliver all such deeds, assignments or assurances in law and to all acts necessary or proper to vest, perfect or confirm title to and possession of such rights, properties or assets in the Surviving Corporation and otherwise to carry out the purposes of this Agreement, and the officers and directors of the Surviving Corporation are authorized in the name of Company or otherwise to take any and all such action. II. CONVERSION OF SHARES 2.1 Conversion of Shares. Subject to Section 2.3, at the Effective Time, (a) each then-outstanding share of Company Common Stock not owned by National City or any direct or indirect wholly-owned subsidiary of National City (except for any such shares of Company Common Stock held in trust accounts, managed accounts or in any similar manner as trustee or in a fiduciary capacity ("Trust Account Common Shares") or acquired in satisfaction of debts previously contracted ("DPC Common Shares")), other than those shares of Company Common Stock held in the treasury of the Company, will be canceled, retired and converted into 0.75 shares of common stock, par value $4.00 per share, of National City ("National City Common Stock") ( "Conversion Ratio"). The number of shares of National City Common Stock that each share of Company Common Stock will be converted into is sometimes referred to herein as the "Common Merger Consideration"; (b) each then-outstanding share of Company Series 1 Stock not owned by National City or any direct or indirect wholly owned subsidiary of National City (except for any such shares of Company Series 1 Stock held in trust accounts, managed accounts or in any similar manner as trustee or in a fiduciary capacity ("Trust Account Preferred Shares" and, together with Trust Account Common Shares, "Trust Account 2 7 Shares") or acquired in satisfaction of debts previously contracted ("DPC Preferred Shares" and, together with DPC Common shares, "DPC Shares")), other than those shares of Company Series 1 Stock held in the treasury of the Company, will be canceled, retired and converted into one share of preferred stock, without par value, of National City which will be designated National City's 6% Cumulative Convertible Preferred Stock, Series 1 ("National City Preferred Stock") and be initially convertible into 1.51455 shares of National City Common Stock and otherwise have the designation, preferences and rights set forth in the Form of Certificate of Designation, Preferences and Rights of National City 6% Cumulative Convertible Preferred Stock, Series 1 attached hereto as Exhibit B (the "Certificate of Designation"). The number of shares of National City Preferred Stock that each share of Company Series 1 Stock will be converted into is sometimes referred to herein as the "Preferred Merger Consideration" and, together with the Common Merger Consideration, as the "Merger Consideration"; (c) each then-outstanding share of Company Common Stock owned by National City or any direct or indirect wholly-owned subsidiary of National City (except for any shares that are Trust Account Shares or DPC Shares) will be canceled and retired; (d) each share of Company Common Stock issued and held in Company's treasury will be canceled and retired; and (e) each share of National City Common Stock issued and outstanding immediately prior to the Effective Time shall continue to be an issued and outstanding share of common stock, par value $4.00 per share, of the Surviving Corporation from and after the Effective Time. 2.2 Assumption of Employee and Director Stock Options. Except as expressly provided in this Section 2.2, all rights under any stock option granted by Company or its predecessors pursuant to the Fort Wayne National Corporation 1985 Stock Incentive Plan, the Fort Wayne National Corporation 1994 Stock Incentive Plan and the Fort Wayne National Corporation 1994 Nonemployee Director Stock Incentive Plan (the "Company Option Plans") that remain outstanding and unexercised, whether vested or unvested, immediately prior to the Effective Time ("Unexercised Options") shall cease to represent a right to acquire shares of Company Common Stock and shall be converted into the right to acquire that number of shares of National City Common Stock equal to (a) the number of shares of Company Common Stock subject to the Unexercised Option, multiplied by (b) the Conversion Ratio (rounded to the nearest whole share). The exercise price per share of National City Common Stock under the new option shall be equal to the exercise price per share of the Company Common Stock which was purchasable under each Unexercised Option divided by the Conversion Ratio (rounded to the nearest whole cent) necessary to assure that the rights and benefits of the optionee under such option shall not be increased or decreased by reason of this Section 2.2, and, in addition, each option which is an "incentive stock option" as defined in Section 422 of the Code shall be adjusted as required by section 424 of the Code and the regulations promulgated thereunder so as not to constitute a modification, extension or renewal of the option within the meaning of section 424(h) of the Code. On or before the Effective Time, National City shall file, and maintain the effectiveness of, a registration statement with the Securities and Exchange Commission covering such options and the sale of the National City Common Stock issued upon exercise of such options. At the Effective Time the Company Option Plans shall be terminated with respect to the granting of any additional options or option rights. The duration and other terms and conditions of the new options shall be the same as the original Company options, except that reference to Company shall be deemed to be references to National City. 2.3 Exchange of Certificates. (a) EXCHANGE AGENT. Prior to the Effective Time, National City shall designate National City Bank to act as exchange agent (the "Exchange Agent") and Fort Wayne National Bank to act as forwarding agent in connection with the Merger pursuant to an exchange agent agreement providing for, among other things, the matters set forth in this Section 2.3. Except as set forth herein, from and after the Effective Time each holder of a certificate that immediately prior to the Effective Time represented outstanding shares of 3 8 Company Common Stock ("Common Certificate") shall be entitled to receive in exchange therefor, upon surrender thereof to the Exchange Agent, the Common Merger Consideration for each share of Company Common Stock so represented by the Certificate surrendered by such holder thereof. The certificates representing shares of National City Common Stock which constitute the Common Merger Consideration shall be properly issued and countersigned and executed and authenticated, as appropriate. Except as set forth herein, from and after the Effective Time each holder of a certificate that immediately prior to the Effective Time represented outstanding shares of Company Series 1 Stock ("Preferred Certificate" and, together with the Common Certificates, "Certificates") shall be entitled to receive in exchange therefor, upon surrender thereof to the Exchange Agent, the Preferred Merger Consideration for each share of Company Series 1 Stock so represented by the Certificate surrendered by such holder thereof. The certificates representing shares of National City Preferred Stock which constitute the Preferred Merger Consideration shall be properly issued and countersigned and executed and authenticated, as appropriate. (b) NOTICE OF EXCHANGE. Promptly after the Effective Time, National City and the Surviving Corporation shall cause the Exchange Agent to mail and/or make available to each record holder of a Certificate a notice and letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificate shall pass, only upon proper delivery of the Certificate to the Exchange Agent or its forwarding agent) advising such holder of the effectiveness of the Merger and the procedures to be used in effecting the surrender of the Certificate for exchange therefor. Upon surrender to the Exchange Agent of a Certificate, together with such letter of transmittal duly executed and completed in accordance with the instructions thereon, and such other documents as may reasonably be requested, the Exchange Agent shall promptly deliver to the person entitled thereto the appropriate Merger Consideration for each share of Company Common Stock or Company Series 1 Stock, as the case may be, so represented by the Certificate surrendered by such holder thereof, and such Certificate shall forthwith be canceled. (c) TRANSFER. If delivery of all or part of the Merger Consideration is to be made to a person other than the person in whose name a surrendered Certificate is registered, it shall be a condition to such delivery or exchange that the Certificate surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such delivery or exchange shall have paid any transfer and other taxes required by reason of such delivery or exchange in a name other than that of the registered holder of the Certificate surrendered or shall have established to the reasonable satisfaction of the Exchange Agent that such tax either has been paid or is not payable. (d) RIGHT TO MERGER CONSIDERATION. Subject to Subsection 2.3(e), until surrendered and exchanged in accordance with this Section 2.3, each Certificate shall, after the Effective Time, represent solely the right to receive the appropriate Merger Consideration, multiplied by the number of shares of Company Common Stock or Company Series 1 Stock, as the case may be, evidenced by such Certificate, together with any dividends or other distributions as provided in Sections 2.3(e) and 2.3(f), and shall have no other rights. From and after the Effective Time, National City and Surviving Corporation shall be entitled to treat such Certificates that have not yet been surrendered for exchange as evidencing the ownership of the aggregate Merger Consideration into which the shares of Company Common Stock or Company Series 1 Stock, as the case may be, represented by such Certificates may be converted, notwithstanding any failure to surrender such Certificates. One hundred eighty (180) days following the Effective Time, the Exchange Agent shall deliver to the Surviving Corporation any shares of National City Common Stock and National City Preferred Stock and funds (including any interest received with respect thereto) which National City has made available to the Exchange Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) with respect to the shares of National City Common Stock (and cash in lieu of fractional shares) and shares of National City Preferred Stock deliverable or payable upon due surrender of their Certificates. Neither Exchange Agent nor any party hereto shall be liable to any holder of 4 9 shares of Company Common Stock or Company Series 1 Stock, as the case may be, for any Merger Consideration (or dividends, distributions or interest with respect thereto) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (e) DISTRIBUTION WITH RESPECT TO UNEXCHANGED CERTIFICATES. Whenever a dividend or other distribution is declared by National City on the National City Common Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares issuable pursuant to this Agreement, provided that no dividends or other distributions declared or made with respect to National City Common Stock shall be paid to the holder of any unsurrendered Certificate with respect to the share of National City Common Stock represented thereby until the holder of such Certificate shall surrender such Certificate in accordance with this Article II. The Surviving Corporation shall pay any dividends or make any other distributions with a record date prior to the Effective Time which may have been declared or made by the Company on Company Common Stock or on Company Series 1 Stock in accordance with the terms of this Agreement on or prior to the Effective Time and which remain unpaid at the Effective Time. (f) LOST OR DESTROYED EXCHANGED CERTIFICATES. In the event that any Certificate shall have been lost, stolen or destroyed, the Exchange Agent shall deliver in exchange for such lost, stolen or destroyed certificate, upon the making of an affidavit of that fact by the holder thereof in form satisfactory to the Exchange Agent, the Merger Consideration, as may be required pursuant to this Agreement; provided, however, that the Exchange Agent may, in its sole discretion and as a condition precedent to the delivery of the Merger Consideration to which the holder of such certificate is entitled as a result of the Merger, require the owner of such lost, stolen or destroyed certificate to deliver a bond in such sum as it may direct as indemnity against any claim that may be made against Company, National City or the Exchange Agent or any other party with respect to the certificate alleged to have been lost, stolen or destroyed. (g) VOTING WITH RESPECT TO UNEXCHANGED CERTIFICATES. Holders of unsurrendered Certificates will not be entitled to vote at any meeting of National City stockholders. (h) NO FRACTIONAL SHARES. No certificates or scrip representing fractional shares of National City Common Stock shall be issued upon the surrender for exchange of a Certificate or Certificates. No dividends or distributions of National City shall be payable on or with respect to any fractional share and any such fractional share interest will not entitle the owner thereof to vote or to any rights of stockholders of National City. In lieu of any such fractional shares, holders of Certificates otherwise entitled to fractional shares shall be entitled to receive promptly from the Exchange Agent a cash payment in an amount equal to the fraction of such share of National City Common Stock to which such holder would otherwise be entitled multiplied by the Market Price (as hereinafter defined). 2.4 Closing of the Company's Transfer Books. The stock transfer books of Company shall be closed at the close of business on the business day immediately preceding the date of the Effective Time. In the event of a transfer of ownership of Company Common Stock or Company Series 1 Stock which is not registered in the transfer records of Company, the Merger Consideration to be distributed pursuant to this Agreement may be delivered to a transferee, if a Certificate is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by payment of any applicable stock transfer taxes. National City and The Exchange Agent shall be entitled to rely upon the stock transfer books of Company to establish the identity of those persons entitled to receive the Merger Consideration specified in this Agreement for their shares of Company Common Stock or Company Series 1 Stock, which books shall be conclusive with respect to the ownership of such shares. In the event of a dispute with respect to the ownership of any such shares, the Surviving Corporation and the Exchange Agent shall be entitled to deposit any Merger Consideration represented thereby in escrow with an independent party and thereafter be relieved with respect to any claims to such Merger Consideration. 5 10 2.5 Changes in National City Common Stock. If between the date of this Agreement and the Effective Time, the shares of National City Common Stock shall be changed into a different number of shares by reason of any reclassification, recapitalization, split-up, combination or exchange of shares, or if a stock dividend thereon shall be declared with a record date within said period, the Merger Consideration shall be adjusted accordingly. III. REPRESENTATIONS AND WARRANTIES OF NATIONAL CITY National City hereby represents and warrants to Company that: 3.1 Corporate Organization. National City is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to do business as a foreign corporation in each jurisdiction in which its ownership or lease of property or the nature of the business conducted by it makes such qualification necessary, except for such jurisdictions in which the failure to be so qualified would not have a Material Adverse Effect. National City is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). National City has the requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as it is now being conducted. National City has heretofore delivered to Company true and complete copies of its Certificate of Incorporation and By-laws. 3.2 Authority. National City has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly approved by the Board of Directors of National City and no other corporate proceedings on the part of National City are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by, and constitutes valid and binding obligations of National City enforceable against National City in accordance with its terms, except as enforceability thereof may be limited by applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other similar laws affecting the enforcement of creditors' rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceedings may be brought. 3.3 Capitalization. As of the date hereof, the authorized capital stock of National City consists of 700,000,000 shares of National City Common Stock and 5,000,000 shares of National City preferred stock. As of the close of business on January 9, 1998 (i) 211,097,837 shares of National City Common Stock were validly issued and outstanding, fully paid and nonassessable and (ii) no shares of preferred stock were issued and outstanding. As of the date hereof, except as set forth in this Section 3.3, pursuant to the exercise of employee stock options under National City's various stock option plans in effect, National City's dividend reinvestment plan and stock grants made pursuant to the National City 1991 Restricted Stock Plan or set forth in the National City Disclosure Letter, there are no other shares of capital stock of National City authorized, issued or outstanding and there are no outstanding subscriptions, options, warrants, rights, convertible securities or any other agreements or commitments of any character relating to the issued or unissued capital stock or other securities of National City obligating National City to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of National City or obligating National City to grant, extend or enter into any subscription, option, warrant, right, convertible security or other similar agreement or commitment. As of the date hereof, except as provided in this Agreement, there are no voting trusts or other agreements or understandings to which National City or any National City subsidiary is a party with respect to the voting of the capital stock of National City. All of the shares of National City Common Stock and National City Preferred Stock issuable in exchange for the Company Common Stock and Company Series 1 Stock, respectively, at the Effective Time in accordance with this Agreement and all of the shares of National City Common Stock issuable upon exercise of Unexercised Options 6 11 will be, when so issued, duly authorized, validly issued, fully paid and nonassessable and will not be subject to preemptive rights. 