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1
2000 ANNUAL REPORT
IN MOTION
[NATIONAL CITY LOGO]
[PHOTO]
2
WE'RE MOVING FORWARD BY . . .
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FINANCIAL HIGHLIGHTS
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(Dollars in Millions, Except Per Share Amounts) 2000 1999 1998(a)
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FOR THE YEAR
Revenue:
Tax-Equivalent Net Interest Income $2,992 $3,037 $2,952
Noninterest Income 2,484 2,381 2,314
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Total Revenue $5,476 $5,418 $5,266
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Net Income $1,302 $1,405 $1,333
Net Income Per Common Share:
Basic 2.14 2.25 2.04
Diluted 2.13 2.22 2.00
Dividends Paid Per Common Share 1.14 1.06 .94
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Return on Average Common Equity 21.29% 22.64% 19.18%
Return on Average Assets 1.52 1.67 1.66
Net Interest Margin 3.85 3.99 4.11
Efficiency Ratio 58.75 56.49 58.42
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Average Shares - Basic 607,378,801 623,623,811 652,011,504
Average Shares - Diluted 612,625,349 632,452,146 665,720,330
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AT YEAR END
Assets $88,535 $87,121 $88,246
Loans 65,604 60,204 58,011
Earning Assets 79,623 78,903 78,368
Deposits 55,256 50,066 58,247
Stockholders' Equity 6,770 5,728 7,013
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Book Value Per Common Share $11.06 $9.39 $10.69
Market Value Per Common Share 28.75 23.69 36.25
Equity to Assets Ratio 7.65% 6.57% 7.95%
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Common Shares Outstanding 609,188,668 607,058,364 652,654,720
Common Stockholders of Record 68,981 70,545 71,592
Full-Time Equivalent Employees 36,097 38,054 41,218
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(a) Excludes merger charges. See further discussion in Note 3 to the
Consolidated Financial Statements.
CONTENTS
To Our Stockholders......................... 1
National City in Motion..................... 3
Financial Review............................ 6
Consolidated Financial Statements and
Notes..................................... 22
Form 10-K................................... 48
Board of Directors and Officers............. 52
Visit our Web site at www.national-city.com.
BUSINESS PROFILE
National City Corporation (NYSE: NCC) is
an $89 billion financial holding company
headquartered in Cleveland, Ohio. The
company provides a full range of banking
and financial services to individuals and
businesses and operates more than 1,200
branch banking offices and over 1,600 ATMs
in Ohio, Pennsylvania, Indiana, Kentucky,
Illinois and Michigan.
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FOCUSING AND EXECUTING
[PHOTO]
(Left to Right)
Robert G. Siefers, Vice Chairman
David A. Daberko, Chairman & CEO
Vincent A. DiGirolamo, Vice Chairman
To Our Stockholders:
National City's net income for 2000 was $1.3 billion, or $2.13 per share, the
second highest per share earnings in the company's history. Return on average
equity was also strong at 21.3%. Earnings fell short of our internal targets
primarily due to the effects of the rapid rise in market interest rates between
June 1999 and May 2000. Following nearly a decade of double-digit annual
increases in earnings per share, 2000's financial performance was disappointing.
Nonetheless, substantial progress was made on numerous customer-focused
initiatives this year. Some of these came at the expense of current earnings but
were necessary to address the competitive realities of the financial services
industry and to position National City for future growth.
BUSINESS MIX IMPROVEMENTS
We undertook a number of restructuring actions this year to improve
business mix and long-term growth prospects. We sold or securitized several
billion dollars of low-yielding assets to reduce reliance on purchased funds,
raise capital ratios, and reduce exposure to future interest rate volatility. We
closed 69 underperforming Loan Zone consumer finance stores and announced our
intention to exit the low-return automobile leasing business. These
restructuring actions make room on the balance sheet for higher-return assets,
such as the nonconforming mortgage loans generated by our First Franklin
subsidiary. These loans are readily saleable to third parties at a premium to
origination cost but have greater lifetime value when held on the balance sheet.
LOAN AND DEPOSIT GROWTH
The company continues to be very successful in originating large volumes of
high-quality assets, with average loan growth of 12% for the year, adjusted for
loan sales and securitizations. Corporate loan growth was especially strong.
Emphasis on syndications and commercial finance, along with initiatives to
increase market share in Chicago and Detroit, all contributed to the growth. Our
Philadelphia specialized lending office, opened in September 1999 and staffed
with experienced professionals with deep knowledge of the market, has surpassed
our expectations. In just over a year, outstanding loans have grown to more than
$900 million and the operation became profitable six months ahead of plan.
Consumer loan results were mixed, with indirect automobile lending, our largest
consumer business, under competitive price pressure all year. Mortgage loan
production, both conventional and nonconforming, reached a record $28 billion.
Our commercial leasing
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NATIONAL CITY
2000 ANNUAL REPORT
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and commercial real estate divisions also demonstrated solid growth. Credit
quality across all portfolios continues to be good. The weakening economy
virtually assures an increase in problem assets and loan losses, but we expect
the problems to be manageable and of a lesser scope for National City than for
the industry as a whole.