3.4 Subsidiaries. The name and state of incorporation of each significant subsidiary (as defined in Paragraph 8.6(i) hereof) of National City (collectively, the "Significant Subsidiaries") is set forth in the National City Disclosure Letter. Each of the Significant Subsidiaries is a bank or a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation or organization and is duly qualified to do business as a foreign corporation in each jurisdiction in which its ownership or lease of property or the nature of the business conducted by it makes such qualification necessary, except for such jurisdictions in which the failure to be so qualified would not have a Material Adverse Effect. Each of the Significant Subsidiaries has the requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its businesses as they are now being conducted. Except as set forth in the National City Disclosure Letter, all outstanding shares of capital stock of each of the Significant Subsidiaries are owned by National City or another of National City's subsidiaries and are validly issued, fully paid and (except pursuant to 12 USC Section 55 in the case of each national bank subsidiary and applicable state law in the case of each state bank subsidiary) nonassessable, are not subject to preemptive rights and are owned free and clear of all liens, claims and encumbrances. There are no outstanding subscriptions, options, warrants, rights, convertible securities or any other agreements or commitments of any character relating to the issued or unissued capital stock or other securities of any Significant Subsidiary obligating any of the Significant Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold additional shares of its capital stock or obligating any of the Significant Subsidiaries to grant, extend or enter into any subscription, option, warrant, right, convertible security or other similar agreement or commitment. 3.5 Information in Disclosure Documents, Registration Statement, Etc. None of the information with respect to National City or any of National City's subsidiaries provided by National City for inclusion in (i) the Registration Statement to be filed with the Securities and Exchange Commission (the "Commission") by National City on Form S-4 under the Securities Act of 1933, as amended (the "Securities Act"), for the purpose of registering the shares of National City Common Stock and National City Preferred Stock to be issued in the Merger (the "Registration Statement") and (ii) any proxy statement of Company ("Proxy Statement") required to be mailed to Company's shareholders in connection with the Merger will, in the case of the Proxy Statement or any amendments or supplements thereto, at the time of the mailing of the Proxy Statement and any amendments or supplements thereto, and at the time of the Company Meeting (as hereinafter defined), or, in the case of the Registration Statement, at the time it becomes effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Registration Statement will comply as to form in all material respects with the provisions of the Securities Act and the rules and regulations promulgated thereunder. The Proxy Statement will comply as to form in all material respects with the provisions of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder. 3.6 Consents and Approvals; No Violation. Except as set forth in the National City Disclosure Letter, neither the execution and delivery of this Agreement by National City nor the consummation by National City of the transactions contemplated hereby will (a) conflict with or result in any breach of any provision of its certificate of incorporation or By-laws of National City, (b) violate, conflict with, constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any lien or other encumbrance upon any of the properties or assets of National City or any of National City's subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which National City or any of National City's subsidiaries is a party or to which they or any of their respective properties or assets are subject, except for such violations, conflicts, breaches, defaults, 7 12 terminations, accelerations or creations of liens or other encumbrances, which will not have a Material Adverse Effect or (c) require any consent, approval, authorization or permit of or from, or filing with or notification to, any court, governmental authority or other regulatory or administrative agency or commission, domestic or foreign ("Governmental Entity"), except (i) pursuant to the Exchange Act and the Securities Act, (ii) filing the Certificate of Merger and the Certificate of Designation pursuant to the DGCL, (iii) filing the Plan of Merger, (iv) filings required under the securities or blue sky laws of the various states, (v) filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (vi) filings with, and approval by, the Federal Reserve Board (the "FRB"), (vii) filings with, and approvals by, the Ohio Superintendent of Banks, the Arizona Director of Insurance and such other state regulatory agencies as may be required (collectively, the "State Entities"), (viii) filings and approvals pursuant to any applicable state takeover law, (ix) filings and approvals under the Small Business Investment Act of 1958 and the rules and regulations thereunder ("SBIA") or (x) consents, approvals, authorizations, permits, filings or notifications which, if not obtained or made will not, individually or in the aggregate, have a Material Adverse Effect. 3.7 Reports and Financial Statements. Since January 1, 1992, National City and each of National City's subsidiaries have filed all reports, registrations and statements, together with any required amendments thereto, that they were required to file with the Commission under Section 12(b), 12(g), 13(a) or 14(a) of the Securities Exchange Act of 1934, including, but not limited to Forms 10-K, Forms 10-Q and proxy statements (the "National City Reports"). National City has previously furnished or will promptly furnish Company with true and complete copies of each of National City's annual reports on Form 10-K for the years 1992 through 1996 and its quarterly reports on Form 10-Q for March 31, 1997, June 30, 1997 and September 30, 1997. As of their respective dates, the National City Reports complied with the requirements of the Commission and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstance under which they were made, not misleading. The audited consolidated financial statements and unaudited interim financial statements of National City included in the National City Reports have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated therein or in the notes thereto) and fairly present the consolidated financial position of National City and National City's subsidiaries as of the dates thereof and the results of their operations and cash flows for the periods then ended subject, in the case of the unaudited interim financial statements, to normal year-end and audit adjustments and any other adjustments described therein. There exist no material liabilities of National City and its consolidated subsidiaries, contingent or otherwise of a type required to be disclosed in accordance with generally accepted accounting practices, except as disclosed in the National City Reports. National City's reserve for possible loan losses as shown in its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 was adequate, within the meaning of generally accepted accounting principles and safe and sound banking practices. 3.8 Taxes. National City will promptly make available to Company, upon request by Company, true and correct copies of the federal, state and local income tax returns, and state and local property and sales tax returns and any other tax returns filed by National City and any of National City's subsidiaries for each of the fiscal years that remains open, as of the date hereof, for examination or assessment of tax. National City and each National City subsidiary have prepared in good faith and duly and timely filed, or caused to be duly and timely filed, all federal, state, local and foreign income, estimated tax, withholding tax, franchise, sales and other tax returns or reports required to be filed by them on or before the date hereof, except to the extent that all such failures to file, taken together, would not have a Material Adverse Effect. National City and each of its subsidiaries have paid, or have made adequate provision or set up an adequate accrual or reserve for the payment of, all taxes, shown or required to be shown to be owing on all such returns or reports, together with any interest, additions or penalties related to any such taxes or to any open taxable year or period. Except as set forth in the National City Disclosure Letter, neither National City nor any of National City's subsidiaries has consented to extend the statute of limitations with respect to the assessment of any tax. Except as set forth in 8 13 the National City Disclosure Letter, neither National City nor any of National City's subsidiaries is a party to any action or proceeding, nor to the best of National City's knowledge is any such action or proceeding threatened, by any Governmental Entity in connection with the determination, assessment or collection of any taxes, and no deficiency notices or reports have been received by National City or any of National City's subsidiaries in respect of any material deficiencies for any tax, assessment, or government charges. 3.9 Employee Plans. Except as set forth in the National City Disclosure Letter, all employee benefit, welfare, bonus, deferred compensation, pension, profit sharing, stock option, employee stock ownership, consulting, severance, or fringe benefit plans, formal or informal, written or oral, and all trust agreements related thereto, relating to any present or former directors, officers or employees of National City or its subsidiaries ("National City Employee Plans") have been maintained, operated, and administered in substantial compliance with their terms and currently comply, and have at all relevant times complied, in all material respects with the applicable requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code, and any other applicable laws. With respect to each National City Employee Plan which is a pension plan (as defined in Section 3(2) of ERISA): (a) except for recent amendment(s) to the plans not materially affecting the qualified status of the plans (which are disclosed in, and copies of which are attached to, the National City Disclosure Letter), each pension plan as amended (and any trust relating thereto) intended to be a qualified plan under Section 401(a) of the Code either: (i) has been determined by the Internal Revenue Service ("IRS") to be so qualified, (ii) is the subject of a pending application for such determination that was timely filed, or (iii) will be submitted for such a determination prior to end of the "remedial amendment period" within the meaning of Section 401(b) of the Code, (b) there is no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, and no waiver of the minimum funding standards of such sections has been requested from the IRS, (c) neither National City nor any of its subsidiaries has provided, or is required to provide, security to any pension plan pursuant to Section 401(a)(29) of the Code, (d) the fair market value of the assets of each defined benefit plan (as defined in Section 3(35) of ERISA) exceeds the value of the "benefit liabilities" within the meaning of Section 4001(a)(16) of ERISA under such defined benefit plan as of the end of the most recent plan year thereof ending prior to the date hereof, calculated on the basis of the actuarial assumptions used in the most recent actuarial valuation for such defined benefit plan as of the date hereof, (e) no reportable event described in Section 4043 of ERISA for which the 30 day reporting requirement has not been waived has occurred, (f) except as disclosed in the National City Disclosure Letter, no defined benefit plan has been terminated, nor has the Pension Benefit Guaranty Corporation ("PBGC") instituted proceedings to terminate a defined benefit plan or to appoint a trustee or administrator of a defined benefit plan, and no circumstances exist that constitute grounds under Section 4042(a)(2) of ERISA entitling the PBGC to institute any such proceedings and (g) no pension plan is a "multiemployer plan" within the meaning of Section 3(37) of ERISA or a "multiple employer plan" within the meaning of 413(c) of the Code. Neither National City nor any of its subsidiaries has incurred any liability to the PBGC with respect to any "single-employer plan" within the meaning of Section 4001(a)(15) of ERISA currently or formerly maintained by any entity considered one employer with it under Section 4001 of ERISA or Section 414 of the Code, except for premiums all of which have been paid when due. Neither National City nor any of its subsidiaries has incurred any withdrawal liability with respect to a multiemployer plan under Subtitle E of Title IV of ERISA. Except as set forth in the National City Disclosure Letter, there is no basis for any person to assert that National City or any of its subsidiaries has an obligation to institute any Employee Plan or any such other arrangement, agreement or plan. With respect to any insurance policy that heretofore has or currently does provide funding for benefits under any National City Employee Plan, (A) there is no liability on the part of National City or any of its subsidiaries in the nature of a retroactive or retrospective rate adjustment, loss sharing arrangement, or other actual or contingent liability, nor would there be any such liability if such insurance policy was terminated, and (B) no insurance company issuing such policy is in receivership, conservatorship, liquidation or similar proceeding and, to the knowledge of National City, no such proceeding with respect to any such insurer is imminent. Except as set forth in the National City Disclosure Letter, neither the execution of this Agreement, nor the consummation of the transactions contemplated thereby will 9 14 (A) constitute a stated triggering event under any National City Employee Plan that will result in any payment (whether of severance pay or otherwise) becoming due from National City or any of its subsidiaries to any present or former officer, employee, director, shareholder, consultant or dependent of any of the foregoing or (B) accelerate the time of payment or vesting, or increase the amount of compensation due to any present or former officer, employee, director, shareholder, consultant, or dependent of any of the foregoing. Neither National City nor any of its subsidiaries has any obligations for retiree health and life benefits under any National City Employee Plan, except as set forth in the National City Disclosure Letter. There are no restrictions on the rights of National City or its subsidiaries to amend or terminate any such National City Employee Plan without incurring any liability thereunder. 3.10 Material Contracts. Except as set forth in the National City Disclosure Letter or disclosed in the National City Reports, neither National City nor any of its subsidiaries is a party to, or is bound or affected by, or receives benefits under (a) any employment, severance, termination, consulting or retirement agreement (collectively, "Benefit Agreements") providing for aggregate payments to any person in any calendar year in excess of $100,000, (b) any material agreement, indenture or other instrument relating to the borrowing of money by National City or any of its subsidiaries or the guarantee by National City or any of its subsidiaries of any such obligation (other than trade payables and instruments relating to borrowings or guaranties made in the ordinary course of business) or (c) any other contract or agreement or amendment thereto that would be required to be filed as an exhibit to a Form 10-K filed by National City with the Commission as of the date of this Agreement (collectively, the "National City Contracts"). Neither National City nor any of National City's subsidiaries is in default under any of the National City Contracts, which default is reasonably likely to have, either individually or in the aggregate, a Material Adverse Effect and there has not occurred any event that with the lapse of time or the giving of notice or both would constitute such a default. Neither National City nor any of National City's subsidiaries is a party to, or is bound by, any collective bargaining agreement, contract, or other agreement or understanding with a labor union or labor organization, nor is National City or any of National City's subsidiaries the subject of a proceeding asserting that it or any such subsidiary has committed an unfair labor practice or seeking to compel it or such subsidiary to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other labor dispute involving it or any of its subsidiaries pending or threatened. 3.11 Absence of Certain Changes or Events. Except as set forth in the National City Disclosure Letter or disclosed in the National City Reports filed by National City with the Commission prior to the date of this Agreement, since December 31, 1996, there has not been any change in the financial condition, results of operations or business of National City and its subsidiaries which would or in the future will have a Material Adverse Effect. 3.12 Litigation. Except as disclosed in the National City Reports filed by National City with the Commission prior to the date of this Agreement, there is no suit, action or proceeding pending, or, to the knowledge of National City, threatened against or affecting National City or any of National City's subsidiaries which, if decided adversely to National City, would be reasonably expected to result in a Material Adverse Effect, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator, outstanding against National City or any of National City's subsidiaries having, or which, insofar as reasonably can be foreseen, in the future would have, a Material Adverse Effect. 3.13 Compliance with Laws and Orders. Except as set forth in the National City Disclosure Letter or disclosed in the National City Reports filed by National City with the Commission prior to the date of this Agreement, the businesses of National City and of National City's subsidiaries are not being conducted in violation of any law, ordinance, regulation, judgment, order, decree, license or permit of any Governmental Entity (including, without limitation, in the case of National City's subsidiaries that are banks, all statutes, rules and regulations pertaining to the conduct of the banking business and the exercise of trust powers), except for 10 15 violations which individually or in the aggregate do not, and, insofar as reasonably can be foreseen, in the future will not, have a Material Adverse Effect. Except as set forth in the National City Disclosure Letter, no investigation or review by any Governmental Entity with respect to National City or any of National City's subsidiaries is pending or, to the knowledge of National City, threatened, nor has any Governmental Entity indicated an intention to conduct the same in each case other than those the outcome of which will not have a Material Adverse Effect. 3.14 Agreements with Bank Regulators, Etc. Neither National City nor any National City subsidiary is a party to any written agreement or memorandum of understanding with, or a party to any commitment letter, board resolution or similar undertaking to, or is subject to any order or directive by, or is a recipient of any extraordinary supervisory letter from, any Governmental Entity which restricts materially the conduct of its business, or in any manner relates to its capital adequacy, its credit or reserve policies or its management, nor has National City been advised by any Governmental Entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum of understanding, extraordinary supervisory letter, commitment letter or similar submission. Neither National City nor any of National City's subsidiaries is required by Section 32 of the Federal Deposit Insurance Act ("FDIA") to give prior notice to a Federal banking agency of the proposed addition of an individual to its board of directors or the employment of an individual as a senior executive officer. National City knows of no reason why the regulatory approvals referred to in Subsection 3.6(c) should not be obtained. 3.15 National City Ownership of Stock. As of the date of this Agreement, neither National City nor any of its affiliates or associates (i) beneficially owns, directly or indirectly, or (ii) are parties to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of, Company Common Stock (other than DPC Shares or Trust Account Shares), which in the aggregate, represent 5% or more of the outstanding shares of Company Common Stock or Company Series 1 Stock. 3.16 Tax Treatment. As of the date hereof, National City is aware of no reason why the Merger will fail to qualify as a reorganization under Section 368(a) of the Code. 3.17 Fees. Neither National City nor any of National City's subsidiaries has paid or will become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated by this Agreement. 3.18 National City Action. The Board of Directors of National City (at a meeting duly called, constituted and held) has by the requisite vote of all directors present (a) determined that the Merger is advisable and in the best interests of National City and its stockholders and (b) approved this Agreement and the transactions contemplated by this Agreement. The Board of Directors of National City has approved the transactions contemplated by this Agreement and the Option Agreement such that the provisions of Section 203 of the DGCL and any other applicable state business combination or anti-takeover provisions of National City Certificate of Incorporation or By-laws shall not be triggered by the Merger, execution of this Agreement or the Option Agreement or any transactions contemplated by such Agreements. 3.19 Material Interests of Certain Persons. Except as disclosed in National City's Proxy Statement for its 1997 Annual Meeting of Stockholders, no officer or director of National City, or any "associate" (as such term is defined in Rule 14a-1 under the 1934 Act) of any such officer or director, has any material interest in any material contract or property (real or personal), tangible or intangible, used in or pertaining to the business of National City or any of its subsidiaries. 3.20 Environmental Matters. For purposes of this Agreement, the following terms shall have the indicated meanings: "ENVIRONMENTAL LAW" means any federal, state or local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, determination, judgment, decree, injunction or 11 16 agreement with any governmental entity relating to (1) the health, protection, preservation, containment or restoration of the environment including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, wetlands, plant and animal life or any other natural resource, conservation, and/or (2) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances. The term Environmental Law includes without limitation (1) the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. Section 9601, et seq.; the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. 9601(2)(D); the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901, et seq.; the Clean Air Act, as amended, 42 U.S.C. Section 7401, et seq.; the Federal Water Pollution Control Act, as amended by the Clean Water Act, 33 U.S.C. Section 1251, et seq.; the Toxic Substances Control Act, as amended, 15 U.S.C. Section 9601, et seq.; the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001, et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f, et seq.; and all comparable state and local laws, ordinances, rules, regulations respecting the interpretation or enforcement of same and (2) any common law (including without limitation common law that may impose strict liability) that may impose liability for injuries or damages due to the release of any Hazardous Substance. "HAZARDOUS SUBSTANCE" means (i) any hazardous wastes, toxic chemicals, materials, substances or wastes as defined by or for the purposes of any Environmental Law; (ii) any "oil", as defined by the Clean Water Act, as amended from time to time, and regulations promulgated thereunder (including crude oil or any fraction thereof and any petroleum products or derivatives thereof); (iii) any substance, the presence of which is prohibited, regulated or controlled by any applicable federal, state or local laws, regulations, statutes or ordinances now in force or hereafter enacted relating to waste disposal or environmental protection with respect to the exposure to, or manufacture, possession, presence, use, generation, storage, transportation, treatment, release, emission, discharge, disposal, abatement, cleanup, removal, remediation or handling of any such substance; (iv) any asbestos or asbestos-containing materials, polychlorinated biphenyls ("PCBs") in the form of electrical equipment, fluorescent light fixtures with ballasts, cooling oils or any other form, urea formaldehyde, atmospheric radon; (v) any solid, liquid, gaseous or thermal irritant or contaminant, such as smoke, vapor, soot, fumes, alkalis, acids, chemicals, pesticides, herbicides, sewage, industrial sludge or other similar wastes; (vi) industrial, nuclear or medical by-products; (vii) any lead based paint or coating and (viii) any underground storage tank(s). "LOAN PORTFOLIO PROPERTIES, TRUST PROPERTIES AND OTHER PROPERTIES" means any real property, interest in real property, improvements, appurtenances, rights and personal property attendant thereto, which is owned, leased as a landlord or a tenant, licensed as a licensor or licensee, managed or operated or upon which is held a mortgage, deed of trust, deed to secure debt or other security interest by National City or Company, as the case may be, or any of their subsidiaries whether directly, as an agent, as trustee or other fiduciary or otherwise. Except as set forth in the National City Disclosure Letter, (i) to the best of National City's knowledge, neither National City nor any of its subsidiaries is in violation of or has any liability, absolute or contingent, in connection with or under any Environmental Law, except any such violations or liabilities which would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect; (ii) to the best of National City's knowledge, none of the Loan Portfolio Properties, Trust Properties and Other Properties of National City or its subsidiaries is in violation of or has any liability, absolute or contingent, under any Environmental Law, except any such violations or liabilities which, individually or in the aggregate would not have a Material Adverse Effect; and (iii) to the best of National City's knowledge, there are no actions, suits, demands, notices, claims, investigations or proceedings pending or threatened relating to any Loan Portfolio Properties, Trust Properties and Other Properties including, without limitation any notices, demand letters or requests for information from any federal or state environmental agency relating to any 12 17 such liability under or violation of Environmental Law, which would impose a liability upon National City or its subsidiaries pursuant to any Environmental Law, except such as would not, individually or in the aggregate have a Material Adverse Effect. IV. REPRESENTATIONS AND WARRANTIES OF COMPANY Company hereby represents and warrants to National City that: 4.1 Corporate Organization. Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Indiana and is duly qualified to do business as a foreign corporation in each jurisdiction in which its ownership or lease of property or the nature of the business conducted by it makes such qualification necessary, except for such jurisdictions in which the failure to be so qualified would not have a Material Adverse Effect. Company is registered as a bank holding company under the BHCA. Company has the requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as it is now being conducted. Company has heretofore delivered to National City true and complete copies of its Articles of Incorporation and By-laws. 4.2 Authority. Company has the requisite corporate power and authority to execute and deliver this Agreement and, except for any required approval of Company's shareholders, to consummate the transactions contemplated by such. The execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly approved by the Board of Directors of Company and no other corporate proceedings on the part of Company are necessary to authorize this Agreement or to consummate the transactions so contemplated, subject only to approval by the shareholders of Company as provided in Section 5.15 (a) of this Agreement. This Agreement has been duly executed and delivered by, and constitute valid and binding obligations of Company, enforceable against Company in accordance with its terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and other similar laws affecting the enforcement of creditors' rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceedings may be brought. 4.3 Capitalization. As of the date hereof, the authorized capital stock of Company consists of 50,000,000 shares of Company Common Stock, 2,000,000 shares of Company Class A Voting Preferred stock and 2,000,000 shares of Company Class B Nonvoting stock. As of the close of business on January 9, 1998, 17,103,431 shares of Company Common Stock were validly issued and outstanding, fully paid and nonassessable and 739,976 shares of Company Series 1 Stock were issued or outstanding. As of the date of this Agreement except as set forth in this Section 4.3, pursuant to the Company Option Plans, pursuant to the Option Agreement or set forth in a disclosure letter executed by Company and dated and delivered by Company to National City as of the date hereof ("Company Disclosure Letter"), there are no shares of capital stock of Company authorized, issued or outstanding and there are no outstanding subscriptions, options, warrants, rights, convertible securities or any other agreements or commitments of any character relating to the issued or unissued capital stock or other securities of Company obligating Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of Company or obligating Company to grant, extend or enter into any subscription, option, warrant, right, convertible security or other similar agreement or commitment. Except as set forth in the Company Disclosure Letter, there are no voting trusts or other agreements or understandings to which Company or any of Company's subsidiaries is a party with respect to the voting of the capital stock of Company. As of the date of this Agreement, there were outstanding under the Company Option Plans options to purchase 951,487 shares of Company Common Stock, which Company stock options had a weighted average exercise price of $22.78 and for which adequate shares of Company Common Stock have been reserved for issuance under the Company Option Plans. 13 18 4.4 Subsidiaries. The Company Disclosure Letter sets forth the name and state of incorporation of each subsidiary of Company (collectively, "Company Subsidiaries"). Each of Company Subsidiaries is a bank, a corporation or other business entity duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation or organization and is duly qualified to do business as a foreign corporation or foreign business entity in each jurisdiction in which its ownership or lease of property or the nature of the business conducted by it makes such qualification necessary, except for such jurisdictions in which the failure to be so qualified would not have a Material Adverse Effect. Each of Company Subsidiaries has the requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its businesses as they are now being conducted. Except as set forth in the Company Disclosure Letter, all outstanding shares of capital stock of each Company Subsidiary is owned by Company or another Company Subsidiary and are validly issued, fully paid and (except pursuant to 12 USC Section 55 in the case of each national bank subsidiary and applicable state law in the case of each state bank subsidiary) nonassessable, are not subject to preemptive rights and are owned free and clear of all liens, claims and encumbrances. There are no outstanding subscriptions, options, warrants, rights, convertible securities or any other agreements or commitments of any character relating to the issued or unissued capital stock or other securities of any Company Subsidiary obligating any Company Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold additional shares of its capital stock or obligating any Company Subsidiary to grant, extend or enter into any subscription, option, warrant, right, convertible security or other similar agreement or commitment. 4.5 Information in Disclosure Documents, Registration Statement, Etc. None of the information with respect to Company or any Company Subsidiary provided by Company for inclusion in the Proxy Statement or the Registration Statement will, in the case of the Proxy Statement or any amendments or supplements thereto, at the time of the mailing of the Proxy Statement and any amendments or supplements thereto, and at the time of the Company Meeting (as hereinafter defined) or, in the case of the Registration Statement, at the time it becomes effective, contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations promulgated thereunder. 4.6 Consent and Approvals; No Violation. Except as set forth in the Company Disclosure Letter neither the execution and delivery of this Agreement by Company nor the consummation by Company of the transactions contemplated hereby will (a) conflict with or result in any breach of any provision of its articles of incorporation or By-laws of Company, (b) violate, conflict with, constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any lien or other encumbrance upon any of the properties or assets of Company or any of Company Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Company or any Company Subsidiary is a party or to which they or any of their respective properties or assets are subject, except for such violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens or other encumbrances, which will not have a Material Adverse Effect or (c) require any consent, approval, authorization or permit of or from, or filing with or notification to, any Governmental Entity, except (i) pursuant to the Exchange Act and the Securities Act, (ii) filing the Certificate of Merger and the Certificate of Designation, (iii) filing the Plan of Merger, (iv) filings required under the securities or blue sky laws of the various states, (v) filing under the HSR Act, (vi) filings with, and approval by, the FRB, (vii) filings with, and approvals by, the State Entities, (viii) filings and approvals pursuant to any applicable state takeover law, (ix) filings and approvals under the SBIA or (x) consents, approvals, authorizations, permits, filings or notifications which, if not obtained or made will not, individually or in the aggregate, have a Material Adverse Effect. 