Deposit growth, mirroring industry trends, has been less robust. While
interest rates have played a part in the outcome, we recognize we can do better
and have instituted programs to better support this significant component of
our business.
SUBSTANTIAL SUCCESSES
During 2000, our Internet offerings began to come of age. With the rollout
of a new online banking product, participation has risen sharply and we are
adding thousands of new customers each month. We also introduced significant new
Web-based cash management capabilities for corporate customers and a dedicated
small business banking Web site.
In addition, several of our fee-based businesses are experiencing rapid
growth. National Processing, for example, is enjoying substantial momentum as a
leading processor of merchant card transactions as it continues to expand from
its strong base of national accounts into mid-sized and smaller merchants. This
growth has been the direct result of restructuring efforts that took place at
National Processing in 1999. Over the past two years, earnings have doubled at
National Processing and our 87% ownership has tripled in value. In Institutional
Trust, the successful rollout of interactive Web-based 401(k) products,
PlanWorks and Professional PlanWorks, is beginning to drive new business
revenue.
BRANDING AND CUSTOMER-RETENTION INITIATIVES
We are marketing the National City name and brand as never before, but this
effort must and will be backed by a superior customer experience for it to pay
off. Taking care of the Corporation truly begins with taking care of the
customer. Training and incentive programs have been substantially upgraded,
improving the ability of frontline staff to serve customers and reduce turnover.
A company-wide service quality initiative has led to the creation of hundreds of
performance measurement standards and a problem resolution function. This effort
is already paying dividends in better customer service and fewer errors. We've
also instituted retention programs aimed at long-time deposit customers,
offering them incentives to maintain or improve their deposit relationship with
National City.
SENIOR MANAGEMENT REALIGNMENT
In my opinion, one of the most important long-term actions taken this year
was the realignment of responsibilities among the senior management team. Jim
Bell, who had headed Retail Sales and Distribution, was named head of Capital
Markets, a newly created business unit within Corporate Banking. Capital Markets
includes equity sponsor, investment banking, large corporate, specialized
lending, treasury management and venture capital. Joe Parker moved over from
Consumer Finance to head Retail Sales and Distribution, and Peter Raskind was
hired to take Joe's place as head of Consumer Finance. Peter joined us after a
17-year career at another leading superregional banking company. Paul Clark, who
had been CEO of our Michigan bank, transferred to Cleveland to assume
responsibility for three fee-based businesses: National City Mortgage, National
Processing and Institutional Trust. Jeff Kelly, who had headed our investment
funding operation as well as specialized lending, was named CFO, reporting to
Bob Siefers, who had held that position since 1991. Each major function within
the company is now led by an individual uniquely well-suited to the task. I
firmly believe our management team represents a competitive advantage for
National City over the next several years.
LOOKING AHEAD
Our primary goal for 2001 and the coming years is the resumption of
positive revenue and earnings momentum. The people and strategies are in place
to do just that. Employee retention and customer satisfaction in the branches
and in all business lines have improved due to better training and emphasis on
service quality. Across every line of business, the focus and strategic plans
have never been clearer and the ability to execute never better.
Given National City's capital strength, credit quality, and management
depth, we are well positioned to capitalize on future opportunities as they
arise. Disruptions from bank merger activity within our markets should work in
our favor. Economic and credit weakness, while creating some operating
challenges, could also create attractive opportunities for investment. As
employees and as stockholders, we are excited about the potential the new year
holds for this company.
Thank you for your support.
/s/ David A. Daberko
David A. Daberko
Chairman & CEO
January 24, 2001
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NATIONAL CITY
2000 ANNUAL REPORT
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NATIONAL CITY IN MOTION
PUTTING CUSTOMERS FIRST
During 2000, National City launched significant new branding and service quality
initiatives. These efforts are already succeeding in delivering a consistent
customer experience across all contact points and improving performance in
critical service areas. The resulting National City-brand preference will
support revenue growth through the attraction and retention of customers.
PROBLEM RESOLUTION CENTERS
Our Problem Resolution Centers are one of the ways we're meeting service
quality goals. Through the centers, frontline personnel now receive help
resolving customer problems from experienced service professionals. The
objective is to address issues quickly and efficiently, in a courteous and
professional manner. Because better service and reliability leads to a larger
share of our customers' business, service quality will be a point of
differentiation for National City going forward.
QUALITY CONTROL
Another ongoing aspect of the service quality initiative is the development
of formal performance standards across all business lines. Hundreds of
customer-focused standards have been developed to address and measure the
speed-to-answer, statement preparation and mailing, and the accuracy and
timeliness of information. Service performance will continue to be measured on a
monthly basis to ensure that we are meeting customer expectations.
[PHOTO]
APPLYING ADVANCED TECHNOLOGY [PHOTO]
Harnessing the power and the potential of advanced technology has been and will
continue to be a focus at National City. In fact, 2000 brought more than a 50
percent increase in discretionary technology spending over 1999, with the
majority of dollars invested to enhance the company's Web presence, develop
state-of-the-art Web-based products, and upgrade internal processes.