4.7 Reports and Financial Statements. Since January 1, 1992, Company and each Company Subsidiary have filed all reports, registrations and statements, together with any required amendments thereto, that they 14 19 were required to file with the Commission under Sections 12(b), 12(g), 13(a) or 14(a) of the Securities Exchange Act of 1934, including, but not limited to Forms 10-K, Forms 10-Q and proxy statements (the "Company Reports"). Company has previously furnished or will promptly furnish National City with true and complete copies of each of Company's annual reports on Form 10-K for the years 1992 through 1996 and its quarterly reports on Form 10-Q for March 31, 1997, June 30, 1997 and September 30, 1997. As of their respective dates, Company Reports complied with the requirements of the Commission and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstance under which they were made, not misleading. The audited consolidated financial statements and unaudited interim financial statements of Company included in the Company Reports have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated therein or in the notes thereto) and fairly present the financial position of Company and Company Subsidiaries taken as a whole as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended subject, in the case of the unaudited interim financial statements, to normal year-end and audit adjustments and any other adjustments described therein. There exist no material liabilities of Company and its consolidated subsidiaries, contingent or otherwise of a type required to be disclosed in accordance with generally accepted accounting practices, except as disclosed in the Company Reports. Company's reserve for possible loan losses as shown in its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 was adequate, within the meaning of generally accepted accounting principles and safe and sound banking practices. 4.8 Taxes. Company will promptly make available to National City, upon request by National City, true and correct copies of the federal, state and local income tax returns, and state and local property and sales tax returns filed by Company and Company Subsidiaries for each of the fiscal years that remains open, as of the date hereof, for examination or assessment of tax. Company and each Company Subsidiary have prepared in good faith and duly and timely filed, or caused to be duly and timely filed, all federal, state, local and foreign income, franchise, sales and other tax returns or reports required to be filed by them on or before the date hereof, except to the extent that all failures to file, taken together, would not have a Material Adverse Effect. Company and each Company Subsidiary have paid, or have made adequate provision or set up an adequate accrual or reserve for the payment of, all taxes shown or required to be shown to be owing on all such returns or reports, together with any interest, additions or penalties related to any such taxes or to any open taxable year or period. Except as set forth in the Company Disclosure Letter, neither Company nor any Company Subsidiary has consented to extend the statute of limitations with respect to the assessment of any tax. Except as set forth in the Company Disclosure Letter, neither Company nor any of Company Subsidiaries is a party to any action or proceeding, nor to the best of Company's knowledge is any such action or proceeding threatened, by any Governmental Entity in connection with the determination, assessment or collection of any taxes, and no deficiency notices or reports have been received by Company or any of Company Subsidiaries in respect of any material deficiencies for any tax, assessment, or government charge. 4.9 Employee Plans. Except as set forth in the Company Disclosure Letter, all employee benefit, welfare, bonus, deferred compensation, pension, profit sharing, stock option, employee stock ownership, consulting, severance, or fringe benefit plans, formal or informal, written or oral and all trust agreements related thereto, relating to any present or former directors, officers or employees of Company or Company Subsidiaries ("Company Employee Plans") have been maintained, operated, and administered in substantial compliance with their terms and currently comply, and have at all relevant times complied, in all material respects with the applicable requirements of ERISA, the Code, and any other applicable laws. Except as set forth in the Company Disclosure Letter, with respect to each Company Employee Plan which is a pension plan (as defined in Section 3(2) of ERISA): (a) except for recent amendment(s) to the plans not materially affecting the qualified status of the plans (which are disclosed in the Company Disclosure Letter, and copies of which were previously made available to National City), each pension plan as amended (and any trust relating thereto) intended to be a qualified plan 15 20 under Section 401(a) of the Code either has been determined by the IRS to be so qualified or is the subject of a pending application for such determination that was timely filed, (b) there is no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, and no waiver of the minimum funding standards of such sections has been requested from the IRS, (c) neither Company nor any of the Company Subsidiaries has provided, or is required to provide, security to any pension plan pursuant to Section 401(a)(29) of the Code, (d) the fair market value of the assets of each defined benefit plan (as defined in Section 3(35) of ERISA) exceeds the value of the "benefit liabilities" within the meaning of Section 4001(a)(16) of ERISA under such defined benefit plan as of the end of the most recent plan year thereof ending prior to the date hereof, calculated on the basis of the actuarial assumptions used in the most recent actuarial valuation for such defined benefit plan as of the date hereof, (e) no reportable event described in Section 4043 of ERISA for which the 30 day reporting requirement has not been waived has occurred, (f) no defined benefit plan has been terminated, nor has the PBGC instituted proceedings to terminate a defined benefit plan or to appoint a trustee or administrator of a defined benefit plan, and no circumstances exist that constitute grounds under Section 4042(a)(2) of ERISA entitling the PBGC to institute any such proceedings and (g) no pension plan is a "multiemployer plan" within the meaning of Section 3(37) of ERISA or a "multiple employer plan" within the meaning of 413(c) of the Code. Neither Company nor any Company Subsidiary has incurred any liability to the PBGC with respect to any "single-employer plan" within the meaning of Section 4001(a)(15) of ERISA currently or formerly maintained by any entity considered one employer with it under Section 4001 of ERISA or Section 414 of the Code, except for premiums all of which have been paid when due. Neither Company nor any of its subsidiaries has incurred any withdrawal liability with respect to a multiemployer plan under Subtitle E of Title IV of ERISA. Except as set forth in the Company Disclosure Letter, there is no basis for any person to assert that Company or any of its subsidiaries has an obligation to institute any Employee Plan or any such other arrangement, agreement or plan. With respect to any insurance policy that heretofore has or currently does provide funding for benefits under any Company Employee Plan, (A) there is no liability on the part of Company or any of its subsidiaries in the nature of a retroactive or retrospective rate adjustment, loss sharing arrangement, or other actual or contingent liability, nor would there be any such liability if such insurance policy was terminated, and (B) no insurance company issuing such policy is in receivership, conservatorship, liquidation or similar proceeding and, to the knowledge of Company, no such proceeding with respect to any such insurer is imminent. Except as set forth in the Company Disclosure Letter, neither the execution of this Agreement, nor the consummation of the transactions contemplated thereby will (A) constitute a stated triggering event under any Company Employee Plan that will result in any payment (whether of severance pay or otherwise) becoming due from Company or any of its subsidiaries to any present or former officer, employee, director, shareholder, consultant or dependent of any of the foregoing or (B) accelerate the time of payment or vesting, or increase the amount of compensation due to any present or former officer, employee, director, shareholder, consultant, or dependent of any of the foregoing. Neither Company nor any Company Subsidiary has any obligations for retiree health and life benefits under any Company Employee Plan, except as set forth in the Company Disclosure Letter. Except as set forth in the Company Disclosure Letter, there are no restrictions on the rights of Company or Company Subsidiaries to amend or terminate any such Company Employee Plan without incurring any liability thereunder. 4.10 Material Contracts. Except as set forth in the Company Disclosure Letter or disclosed in the Company Reports, neither Company nor any Company Subsidiary is a party to, or is bound or affected by, or receives benefits under (a) any Benefit Agreements providing for aggregate payments to any person in any calendar year in excess of $100,000, (b) any material agreement, indenture or other instrument relating to the borrowing of money by Company or any Company Subsidiary or the guarantee by Company or any Company Subsidiary of any such obligation (other than trade payables and instruments relating to transactions entered into in the ordinary course of business) or (c) any other contract or agreement or amendment thereto that would be required to be filed as an exhibit to a Form 10-K filed by Company with the Commission as of the date of this Agreement (collectively, the "Company Contracts"). Neither Company nor any Company Subsidiary is in default under any 16 21 Company Contract, which default is reasonably likely to have, either individually or in the aggregate, a Material Adverse Effect, and there has not occurred any event that with the lapse of time or the giving of notice or both would constitute such a default. Except as set forth in the Company Disclosure Letter, neither Company nor any of Company Subsidiary is a party to, or is bound by, any collective bargaining agreement, contract, or other agreement or understanding with a labor union or labor organization, nor is Company or any Company Subsidiary the subject of a proceeding asserting that is or any Company Subsidiary has committed an unfair labor practice or seeking to compel it or such subsidiary to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other labor dispute involving it or any Company Subsidiary pending or threatened. 4.11 Absence of Certain Changes or Events. Except as set forth in the Company Disclosure Letter or disclosed in Company Reports filed by Company with the Commission prior to the date of this Agreement, since December 31, 1996, there has not been any change in the financial condition, results of operations or business of Company and Company Subsidiaries which would or in the future will have a Material Adverse Effect. 4.12 Litigation. Except as disclosed in Company Reports filed by Company with the Commission prior to the date of this Agreement, there is no suit, action or proceeding pending, or, to the knowledge of Company, threatened against or affecting Company or any Company Subsidiary which, if determined adversely to Company, would be reasonably expected to have a Material Adverse Effect, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator, outstanding against Company or any Company Subsidiary having, or which, insofar as reasonably can be foreseen, in the future would have, a Material Adverse Effect. 4.13 Compliance with Laws and Orders. Except as set forth in the Company Disclosure Letter or as disclosed in Company Reports filed by Company with the Commission prior to the date of this Agreement, the businesses of Company and Company Subsidiaries are not being conducted in violation of any law, ordinance, regulation, judgment, order, decree, license or permit of any Governmental Entity (including, without limitation, in the case of Company Subsidiaries that are banks, all statutes, rules and regulations pertaining to the conduct of the banking business and the exercise of trust powers), except for violations which individually or in the aggregate do not, and, insofar as reasonably can be foreseen, in the future will not, have a Material Adverse Effect. Except as set forth in the Company Disclosure Letter, no investigation or review by any Governmental Entity with respect to Company or any Company Subsidiary is pending or, to the knowledge of Company threatened, nor has any Governmental Entity indicated an intention to conduct the same in each case other than those the outcome of which will not have a Material Adverse Effect. 4.14 Agreements with Bank Regulators, Etc. Neither Company nor any Company Subsidiary is a party to any written agreement or memorandum of understanding with, or a party to any commitment letter, board resolution or similar undertaking to, or is subject to any order or directive by, or is a recipient of any extraordinary supervisory letter from, any Governmental Entity which restricts materially the conduct of its business, or in any manner relates to its capital adequacy, its credit or reserve policies or its management, except for those the existence of which has been disclosed in the Company Disclosure Letter, nor has Company been advised by any Governmental Entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum of understanding, extraordinary supervisory letter, commitment letter or similar submission, except as set forth in the Company Disclosure Letter. Neither Company nor any Company Subsidiary is required by Section 32 of the Federal Deposit Insurance Act to give prior notice to a Federal banking agency of the proposed addition of an individual to its board of directors or the employment of an individual as a senior or executive officer. Company knows of no reason why the regulatory approvals referred to in Subsections 4.6(c) should not be obtained. 4.15 Tax Treatment. As of the date hereof, Company is aware of no reason why the Merger will fail to qualify as a reorganization under Section 368(a) of the Code. 17 22 4.16 Fees. Except for fees paid and payable to Keefe, Bruyette & Woods, Inc., neither Company nor any Company Subsidiary has paid or will become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated by this Agreement. 4.17 Company Action. The Board of Directors of Company (at a meeting duly called, constituted and held) has by the requisite vote of all directors present (a) determined that the Merger is advisable and in the best interests of Company and its shareholders, (b) approved this Agreement and the transactions contemplated hereby, including the Merger, and (c) has directed that the Merger be submitted for consideration by the Company's shareholders at the Company Meeting. The Company has taken all steps necessary to exempt (i) the execution of this Agreement and the Stock Option, (ii) the Merger and (iii) the transactions contemplated hereby and thereby from any statute of the State of Indiana that purports to limit or restrict business combinations or the ability to acquire or to vote shares, and any applicable provision of the Company's Articles of Incorporation or By-Laws containing change of control or anti-takeover provisions. 4.18 Vote Required. The affirmative votes of a majority of the outstanding shares of Company Common Stock entitled to vote thereon are the only votes of the holders of any class or series of Company capital stock necessary to approve this Agreement and the transactions contemplated by the Agreement. 4.19 Material Interests of Certain Persons. Except as disclosed in Company's Proxy Statement for its 1997 Annual Meeting of Shareholders or as set forth in the Company Disclosure Letter, no officer or director of Company, or any "associate" (as such term is defined in Rule 14a-1 under the 1934 Act) of any such officer or director, has any material interest in any material contracts or property (real or personal), tangible or intangible, used in or pertaining to the business of Company or any Company Subsidiaries. 4.20 Environmental Matters. (i) To the best of Company's knowledge, neither Company nor any of its subsidiaries is in violation of or has any liability, absolute or contingent, in connection with or under any Environmental Law, except any such violations or liabilities which would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect; (ii) to the best of Company's knowledge, none of the Loan Portfolio Properties, Trust Properties and Other Properties of Company or its subsidiaries is in violation of or has any liability, absolute or contingent, under any Environmental Law, except any such violations or liabilities which, individually or in the aggregate would not have a Material Adverse Effect; and (iii) to the best of Company's knowledge, there are no actions, suits, demands, notices, claims, investigations or proceedings pending or threatened relating to any Loan Portfolio Properties, Trust Properties and Other Properties including, without limitation any notices, demand letters or requests for information from any federal or state environmental agency relating to any such liability under or violation of Environmental Law, which would impose a liability upon Company or its subsidiaries pursuant to any Environmental Law, except such as would not, individually or in the aggregate have a Material Adverse Effect. V. COVENANTS 5.1 Acquisition Proposals. Each of Company and Company Subsidiaries shall not, directly or indirectly, and shall instruct and otherwise use its best efforts to cause their respective officers, directors, employees, agents or advisors or other representatives or consultants not to, directly or indirectly, (i) solicit or initiate any proposals or offers from any person relating to any acquisition or purchase of all or a material amount of the assets of, or any securities of, or any merger, consolidation or business combination with, Company or any of Company Subsidiaries (such transactions are referred to herein as "Acquisition Transactions") or (ii) except to the extent that the Board of Directors of Company is required, in a written opinion of counsel to the Board of Directors of Company, in the exercise of its fiduciary duties in accordance with applicable law, to participate in any discussions or negotiation regarding, or furnish to any other person any information with respect to, an Acquisition Transaction; provided, however, that nothing contained in this Section 5.1 shall restrict or prohibit any disclosure by Company that is required in any document to be filed with the Commission after the date of this 18 23 Agreement or any disclosure that, in the written opinion of counsel to the Board of Directors of the Company, is otherwise required under applicable law. Company will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. Company will notify National City immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with Company. 5.2 Interim Operations of Company. During the period from the date of this Agreement to the Effective Time, except as specifically contemplated by this Agreement, set forth in the Company Disclosure Letter or as otherwise approved expressly in writing by National City (which approval will not be unreasonably withheld or delayed): (a) CONDUCT OF BUSINESS. Company shall, and shall cause each of Company Subsidiaries to, conduct their respective businesses only in, and not take any action except in, the ordinary course of business consistent with past practice. Company shall use reasonable efforts to preserve intact the business organization of Company and each of Company Subsidiaries, to keep available the services of its and their present key officers and employees and to preserve the goodwill of those having business relationships with Company or Company Subsidiaries. Other than in the ordinary course of business consistent with past practice, Company shall not (i) incur any indebtedness for borrowed money (it being understood and agreed that incurrence of indebtedness in the ordinary course of business shall include, without limitation, the creation of deposit liabilities, purchases of federal funds, borrowings pursuant to existing lines of credit, sales of certificates of deposit and entering into repurchase agreements), (ii) assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, or (iii) make any loan or advance other than in the ordinary course of business consistent with past practice; (b) ARTICLES AND BY-LAWS. Company shall not and shall not permit any Company Subsidiary to make any change or amendment to their respective Articles of Incorporation or By-laws (or comparable governing instruments) in a manner that would materially and adversely effect either party's ability to consummate the Merger or the economic benefits of the Merger to either party. (c) CAPITAL STOCK. Company shall not, and shall not permit any Company Subsidiary to, issue or sell any shares of capital stock or any other securities of any of them (other than pursuant to outstanding exercisable stock options granted pursuant to the Company Option Plans or conversion of any shares of Company Series 1 Stock) or issue any securities convertible into or exchangeable for, or options, warrants to purchase, scrip, rights to subscribe for, calls or commitments of any character whatsoever relating to, or enter into any contract, understanding or arrangement with respect to the issuance of, any shares of capital stock or any other securities of any of them (other than pursuant to the Company Option Plans or the Company's dividend reinvestment plan) or enter into any arrangement or contract with respect to the purchase or voting of shares of their capital stock, or adjust, split, combine or reclassify any of their capital stock or other securities or make any other changes in their capital structures. Neither Company nor any Company Subsidiaries shall grant any additional stock options. (d) DIVIDENDS. Company shall not and shall not permit any Company Subsidiary to, declare, set aside, pay or make any dividend or other distribution or payment (whether in cash, stock or property) with respect to, or purchase or redeem, any shares of the capital stock of any of them other than (a) regular quarterly cash dividends in an amount not to exceed $.20 per share of Company Common Stock payable on the regular historical payment dates (b) regular dividends on Company Series 1 Stock payable consistent with past practice and (c) dividends paid by any Company Subsidiary to Company or another Company Subsidiary with respect to its capital stock between the date hereof and the Effective Time. It is agreed by 19 24 the parties hereto that they will cooperate to assure that, during any quarter, there shall not be a duplication of nor omission of payment of dividends to shareholders of Company. (e) EMPLOYEE PLANS, COMPENSATION, ETC. Except as otherwise provided in this Agreement, Company shall not, and shall not permit any Company Subsidiary to, adopt or amend (except as required by law or other contractual obligations existing on the date hereof) any bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit agreements, trusts, plans, funds or other arrangements for the benefit or welfare of any director, officer or employee, or (except for normal merit increases in the ordinary course of business consistent with past practice) increase the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any existing plan, agreement or arrangement (including, without limitation, the granting of stock options or stock appreciation rights) or take any action or grant any benefit not required under the terms of any existing agreements, trusts, plans, funds or other such arrangements or enter into any contract, agreement, commitment or arrangement to do any of the foregoing. (f) CERTAIN POLICIES. Company will modify and change its loan, litigation, real estate valuation asset, liquidity and investment portfolio policies and practices (including loan classifications and level of reserves) prior to the Effective Time so as to be consistent on a mutually satisfactory basis with those of National City and generally accepted accounting principles, at the earlier of (i) such time as National City acknowledges that all conditions to its obligations to consummate the Merger set forth in Sections 7.1 and 7.3 have been waived or satisfied or (ii) immediately prior to the Effective Time. Company's representations, warranties or covenants contained in this Agreement shall not be deemed to be untrue or breached in any respect for any purpose as a consequence of any such modifications or changes. 5.3 Interim Operations of National City. During the period from the date of this Agreement to the Effective Time, without the prior written consent of Company, National City will not declare or pay any extraordinary or special dividend on the National City Common Stock or take any action that would (a) materially delay or adversely affect the ability of National City to obtain any approvals of Governmental Authorities required to permit consummation of the Merger or (b) materially adversely affect its ability to perform its obligations under this Agreement or to consummate the transaction contemplated hereby. 5.4 Employee Matters. (a) BENEFIT AGREEMENTS. Surviving Corporation and National City shall honor, maintain and perform on and after the Effective Time, without deduction, counterclaims, interruptions or deferment (other than withholding under applicable law), all vested benefits of any person under the Company Employee Plans. (b) RETIREMENT AND BENEFIT PLANS. For purposes of all employee benefit plans, programs or arrangements maintained or contributed to by National City or Surviving Corporation, National City shall credit or shall cause Surviving Corporation to credit employees of Company and Company Subsidiaries who become employees of National City or Surviving Corporation as a result of the Merger ("Company Employees") with all service with Company or any Company Subsidiaries for purposes of eligibility and vesting as if such service, and compensation from, had been performed for National City, and, for purposes of benefit accruals under any severance sick leave and other similar employee benefit plans (but not under any qualified retirement plan maintained by National City), provided, however, that this provision shall not change the treatment under the National City Non-Contributory Retirement Plan and Trust of service with National City or any of National City's subsidiaries prior to the Closing Date. From and after the Effective Time, National City shall, or shall cause Surviving Corporation to, cause any and all pre-existing condition limitations under any health plans to be waived with respect to Company Employees and their eligible dependents to the extent that such conditions were covered by Company's health plans. To the extent that any Company Employees and their eligible dependents have, before the Effective Time, satisfied in whole or in part any annual deductible or paid any out of pocket or co-payment expenses under the applicable plan 20 25 of the Company, such individual shall be credited therefor under the corresponding plan of National City or Surviving Corporation in which such individual participates after the Effective Time. (c) TRANSITION. Upon and after the Merger, Company Employees shall have benefits that in the aggregate are comparable to the benefits enjoyed generally by National City employees working in similar business lines. (d) GENERAL. Notwithstanding anything to the contrary contained in this Agreement, Company and National City shall take all actions necessary to enact the items set forth on Schedule 5.4 of the Company Disclosure Letter, and Schedule 5.4 of the Company Disclosure Letter shall be deemed incorporated into this Section 5.4(d) 5.5 Access and Information. Upon reasonable notice, each of the parties shall (and shall cause each of the parties' subsidiaries to) afford to the other parties and their representatives (including, without limitation, directors, officers and employees of the parties and their affiliates, and counsel, accountants and other professionals retained) such access during normal business hours throughout the period prior to the Effective Time to the books, records (including, without limitation, tax returns and work papers of independent auditors), properties, personnel and to such other information as any party may reasonably request; provided, however, that no party shall be required to provide access to any such information if the providing of such access (i) would be reasonably likely, in the written opinion of counsel, to result in the loss or impairment of any privilege generally recognized under law with respect to such information or (ii) would be precluded by any law, ordinance, regulation, judgment, order, decree, license or permit of any Governmental Entity. All information furnished by one party to any of the others in connection with this Agreement or the transactions contemplated hereby shall be kept confidential by such other party (and shall be used by it only in connection with this Agreement and the transactions contemplated hereby) except to the extent that such information (i) already is known to such other party when received from a source not known by the receiving party to be under an obligation of confidentiality, (ii) thereafter becomes lawfully obtainable from other sources or (iii) is required to be disclosed in any non-confidential document filed with the Commission, the FRB, the Department of Justice or any other agency or any government. In the event that the transactions contemplated by this Agreement shall fail to consummate, each party shall promptly cause all copies of documents or extracts thereof containing information and data as to another party hereto to be returned to the party which furnished the same or destroyed. 5.6 Certain Filings, Consents and Arrangements. National City and Company shall (a) as soon as practicable make any required filings and applications required to be filed with Governmental Authorities between the date of this Agreement and the Effective Time, (b) cooperate with one another (i) in promptly determining whether any other filings are required to be made or consents, approvals, permits or authorizations are required to be obtained under any other relevant federal, state or foreign law or regulation and (ii) in promptly making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such consents, approvals, permits or authorizations and (c) deliver to the other parties to this Agreement copies of the publicly available portions of all such reports promptly after they are filed. 5.7 State Takeover Statutes. Company shall take all reasonable steps to (i) exempt Company and the Merger from the requirements of any state takeover law by action of the Company's Board of Directors or otherwise and (ii), upon the request of National City, assist in any challenge by National City to the applicability to the Merger of any state takeover law. 5.8 Indemnification and Insurance. (a) INDEMNIFICATION. From and after the Effective Time, National City will assume and honor any obligation as provided for and permitted by applicable federal and state law Company had immediately prior to the Effective Time with respect to the indemnification of each person who is now, or has been at any time 21 26 prior to the date hereof or who becomes prior to the Effective Time, a director or officer of Company or any Company Subsidiary or was serving at the request of Company as a director, officer of any domestic or foreign corporation joint venture, trust, employee benefit plan or other enterprise (collectively, the "Indemnitees") arising out of Company's Articles of Incorporation or By-laws or any indemnification (to the maximum extent available thereunder and permitted by applicable law or regulation) against any and all losses in connection with or arising out of any claim which is based upon, arises out of or in any way relates to any actual or alleged act or omission occurring at or prior to the Effective Time, including any actions taken to approve and implement this Agreement and the transactions contemplated hereby, in the Indemnitee's capacity as a director or officer (whether elected or appointed), of Company or any Company Subsidiary. This Section 5.8 will be construed as an agreement, as to which the Indemnities are intended to be third-party beneficiaries. (b) INSURANCE. For a period of four years after the Effective Time, National City shall use all reasonable efforts to maintain in effect current directors' and officers' liability insurance in an aggregate limit at least equal to the aggregate limit of Company's insurance that is in place on the date of this Agreement, which will insure Company's directors and officers for events which occurred prior to the Effective Time but were undiscovered at the Effective Time provided, however, that in no event shall National City be obligated to expend, in order to maintain or provide insurance coverage pursuant to this Subsection 5.8(b), any amount per annum in excess of 100% of the amount of the annual premium paid as of the date hereof by National City for its current director's and officers' liability insurance. 5.9 Additional Agreements. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its reasonable efforts to take promptly, or cause to be taken promptly, all actions and to do promptly, or cause to be done promptly, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, including using its best efforts to obtain all necessary actions or non-actions, extensions, waivers, consents and approvals from all applicable Governmental Entities, effecting all necessary registrations, applications and filings (including, without limitation, filings under any applicable state securities laws) and obtaining any required contractual consents and regulatory approvals. 5.10 Publicity. The initial press release announcing this Agreement shall be a joint press release and thereafter Company and National City shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and in making any filings with any Governmental Entity or with any national securities exchange with respect thereto. 5.11 Registration Statement. National City shall prepare and file the Registration Statement with the Commission as soon as is reasonably practicable following receipt of final comments from the Staff of the Commission on the Proxy Statement (or advice that such Staff will not review such filing) and shall use all reasonable efforts to have the Registration Statement declared effective by the Commission as promptly as practicable and to maintain the effectiveness of such Registration Statement. National City shall also take any action required to be taken under state blue sky or securities laws in connection with the issuance of the National City Common Stock and National City Preferred Stock pursuant to the Merger, and Company shall furnish National City all information concerning Company and the holders of its capital stock and shall take any action as National City may reasonably request in connection with any such action. 5.12 Stock Exchange Listings. National City shall use its best efforts to list on the New York Stock Exchange, upon official notice of issuance, the National City Common Stock to be issued pursuant to the Merger. 5.13 Proxy. As soon as practicable after the date hereof, Company and National City shall prepare the Proxy Statement, file it with the Commission, respond to comments of the Staff of the Commission, clear the Proxy Statement with the Staff of the Commission and promptly thereafter mail the Proxy Statement to all holders 22 27 of shares of Company Common Stock. National City and Company shall cooperate with each other in the preparation of the Proxy Statement. 5.14 Shareholders' Meeting. Company shall take all action necessary, in accordance with applicable law and its Articles of Incorporation and By-laws, to convene a special meeting of the holders of Company Common Stock (the "Company Meeting") as promptly as practicable for the purpose of considering and taking action upon this Agreement. Unless the Board of Directors of Company shall have received the written advice of counsel, reasonably acceptable to National City, to the effect that making such a recommendation would cause the Board of Directors of Company to violate its fiduciary duty under applicable law and provided that such advice is not predicated solely upon the price of National City Common Stock, the Board of Directors of Company shall recommend that the holders of the Company Common Stock vote in favor of and approve the Merger and adopt this Agreement at the Company Meeting. 5.15 Tax-Free Reorganization Treatment. Neither National City nor Company shall intentionally take or cause to be taken any action, whether before or after the Effective Time, which would disqualify the Merger as a "reorganization" within the meaning of Section 368 of the Code. 5.16 Provision of Shares. National City shall issue and provide the shares of National City Common Stock and National City Preferred Stock deliverable upon the conversion of the Company Common Stock and Series 1 Stock, respectively, pursuant to this Agreement, and will provide the cash to be paid in lieu of fractional shares of National City Common Stock as provided in Subsection 2.3(f). The shares of National City Common Stock and National City Preferred Stock to be issued and exchanged for shares of Company Common Stock pursuant to this Agreement will, at the Effective Time, be duly authorized, validly issued, fully paid and nonassessable and subject to no preemptive rights. 5.17 Adverse Action. From the date hereof until the Effective Time, except as expressly contemplated by the Agreement neither party will, without the written consent of the other party (which consent will not be unreasonably withheld or delayed) knowingly take any action that would, or would be reasonably likely to result in (a) any of its representations and warranties set forth in the Agreement being or becoming untrue in any material respect, (b) any of the conditions to the Merger set forth in Article VII not being satisfied or (c) a material violation of any provision of the Agreement except, in each case, as may be required by applicable law. VI. CLOSING MATTERS 6.1 The Closing. Subject to satisfaction or waiver of all conditions precedent set forth in Article VII of this Agreement, the closing ("Closing") shall occur at such location mutually agreeable to the parties and on a date ("Closing Date") which is on (1) the third business day after the later of: (a) the first date on which the Merger may be consummated in accordance with the approvals of any Governmental Entities or (b) the date the required approvals of Company's shareholders have been obtained or (2) such other date to which the parties agree in writing. If all conditions are determined to be satisfied in all material respects (or are duly waived) at the Closing, the Closing shall be consummated by the making of all necessary filings required by all Governmental Entities. 6.2 Documents and Certificates. National City and Company shall use their respective best efforts, on or prior to Closing, to execute and deliver all such instruments, documents or certificates as may be necessary or advisable, on the advice of counsel, for the consummation at the Closing of the transactions contemplated by this Agreement to occur as soon as practicable. 23 28 VII. CONDITIONS 7.1 Conditions to Each Party's Obligations to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following conditions: (a) The Merger shall have been approved and adopted by the requisite vote of the holders of Company Common Stock. (b) The National City Common Stock issuable in the Merger shall have been authorized for listing on the New York Stock Exchange, upon official notice of issuance. (c) All authorizations, consents, orders or approvals of, and all expirations of waiting periods imposed by, any Governmental Entity (collectively, "Consents") which are necessary for the consummation of the Merger, (other than immaterial Consents, the failure to obtain which would not have a Material Adverse Effect) shall have been obtained or shall have occurred and shall be in full force and effect at the Effective Time, provided, however, that no such authorization, consent, order or approval shall be deemed to have been received if it shall include any material conditions or requirements which would so adversely impact the economic or business benefits of the transactions contemplated by this Agreement so as to render inadvisable in the reasonable opinion of the Board of Directors of National City the consummation of the Merger. (d) The Registration Statement shall have become effective in accordance with the provisions of the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission and remain in effect. (e) No temporary restraining order, preliminary or permanent injunction or other order by any federal or state court in the United States which prevents the consummation of the Merger shall have been issued and remain in effect. (f) Wachtell, Lipton, Rosen & Katz counsel to Company, shall have delivered to Company and National City their opinion, dated the day of the Effective Time, substantially to the effect that, on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing at the Effective Time, the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code and that, accordingly: (i) no gain or loss will be recognized by National City or Company as a result of the Merger; (ii) no gain or loss will be recognized by the shareholders of Company who exchange their shares of the Company Common Stock or Company Series 1 Stock solely for shares of National City Common Stock or National City Preferred Stock, respectively pursuant to the Merger (except with respect to cash received in lieu of a fractional share interest in National City Common Stock); (iii) the aggregate tax basis of the shares of National City Common Stock and National City Preferred Stock received by shareholders who exchange all of their shares of Company Common Stock and Company Series 1 Stock solely for shares of National City Common Stock and National City Preferred Stock in the Merger will be the same as the aggregate tax basis of the shares of Company Common Stock and Company Series 1 Stock surrendered in exchange therefor (reduced by any amount allocable to a fractional share interest for which cash is received); and (iv) the holding period of the shares of National City Common Stock or National City Preferred Stock received in the Merger will include the period during which the shares of Company Common Stock or Company Series 1 Stock, respectively surrendered in exchange therefor were held, provided such shares of Company Common Stock or Company Series 1 Stock were held as capital assets at the Effective Time. In rendering such opinion, counsel may require and rely upon representations contained in certificates of officers of Company, National City, and others. 24 29 7.2 Conditions to Obligation of Company to Effect the Merger. The obligation of Company to effect the Merger shall be subject to the fulfillment or waiver at or prior to the Effective Time of the additional following conditions: (a) National City shall have performed in all material respects its covenants contained in this Agreement required to be performed at or prior to the Effective Time. (b) The representations and warranties of National City contained in this Agreement shall be true and correct when made and the representations and warranties set forth in Article 3 shall be true and correct as of the Effective Time as if made at and as of such time, except as expressly contemplated or permitted by this Agreement, except for representations and warranties relating to a time or times other than the Effective Time which were or will be true and correct at such time or times and except where the failure or failures of such representations and warranties to be so true and correct, individually or in the aggregate, does not result or would not result in a Material Adverse Effect. (c) National City shall have furnished Company a Certificate dated the date of the Closing, signed by the Chief Executive Officer and Chief Financial Officer of National City that, to the best of their knowledge and belief after due inquiry, the conditions set forth in Subsections 7.2(a) and 7.2(b) have been satisfied. 7.3 Conditions to Obligation of National City to Effect the Merger. The obligation of National City to effect the Merger shall be subject to the fulfillment or waiver at or prior to the Effective Time of the additional following conditions: (a) Company shall have performed in all material respects its covenants contained in this Agreement required to be performed at or prior to the Effective Time. (b) The representations and warranties of Company contained in this Agreement shall be true and correct when made and the representations and warranties set forth in Article 4 shall be true and correct as of the Effective Time as if made on and as of such time, except as expressly contemplated or permitted by this Agreement, except for representations and warranties relating to a time or times other than the Effective Time which were or will be true and correct at such time or times and except where the failure or failures of such representations and warranties to be so true and correct, individually or in the aggregate, does not result or would not result in a Material Adverse Effect. (c) Company shall have furnished National City a Certificate dated the date of the Closing signed by the Chief Executive Officer and Chief Financial Officer of Company that, to the best of their knowledge and belief after due inquiry, the conditions set forth in subsections 7.3(a) and 7.3(b) have been satisfied. VIII. MISCELLANEOUS 8.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval by the shareholders of Company: (a) by mutual consent of the Board of Directors of National City and the Board of Directors of Company; (b) by either National City or Company if the Merger shall not have been consummated on or before June 30, 1998 or if this Agreement was not approved at the Company Meeting (provided the terminating party is not otherwise in material breach of its obligations under this Agreement); (c) by Company if any of the conditions specified in Sections 7.1 and 7.2 have not been met or waived by Company at such time as such condition can no longer be satisfied; (d) by National City if any of the conditions specified in Sections 7.1 and 7.3 have not been met or waived by National City at such time as such condition can no longer be satisfied; 25 30 (e) by Company, during the 15-day period commencing on the Fed Approval Date, if both of the following conditions are satisfied: (i) the average of the daily closing prices on the New York Stock Exchange of a share of National City Common Stock for the 20 consecutive trading days ending at the end of the third trading day immediately preceding the Fed Approval is less than $47.40; and (ii) the number obtained by dividing the average of the daily closing prices on the New York Stock Exchange of a share of National City Common Stock for the 20 consecutive trading days ending at the end of the third trading day immediately preceding the Fed Approval Date by the closing price of National City Common Stock on the trading day immediately preceding the public announcement of this Agreement is less than the number obtained by dividing the Final Index Price (as defined below) by the Initial Index Price (as defined below) and subtracting .20 from the quotient. For purposes of this Subsection 8.1(e): The "Index Group" shall mean all those companies listed in the National City Disclosure Letter the common stock of which is publicly traded and as to which there has not been a publicly announced proposal at any time for such company to be acquired. In the event that any such company or companies are so removed from the Index Group, the weights attributed to the remaining companies shall be adjusted proportionately for purposes of determining both the Initial Index Price and the Final Index Price; The "Initial Index Price" shall mean the weighted average (weighted in accordance with the factors listed in the National City Disclosure Letter) of the closing prices on the trading day immediately preceding the public announcement of this Agreement of the common stock of the companies comprising the Index Group; The "Final Price" of any company belonging to the Index Group shall mean the average of the daily closing sale prices of a share of the common stock of such company, as reported in the consolidated transaction reporting system for the market or exchange on which such common stock is principally traded, during the period of 20 consecutive trading days ending at the end of the third trading day immediately preceding the Fed Approval Date; and The "Final Index Price" shall mean the weighted average (weighted in accordance with the factors listed in the National City Disclosure Letter) of the Final Prices for all of the companies comprising the Index Group. If National City or any company belonging to the Index Group declares a stock dividend or effects a reclassification, recapitalization, split-up, combination, exchange or shares or similar transaction between the date of this Agreement and the Fed Approval Date, the closing prices for the common stock of such company shall be appropriately adjusted for the purposes of the definitions above so as to be comparable to the price on the date of this Agreement. 8.2 Non-Survival of Representations, Warranties and Agreements. The representations and warranties or covenants in this Agreement will terminate at the Effective Time or the earlier termination of this Agreement pursuant to Section 8.1, as the case may be; provided, however, that if the Merger is consummated, Sections 1.6, 2.1 through 2.4, 5.4, 5.5, 5.8, 5.16, 5.17 and 8.2 hereof will survive the Effective Time to the extent contemplated by such Sections; provided, further, that the last sentence of Section 5.5 and all of Section 8.10 hereof will in all events survive any termination of this Agreement. 8.3 Waiver and Amendment. Subject to applicable provisions of the DGCL and IC, any provision of this Agreement may be waived at any time by the party which is, or whose stockholders or shareholders are, entitled to the benefits thereof, and this Agreement may be amended or supplemented at any time, provided that no 26 31 amendment will be made after any stockholder or shareholder approval of the Merger which reduces or changes the form of the Merger Consideration without further stockholder or shareholder approval. No such waiver, amendment or supplement will be effective unless in a writing which makes express reference to this Section 8.3 and is signed by the party or parties sought to be bound thereby. 8.4 Entire Agreement. This Agreement together with the Option Agreement and the Confidentiality Agreement by and between National City and the Company dated December 30, 1997 contain the entire agreement among National City and Company with respect to the Merger and the other transactions contemplated hereby and thereby, and supersedes all prior agreements among the parties with respect to such matters. 8.5 Applicable Law; Consent to Jurisdiction. This Agreement will be governed by and construed in accordance with the laws of the State of Indiana except to the extent laws of the state of Delaware govern the Merger. National City and Company consent to personal jurisdiction in any action brought in any federal or state court within the State of Indiana having subject matter jurisdiction in the matter for purposes of any action arising out of this Agreement. 8.6 Certain Definitions; Headlines. (a) For purposes of this Agreement, the term: (i) "affiliate", "associate" and "significant subsidiary" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date hereof. (ii) "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise; (iii) "Fed Approval Date" means the day the FRB issues an order approving consummation of the Merger. (iv) "Market Price" means the average of the per share closing prices on the New York Stock Exchange of National City Common Stock for the 20 consecutive trading days ending at the end of the third trading day immediately preceding the Effective Time. (v) "Material Adverse Effect" means an event, change or occurrence which has a material negative impact on the financial condition, businesses or results of operations of Company and its subsidiaries, taken as a whole, or National City and its subsidiaries, taken as a whole, as the case may be, or the ability of Company or National City, as the case may be, to consummate the transactions contemplated hereby. The effect of any action taken by Company solely pursuant to Subsection 5.2(f) shall not be taken into consideration in determining whether any Material Adverse Effect has occurred. (vi) "person" means an individual, corporation, partnership, association, trust or unincorporated organization; and (vii) "subsidiary" of Company, National City or any other person means, except where the context otherwise requires, any corporation, partnership, trust or similar association of which Company, National City or any other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, more than 50% of the stock or other equity interests, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation. (b) The descriptive headings contained in this Agreement are for convenience and reference only and will not affect in any way the meaning or interpretation of this Agreement. 27 32 (c) Unless the context of this Agreement expressly indicates otherwise, (i) any singular term in this Agreement will include the plural and any plural term will include the singular and (ii) the term section or schedule will mean a section or schedule of or to this Agreement. 8.7 Notices. All notices, consents, requests, demands and other communications hereunder will be in writing and will be deemed to have been duly given or delivered if delivered personally, telexed with receipt acknowledged, mailed by registered or certified mail return receipt requested, sent by facsimile with confirmation of receipt, or delivered by a recognized commercial courier addressed as follows: If to Company to: Fort Wayne National Corporation 110 W. Berry Street Fort Wayne, Indiana 46801 attn: Chief Executive Officer Fax No. (219) 461-6238 With copies to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Edward Herlihy, Esq. Fax No. (212) 403-2000 If to National City to: National City Corporation P. O. Box 5756 Cleveland, Ohio 44101-0756 Attention: Chairman of the Board Fax No. (216) 575-3332 With a copy to: National City Corporation Law Department P. O. Box 5756 Cleveland, Ohio 44101-0756 Attention: General Counsel Fax No. (216) 575-3332 or to such other address as any party may have furnished to the other parties in writing in accordance with this Section 8.7. 8.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original but all of which together will constitute but one agreement. 8.9 Parties in Interest; Assignment. Except for Section 2.2, (which is intended to be for the benefit of the holders of Outstanding Options under the Company Option Plans to the extent contemplated thereby and their beneficiaries, and may be enforced by such persons) and Sections 5.4 and 5.8 hereof (which are intended to be for the benefit of directors, officers or employees to the extent contemplated thereby and their beneficiaries, and may be enforced by such persons), this Agreement is not intended to nor will it confer upon any other person (other than the parties hereto) any rights or remedies. Without the prior written consent of the other parties to this Agreement neither National City nor Company shall assign any rights or delegate any obligations under this Agreement. Any such purported assignment or delegation made without prior consent of the other parties hereto shall be null and void. 28 33 8.10 Expenses. Each party will bear all expenses incurred by it in connection with this Agreement and the transactions contemplated hereby, except that printing expenses and Commission filing and registration fees shall be shared equally between Company and National City. 8.11 Enforcement of the Agreement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties hereto will be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 8.12 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party hereto. Upon any such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto will negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated by this Agreement are consummated to the extent possible. IN WITNESS WHEREOF, the parties hereto have caused their duly authorized representatives to execute this Agreement as of the date first above written. FORT WAYNE NATIONAL CORPORATION By: /s/ M. James Johnston -------------------------------------- M. James Johnston Chairman of the Board and Chief Executive Officer NATIONAL CITY CORPORATION By: /s/ Vincent A. DiGirolamo -------------------------------------- Vincent A. DiGirolamo Vice Chairman 29 34 INDEX TO DEFINITIONS
DEFINITIONS SECTIONS ---------------------------------------------------------------------- ----------------- Acquisition Transaction Section 5.1 affiliate Section 8.6(i) Agreement Introduction Articles of Merger Section 1.2 Benefit Agreements Section 3.10 BHCA Section 3.1 Certificate Section 2.3(a) Closing Section 6.1 Closing Date Section 6.1 Commission Section 3.5 Company Introduction Company Common Stock Section 2.1(a) Company Contracts Section 4.10 Company Disclosure Letter Section 4.3 Company Employees Section 5.4(b) Company Employee Plans Section 4.9 Company Meeting Section 5.15(a) Company Option Plans Section 2.2 Company Reports Section 4.7 Company Subsidiaries Section 4.4 Code Introduction Consents Section 7.1(c) Constituent Corporations Section 1.2 Control Section 8.6(ii) Conversation Ratio Section 2.1(a) Certificate of Merger Section 1.2 DGCL Section 1.1 DPC Common Shares Section 2.1(a) Effective Time Section 1.2 Environmental Law Section 3.21 ERISA Section 3.9 Exchange Act Section 3.5 Exchange Agent Section 2.3(a) FDIA Section 3.14 Fed Approval Date Section 8.6(iii) Final Index Price Section 8.1(c) Final Price Section 8.1(e) FRB Section 3.6 Governmental Entity Section 3.6
i 35
DEFINITIONS SECTIONS ---------------------------------------------------------------------- ----------------- Hazardous Substance Section 3.21 HSR Act Section 3.6 IC Section 1.1 Indemnitees Section 5.8 Index Group Section 8.1(e) Initial Indies Price Section 8.1(e) IRS Section 3.9 Loan Portfolio Properties and Other Properties Owned Section 3.21 Market Price Section 2.3(g) Material Adverse Effect Section 3.1 Merger Section 1.1 Common Merger Consideration Section 2.1(a) National City Introduction National City Common Stock Section 2.1(a) National City Contracts Section 3.10 National City Disclosure Letter Section 1.4 National City Employee Plans Section 3.9 National City Meeting Section 5.15(b) National City Preferred Stock Section 3.3 National City Reports Section 3.7 Option Agreement Introduction OTS Section 3.6 PBGC Section 3.9 PCBs Section 3.21 Person Section 8.6(vi) Plan of Merger Section 1.2 Proxy Statement Section 3.5 Registration Statement Section 3.5 SBIA Section 3.6 Securities Act Section 3.5 Significant Subsidiaries Section 3.4 State Entities Section 3.6 Subsidiary Section 8.6(i) Surviving Corporation Section 1.3 Trust Account Common Shares Section 2.1(a) Unexercised Options Section 2.2
ii EX-3.1 3 EXHIBIT 3.1 1 EXHIBIT 3.1 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION ------------------------ National City Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST, that a meeting of the Directors of the Corporation was duly called and held on February 24, 1997, at which meeting of Directors a quorum was present and at such meeting the Directors, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, adopted resolutions setting forth a proposed Amendment to the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation, declaring its advisability, and directing that such proposed Amendment be considered at the annual meeting of stockholders to be held on April 14, 1997. SECOND, that a meeting of the stockholders of the Corporation was duly called and held on April 14, 1997, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting of stockholders a quorum was present, and at such meeting the stockholders, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, duly adopted an Amendment to the first paragraph of the Article Fourth of the Restated Certificate of Incorporation, so that the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation reads in its entirely as follows: "FOURTH: The Corporation is authorized to issue a total of seven hundred five million (705,000,000) shares of all classes of stock. Of such total number of authorized shares of stock, seven hundred million (700,000,000) shares are Common Stock, par value $4.00 per share, and five million (5,000,000) shares are Preferred Stock without par value." IN WITNESS WHEREOF, David A, Daberko, Chairman and Chief Executive Officer of the Corporation, acting for and on its behalf, have hereunto subscribed his name on November 4, 1997. National City Corporation By: /s/ DAVID A. DABERKO ----------------------------------- David A. Daberko, Chairman and Chief Executive Officer STATE OF OHIO ) SS COUNTY OF CUYAHOGA ) BEFORE ME, a Notary Public in and for said County and State, personally appeared David A. Daberko, in his capacity as Chairman and Chief Executive Officer of the above-named corporation, National City Corporation, who acknowledged that he did sign the foregoing for and on behalf of that corporation, by authority of its board of directors, that the same is the act and deed of that corporation and is the act and deed of himself personally and as such officer, and that the facts stated therein are true. IN TESTIMONY WHEREOF, I set my hand and official seal, this 4th day of November, 1997. /s/ DAVID PAUL LEWIS ----------------------------------- Notary Public David Paul Lewis, Atty. At Law NOTARY PUBLIC -- STATE OF OHIO My Commission Has No Expiration Date SEC. 147.03 R.C. 2 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION ------------------------ NATIONAL CITY CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST, that a meeting of the Directors of the Corporation was duly called and held on February 22, 1993, at which meeting of Directors a quorum was present, and at such meeting the Directors, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, adopted resolutions setting forth a proposed Amendment to the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation, declaring its advisability, and directing that such proposed Amendment be considered at the annual meeting of stockholders to be held on April 26, 1993. SECOND, that thereafter a meeting of the stockholders of the Corporation was duly called and held on April 26, 1993, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting of stockholders a quorum was present, and at such meeting the stockholders, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, duly adopted an Amendment to the first paragraph of Article Fourth of the Restated Certificate of Incorporation, so that the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation reads in its entirety as follows: "FOURTH. The Corporation is authorized to issue a total of three hundred fifty-five million (355,000,000) shares of all classes of stock. Of such total number of authorized shares of stock, three hundred fifty million (350,000,000) shares are Common Stock, par value $4.00 per share, and five million (5,000,000) shares are Preferred Stock without par value." IN WITNESS WHEREOF, William R. Robertson, Deputy Chairman of the Corporation, and David L. Zoeller, Secretary of the Corporation, acting for and on its behalf, have hereunto subscribed their names and caused the seal of the Corporation to be affixed hereto on May 10, 1993. NATIONAL CITY CORPORATION By: /s/ WILLIAM R. ROBERTSON --------------------------------- William R. Robertson Deputy Chairman [Seal] Attest: /s/ DAVID L. ZOELLER ------------------------------- David L. Zoeller Secretary 3 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION ------------------------ NATIONAL CITY CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That a meeting of the Directors of the Corporation was duly called and held on February 23, 1987, at which meeting of Directors a quorum was present, and at such meeting the Directors, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, adopted resolutions setting forth a proposed Amendment to the first paragraph of Article Fourth, and the addition of a new Article Seventh, of the Restated Certificate of Incorporation of the Corporation dated March 12, 1973, declaring the advisability of such proposed Amendments, and directing that such proposed Amendments be considered at the annual meeting of stockholders to be held on April 27, 1987. SECOND: That thereafter a meeting of the stockholders of the Corporation was duly called and held on April 27, 1987, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting of stockholders a quorum was present, and at such meeting the stockholders, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, duly adopted an Amendment to the first paragraph of Article Fourth of the Restated Certificate of Incorporation dated March 12, 1973, so that the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation dated March 12, 1973 reads in its entirety as follows: "FOURTH. The Corporation is authorized to issue a total of one hundred fifty-five million (155,000,000) shares of all classes of stock. Of such total number of authorized shares of stock, one hundred fifty million (150,000,000) shares are Common Stock, par value $4.00 per share, and five million (5,000,000) shares are Preferred Stock without par value." THIRD: That at the same meeting the stockholders, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, duly adopted a new Article Seventh to the Restated Certificate of Incorporation of the Corporation dated March 12, 1973, which new Article reads in its entirety as follows: "SEVENTH: No director or former director of this Corporation shall be personally liable to this Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the Delaware General Corporation Law, which deals with the paying of a dividend or the approving of a stock repurchase or redemption which is illegal under Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit." IN WITNESS WHEREOF, William R. Robertson, Vice Chairman of the Corporation, and Theodore W. Jones, Secretary of the Corporation, acting for and on its behalf, have hereunto subscribed their names and caused the seal of the Corporation to be affixed hereto on May 7, 1987. NATIONAL CITY CORPORATION By: /s/ WILLIAM R. ROBERTSON --------------------------------- William R. Robertson Vice Chairman [Seal] Attest: /s/ THEODORE W. JONES ------------------------------- Theodore W. Jones Secretary 4 RESTATED CERTIFICATE OF INCORPORATION OF NATIONAL CITY CORPORATION ------------------------ The present name of the Corporation is National City Corporation. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on August 17, 1972. The within Restated Certificate of Incorporation of the Corporation was duly adopted by the Board of Directors and stockholders of the Corporation in accordance with the provisions of Sections 245 and 242 of the General Corporation Law of the State of Delaware. FIRST. The name of the Corporation is National City Corporation. SECOND. The address of its registered office in the State of Delaware is No. 100 West Tenth Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. The Corporation is authorized to issue a total of fifty-five million (55,000,000) shares of all classes of stock. Of such total number of authorized shares of stock, fifty million (50,000,000) shares are Common Stock, par value $4.00 per share, and five million (5,000,000) shares are Preferred Stock without par value. Each of the shares of Common Stock, par value $8.00 per share, of the Corporation hereto authorized and now outstanding hereby is changed and converted into one share of Common Stock, par value $4.00 per share. The stated capital of the Corporation shall be the same immediately after such change and conversion as it was immediately prior thereto. A statement of the designations of the authorized classes of stock or of any series thereof, and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, or of the authority of the Board of Directors to fix by resolution or resolutions such designations and other terms, is as follows: A. Preferred Stock: Shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in this Article Fourth, to fix by resolution or resolutions the designation of each series of Preferred Stock and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including, without limiting the generality of the foregoing, such provisions as may be desired concerning voting, provided, however, that [in no event shall any holder of any series of Preferred Stock be entitled to more than one vote for each share of such Preferred Stock held by him, redemption, dividends, dissolution or the distribution of assets, conversion or exchange, and such other subjects or matters as may be fixed by resolution or resolutions or exchange, and such other subjects or matters as may be fixed by resolution or resolutions of the Board of Directors under the General Corporation Law of the State of Delaware.] B. Common Stock: Subject to all of the preferences and rights of the Preferred Stock or a series thereof that may be fixed by a resolution or resolutions of the Board of Directors, (i) dividends may be paid on the Common Stock as and when declared by the Board of Directors, out of any funds of the Corporation legally available for the payment of such dividends, and (ii) each share of Common Stock will be entitled to one vote on all matters. FIFTH. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the By-laws of the Corporation. SIXTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on stockholders, directors and officers are subject to this reserved power. IN WITNESS WHEREOF, we have hereunto set our respective hands this 7th day of May, 1984. NATIONAL CITY CORPORATION By: /s/ JULIEN L. MCCALL --------------------------------- Julien L. McCall Chairman of the Board Attest: /s/ DAVID W. HART ------------------------------- David W. Hart, Secretary 5 CERTIFICATE OF CORRECTION OF RESTATED CERTIFICATE OF INCORPORATION OF NATIONAL CITY CORPORATION ------------------------ NATIONAL CITY CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the 'Corporation'), DOES HEREBY CERTIFY, pursuant to Section 103(f) of the General Corporation Law of the State of Delaware: FIRST: That on May 21, 1984, an officer of the Corporation filed with the Secretary of State of the State of Delaware on behalf of the Corporation a Restated Certificate of Incorporation dated May 7, 1984, the purpose of which was to effect an Amendment to the Restated Certificate of Incorporation of the Corporation dated March 12, 1973, which Amendment had been duly proposed by the Directors of the Corporation and duly adopted by the stockholders of the Corporation pursuant to Section 242 of the General Corporation Law of the State of Delaware. SECOND: That the Restated Certificate of Incorporation dated May 7, 1984 and filed on May 21, 1984 is an inaccurate record of the corporate action referred to therein to the extent that it states that it was duly adopted in such form by the Board of Directors and stockholders of the Corporation in accordance with provisions of Delaware law, when in fact the Board of Directors and stockholders of the Corporation had, respectively, duly proposed and adopted an Amendment to the Restated Certificate of Incorporation dated March 12, 1973. The Board of Directors and stockholders of the Corporation did not adopt in such form nor authorize the filing of the Restated Certificate of Incorporation dated May 7, 1984. The Corporation was authorized to file a Certificate of Amendment of the Restated Certificate of Incorporation, setting forth the Amendment and certifying that it had been duly adopted. Attached hereto as Exhibit A is a Certificate of Amendment of the Restated Certificate of Incorporation dated March 12, 1973, which is the corrected form of the instrument that was filed on May 21, 1984. IN WITNESS WHEREOF, William R. Robertson, Executive Vice-President of the Corporation, and David W. Hart, Secretary of the Corporation, acting for and on its behalf, have hereunto subscribed their names and caused the seal of the Corporation to be affixed hereunto on July 17, 1984. NATIONAL CITY CORPORATION By: /s/ WILLIAM R. ROBERTSON --------------------------------- William R. Robertson Executive Vice-President Attest: /s/ DAVID W. HART ------------------------------- David W. Hart, Secretary [Seal] 6 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION ------------------------ NATIONAL CITY CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That a meeting of the Directors of the Corporation was duly called and held on February 27, 1984, at which meeting of Directors a quorum was present, and at such meeting the Directors, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, adopted resolutions setting forth a proposed Amendment to the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation dated March 12, 1973, declaring its advisability, and directing that such proposed Amendment be considered at the annual meeting of stockholders to be held on April 23, 1984. SECOND: That thereafter a meeting of the stockholders of the Corporation was duly called and held on April 23, 1984, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting of stockholders a quorum was present, and at such meeting the stockholders, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, duly adopted an Amendment to the first paragraph of Article Fourth of the Restated Certificate of Incorporation dated March 12, 1973, so that the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation dated March 12, 1973 reads in its entirety as follows: "FOURTH. The Corporation is authorized to issue a total of fifty-five million (55,000,000) shares of all classes of stock. Of such total number of authorized shares of stock, fifty million (50,000,000) shares are Common Stock, par value $4.00 per share, and five million (5,000,000) shares are Preferred Stock without par value." IN WITNESS WHEREOF, William R. Robertson, Executive Vice-President of the Corporation, and David W. Hart, Secretary of the Corporation, acting for and on its behalf, have hereunto subscribed their names and caused the seal of the Corporation to be affixed hereto on May 7, 1984. NATIONAL CITY CORPORATION By: /s/ WILLIAM R. ROBERTSON --------------------------------- William R. Robertson, Executive Vice-President Attest: /s/ DAVID W. HART ------------------------------- David W. Hart, Secretary [SEAL] 7 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION ------------------------ NATIONAL CITY CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the 'Corporation'), DOES HEREBY CERTIFY: FIRST: That a meeting of the Directors of the Corporation was duly called and held on February 23, 1987, at which meeting of Directors a quorum was present, and at such meeting the Directors, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, adopted resolutions setting forth a proposed Amendment to the first paragraph of Article Fourth, and the addition of a new Article Seventh, of the Restated Certificate of Incorporation of the Corporation dated March 12, 1973, declaring the advisability of such proposed Amendments, and directing that such proposed Amendments be considered at the annual meeting of stockholders to be held on April 27, 1987. SECOND: That thereafter a meeting of the stockholders of the Corporation was duly called and held on April 27, 1987, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting of stockholders a quorum was present, and at such meeting the stockholders, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, duly adopted an Amendment to the first paragraph of Article Fourth of the Restated Certificate of Incorporation dated March 12, 1973, so that the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation dated March 12, 1973 reads in its entirety as follows: "FOURTH. The Corporation is authorized to issue a total of one hundred fifty-five million (155,000,000) shares of all classes of stock. Of such total number of authorized shares of stock, one hundred fifty million (150,000,000) shares are Common Stock, par value $4.00 per share, and five million (5,000,000) shares are Preferred Stock without par value." THIRD: That at the same meeting the stockholders, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, duly adopted a new Article Seventh to the Restated Certificate of Incorporation of the Corporation dated March 12, 1973, which new Article reads in its entirety as follows: "SEVENTH: No director or former director of this Corporation shall be personally liable to this Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the Delaware General Corporation Law, which deals with the paying of a dividend or the approving of a stock repurchase or redemption which is illegal under Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit." IN WITNESS WHEREOF, William R. Robertson, Vice Chairman of the Corporation, and Theodore W. Jones, Secretary of the Corporation, acting for and on its behalf, have hereunto subscribed their names and caused the seal of the Corporation to be affixed hereto on May 7, 1987. NATIONAL CITY CORPORATION By: /s/ WILLIAM R. ROBERTSON --------------------------------- William R. Robertson Vice Chairman Attest: /s/ THEODORE W. JONES ------------------------------- Theodore W. Jones, Secretary 8 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION ------------------------ NATIONAL CITY CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the 'Corporation'), DOES HEREBY CERTIFY: FIRST, That a meeting of the Directors of the Corporation was duly called and held on February 22, 1993, at which meeting of Directors a quorum was present, and at such meeting the Directors, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, adopted resolutions setting forth a proposed Amendment to the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation, declaring its advisability, and directing that such proposed Amendment be considered at the annual meeting of stockholders to be held on April 26, 1993. SECOND, THAT thereafter a meeting of the stockholders of the Corporation was duly called and held on April 26, 1993, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting of stockholders a quorum was present, and at such meeting the stockholders, acting pursuant to Section 242 of the General Corporation Law of the State of Delaware, duly adopted an Amendment to the first paragraph of Article Fourth of the Restated Certificate of Incorporation, so that the first paragraph of Article Fourth of the Restated Certificate of Incorporation of the Corporation reads in its entirety as follows: 'FOURTH. The Corporation is authorized to issue a total of three hundred fifty-five million (355,000,000) shares of all classes of stock. Of such total number of authorized shares of stock, three hundred fifty million (350,000,000) shares are Common Stock, par value $4.00 per share, and five million (5,000,000) shares are Preferred Stock without par value.' IN WITNESS WHEREOF, William R. Robertson, Deputy Chairman of the Corporation, and David L. Zoeller, Secretary of the Corporation, acting for and on its behalf, have hereunto subscribed their names and caused the seal of the Corporation to be affixed hereto on May 10, 1993. NATIONAL CITY CORPORATION By: /s/ WILLIAM R. ROBERTSON --------------------------------- William R. Robertson Vice Chairman Attest: /s/ DAVID L. ZOELLER ------------------------------- David L. Zoeller, Secretary EX-21.1 4 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES The following table sets forth all of National City Corporation's direct or indirect subsidiaries, as of December 31, 1997:
STATE OR JURISDICTION % OF VOTING UNDER THE LAW OF SECURITIES OWNED WHICH ORGANIZED ---------------- --------------------- SUBSIDIARIES OF NATIONAL CITY CORPORATION: Advent Guaranty Corporation.................................. 100% Vermont Advent Life Insurance Company................................ 100% Arizona Buckeye Service Corp......................................... 100% Ohio Circle Equity Leasing Corporation of Michigan................ 100% Michigan Commercial Servicing, Inc.................................... 100% Indiana Computer Bank Services, Inc.................................. 100% Kentucky Gem America Realty and Investment Corporation................ 100% Ohio Harva, Inc. (Inactive)....................................... 100% Delaware Integra Holdings Limited (Inactive).......................... 100% Delaware Integra Investment Company (Inactive)........................ 100% Delaware The Madison Bank and Trust Company........................... 100% Indiana Merchants Capital Management, Inc............................ 100% Indiana NatCity Investments, Inc..................................... 100% Indiana National Asset Management Corporation........................ 100% Kentucky National City Bank........................................... 100% United States National City Bank of Columbus............................... 100% United States National City Bank of Dayton................................. 100% United States National City Bank of Indiana................................ 100% United States National City Bank of Kentucky............................... 100% United States National City Bank of Pennsylvania........................... 100% United States National City Bank of Southern Indiana....................... 100% United States National City Capital Corporation............................ 100% Delaware National City Commercial Leasing, Inc........................ 100% Ohio National City Community Development Corporation.............. 100% Ohio National City Credit Corporation............................. 100% Ohio National City Financial Corporation.......................... 100% Ohio National City Life Insurance Company......................... 100% Arizona National City Mortgage Co.................................... 100% Ohio National Processing, Inc..................................... 87.7% Ohio National City Trust Company.................................. 100% United States National City Venture Corporation............................ 100% Delaware NC Acquisition, Inc. (Inactive).............................. 100% Delaware Second Premises Corporation.................................. 100% Kentucky Stored Value Systems, Inc.................................... 83% Delaware UBK Realty, Inc.............................................. 100% Kentucky Western Reserve Company...................................... 100% Pennsylvania SUBSIDIARIES OF NATIONAL CITY BANK: AKREO Service Corp........................................... 100% Ohio Capstone Realty, Inc......................................... 100% Ohio National City Commercial Finance, Inc........................ 100% Ohio National City Holdings, Inc. (Inactive)...................... 100% Ohio National City Investments Corporation........................ 100% Kentucky Ohio National Corporation Trade Services..................... 100% Ohio SUBSIDIARIES OF NATIONAL CITY HOLDINGS, INC.: National City Insurance Agency of Ohio, Inc. (Inactive)...... 100% Ohio National City Life Insurance Agency of Ohio, Inc. (Inactive)................................................. 0(1) Ohio
- --------------- (1) National City Holdings, Inc. owns only 100% of non-voting securities.
2
STATE OR JURISDICTION % OF VOTING UNDER THE LAW OF SECURITIES OWNED WHICH ORGANIZED ---------------- --------------------- SUBSIDIARY OF NATIONAL CITY INVESTMENTS CORPORATION: National City Commodity Corp................................. 100% Indiana SUBSIDIARY OF OHIO NATIONAL CORPORATION TRADE SERVICES: National City Trade Services Limited......................... 99(2) Hong Kong SUBSIDIARIES OF NATIONAL CITY BANK OF COLUMBUS: The Loan Zone, Inc. (Inactive)............................... 100% Ohio Scott Street Properties, Inc................................. 100% Ohio SUBSIDIARIES OF NATIONAL CITY BANK OF KENTUCKY: Churchill Insurance Agency, Inc.............................. 100% Kentucky First National Broadway Corp................................. 100% Kentucky FNB Service Corporation...................................... 100% Kentucky National Capital Properties, Inc............................. 100% Kentucky National City Insurance Agency of Kentucky, Inc. (Inactive)................................................. 100% Kentucky National City Leasing Corporation............................ 100% Kentucky SUBSIDIARY OF NATIONAL PROCESSING, INC.: National Processing Company.................................. 100% Kentucky SUBSIDIARIES OF NATIONAL PROCESSING COMPANY: B. & L. Consultants, Inc..................................... 100% Massachusetts Caribbean Data Services, Ltd................................. 100% Delaware FA Holdings, Inc............................................. 100% Delaware NPC Check Services, Inc...................................... 100% Delaware NPC Internacional, S.A. de C.V............................... 99.6% Mexico NPC Services, Inc............................................ 100% Arizona NTA, Inc..................................................... 100% Washington SUBSIDIARY OF FA HOLDINGS, INC.: Financial Alliance Processing Services, Inc.................. 100% Delaware SUBSIDIARY OF NTA, INC.: Northwest Traffic Associates, Inc............................ 100% Washington SUBSIDIARY OF GEM AMERICA REALTY & INVESTMENT CORPORATION: Gem Financial Insurance Agency, Inc. (Inactive).............. 100% Ohio SUBSIDIARY OF NATIONAL CITY MORTGAGE CO.: Muirfield Mortgage Limited Partnership (Partnership)......... 51% Texas SUBSIDIARIES OF NATIONAL CITY BANK OF INDIANA: Ash Realty Company, Inc...................................... 100% Indiana Bank Service Corporation of Indiana.......................... 33 1/3% Indiana M.N.B. Trustee Company (UK) Limited.......................... 50(3) United Kingdom NCBI Holdings, Inc........................................... 100% Indiana National City Indiana, LLC................................... 99(4) Indiana National City Insurance Agency of Indiana, Inc. (Inactive)... 100% Indiana SUBSIDIARY OF THE MADISON BANK AND TRUST COMPANY: National City Insurance Agency, Inc.......................... 100% Indiana SUBSIDIARIES OF NATIONAL CITY BANK OF PENNSYLVANIA: Altegra Credit Company....................................... 100% Delaware Integra Brokerage Services Company (Inactive)................ 100% Pennsylvania Integra Business Credit Company.............................. 100% Pennsylvania Liberty Business Credit Corporation (Inactive)............... 100% Pennsylvania
- --------------- (2) Additional 1% owned by National City Bank. (3) Additional 50% owned by National City Bank. (4) Additional 1% owned by NCBI Holdings, Inc.
3
STATE OR JURISDICTION % OF VOTING UNDER THE LAW OF SECURITIES OWNED WHICH ORGANIZED ---------------- --------------------- National City Insurance Agency of Pennsylvania, Inc. (Inactive)................................................. 100% Pennsylvania Nottingham Corporation (Inactive)............................ 100% Pennsylvania Western Properties, Inc...................................... 100% Pennsylvania SUBSIDIARY OF ALTEGRA CREDIT COMPANY: New England AFC, Inc. (Inactive)............................. 100% Massachusetts SUBSIDIARY OF NOTTINGHAM CORPORATION: EQK Realty Holdings, Inc..................................... 100% Pennsylvania LBCC Properties, Inc......................................... 100% Delaware LSB Properties, Inc.......................................... 100% Delaware
EX-23.1 5 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 33-39479 on Form S-3, Registration Statement No. 33-39480 on Form S-3, Registration Statement No. 33-44209 on Form S-3, Post-Effective Amendment No. 1 (on Form S-8) to Registration Statement No. 33-20267 on Form S-4, Registration Statement No. 33-52271 on Form S-8, Registration Statement No. 33-45363 on Form S-8, Post-Effective Amendment No. 1 (on Form S-8) to Registration Statement No. 33-45980 on Form S-4, Post Effective Amendment No. 1 (on Form S-8) to Registration Statement No. 33-56539, Registration Statement No. 33-58115 on Form S-8, Registration Statement No. 33-55487 on Form S-8 and Post-Effective Amendment No. 1 (on Form S-8) to Registration Statement No. 333-01697 of our report dated January 21, 1998, with respect to the consolidated financial statements of National City Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1997. Ernst & Young LLP Cleveland, Ohio January 27, 1998 EX-24.1 6 EXHIBIT 24.1 1 EXHIBIT 24.1 DIRECTORS AND OFFICERS OF NATIONAL CITY CORPORATION REGISTRATION STATEMENT ON FORM 10-K POWER OF ATTORNEY The undersigned Directors and Officers of National City Corporation, a Delaware corporation (the "Corporation"), which anticipate filing a Form 10-K annual report pursuant to Section 12(g) Securities and Exchange Commission Act of 1934 for the Corporation's fiscal year ended December 31, 1997, with the Securities and Exchange Commission hereby constitute and appoint David L. Zoeller, Carlton E. Langer and Thomas A. Richlovsky, and each of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for us and in our names, in the capacities indicated below, said Form 10-K, and any and all amendments and exhibits thereto, or other documents to be filed with the Securities and Exchange Commission pertaining thereto, with full power and authority to do and perform any and all acts and things whatsoever required and necessary to be done in the premises, as fully to all intents and purposes as we could do if personally present, hereby ratifying and approving the acts of said attorneys, and any of them, and any such substitute. EXECUTED this 22nd day of December, 1997. /s/ SANDRA H. AUSTIN Director ---------------------------------------- Sandra H. Austin /s/ CHARLES H. BOWMAN Director ---------------------------------------- Charles H. Bowman /s/ EDWARD B. BRANDON Director ---------------------------------------- Edward B. Brandon /s/ JOHN G. BREEN Director ---------------------------------------- John G. Breen /s/ JAMES S. BROADHURST Director ---------------------------------------- James S. Broadhurst /s/ DUANE E. COLLINS Director ---------------------------------------- Duane E. Collins /s/ DAVID A. DABERKO Chairman of the Board and Chief ---------------------------------------- Executive Officer (Principal Executive David A. Daberko Officer) /s/ DANIEL E. EVANS Director ---------------------------------------- Daniel E. Evans /s/ OTTO N. FRENZEL III Director ---------------------------------------- Otto N. Frenzel III /s/ BERNADINE P. HEALY, M.D. Director ---------------------------------------- Bernadine P. Healy, M.D. /s/ JOSEPH H. LEMIEUX Director ---------------------------------------- Joseph H. Lemieux
2 /s/ W. BRUCE LUNSFORD Director ---------------------------------------- W. Bruce Lunsford /s/ ROBERT A. PAUL Director ---------------------------------------- Robert A. Paul /s/ WILLIAM R. ROBERTSON Director ---------------------------------------- William R. Robertson /s/ WILLIAM F. ROEMER Director ---------------------------------------- William F. Roemer /s/ MICHAEL A. SCHULER Director ---------------------------------------- Michael A. Schuler /s/ STEPHEN A. STITLE Director ---------------------------------------- Stephen A. Stitle /s/ MORRY WEISS Director ---------------------------------------- Morry Weiss
EX-27.1 7 EXHIBIT 27.1
9 1 US DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 2,967,181 48,914 535,576 15,060 8,865,063 0 8,865,063 39,573,125 698,405 54,683,521 36,861,136 7,521,388 1,209,299 4,810,417 0 0 844,391 3,436,960 54,683,521 3,204,969 543,948 27,223 3,776,140 1,252,467 1,833,312 1,942,828 139,660 83,514 2,010,577 1,168,527 807,433 0 0 807,433 3.73 3.66 4.25 145,000 110,900 0 0 705,893 225,703 86,688 698,405 414,476 158 283,771
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