WEB SITE CAPABILITIES
Throughout 2000, National City strengthened its Internet capabilities and
saw a five-fold increase in online banking participation. The revamped and
redesigned Web site consolidated over 40 Web sites. Retail customers can now
review their account history, transfer funds, and pay bills directly online.
Corporate customers are taking advantage of the newly developed Web-based cash
management products. Additional functionality for both individuals and
businesses is on the way in 2001. This past year National City also teamed with
America Online and AOL subsidiary Digital City. Through the partnership,
National City became the local financial services sponsor of Digital City's
online network in six major markets. The agreement enables National City to
reach an estimated six million consumers.
exact4web(sm)
Enhancements to exact4web, our Internet-based suite of treasury management
products, continue to keep National City clients at the forefront of global
treasury management. During 2000, we began to significantly expand exact4web's
capabilities, offering clients increased functionality and access to a variety
of funds transfer, account and information reporting, and transaction initiation
services. Notable additions include multi-bank reporting, current-day reporting
and foreign exchange services. In 2001, new features will further broaden global
trade and treasury management services.
PROCESS UPGRADES
Several projects were undertaken to upgrade processes, reduce costs and
improve performance. For instance, we initiated technology process improvement
projects in mutual fund administration and credit decision support for the
indirect dealer business. Each project produced cost savings and greatly
enhanced the quality of customer service. In our retail branches, we connected
each office to a central network infrastructure to facilitate more effective
work flow and communication.
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NATIONAL CITY
2000 ANNUAL REPORT
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SEIZING OPPORTUNITIES
Expansions, new approaches and award-winning service headlined the
forward-looking efforts National City made throughout the year. These
accomplishments stand among the company's most noteworthy in 2000.
[PHOTO]
PHILADELPHIA OFFICE
National City established the Philadelphia Corporate Banking office in the
second half of 1999, hiring over two dozen locally based, experienced bankers.
Home to National City's Communications & Media, and Transportation & Equipment
Finance Groups, the office has been a winning endeavor. Both groups hit the
ground running and moved into the black much faster than planned.
FIRST FRANKLIN
Acquired in the second half of 1999, First Franklin Financial Companies,
Inc. originates "nonconforming" mortgages through a broker network. The loans
are then sold to financial institutions and other buyers. The loans are
typically in the higher credit tier of nonprime mortgages. Beginning in 2000,
National City began to hold a portion of the First Franklin products in the
portfolio. In the near term, holding these loans softens earnings because of
reduced gain on sale, but over time, the value of holding the loans should
greatly exceed the foregone gain.
NATIONAL PROCESSING
National Processing, Inc. (NYSE: NAP) is a leading provider of merchant
processing and customized outsourcing services. The company is the nation's
second largest processor of point-of-sale credit card transactions, serving
approximately 160,000 merchants in more than 500,000 locations. It processes one
of every six Visa(R) and MasterCard(R) transactions in the United States and
over $100 billion in transactions annually. National Processing's strong
performance in 2000 was the product of a carefully executed strategy. In 1999,
National Processing divested noncore businesses to more intensely focus on
opportunities within the core business and further broadened its customer base
among regional retailers. This strategic shift led to greater diversity and
stability in the merchant customer base. National Processing is now better
positioned to take advantage of the explosive growth of credit and debit cards
in the payment system and the proliferation of the Internet as an additional
outlet for commerce.
PLANWORKS(R)
PlanWorks, our premier 401(k) retirement plan product, underwent some
exciting additions in 2000. PlanWorks Interactive offers customers instant
electronic access to their plans through the Internet and telephone. It features
PlanWorks OnLine, an interactive Web site and PlanLine, an automated
voice-response system. Both enable customers to access account information, make
transfers, check and change investment elections, and evaluate assets. PlanWorks
Interactive also includes SponsorWorks, a Web site that allows plan sponsors to
more efficiently administer their plans. In addition, through the recently
developed Professional PlanWorks(SM), a truly unique product, plan participants
can use the broker of their choice to buy and sell individual securities.
STOCK TRANSFER GROUP
National City's Stock Transfer Group, part of Institutional Trust, was
ranked No. 1 last year in the Group Five, Inc. Shareowner Services Corporate
Satisfaction Study for providing outstanding shareowner services. It is the
third time in the last four years the Stock Transfer Group has achieved the
distinction. More than 1,500 companies participated in the survey, representing
over 27 million registered shareowners. National City was also named the best
mid-sized stock transfer agent in the SCS/Rutgers University Transfer Agent
Comparison Survey and received the prestigious Talon(R) Award. Over 700 U.S. and
Canadian companies participated in that survey.
[PHOTO]
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NATIONAL CITY
2000 ANNUAL REPORT
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PROVIDING LEADERSHIP
[PHOTO]
Positioning National City for the future requires continuous professional
development for our leadership and ongoing career training for employees. These
efforts go hand-in-hand with the company's branding and service quality
initiatives.
DEVELOPING LEADERSHIP
A sharper focus has been placed on developing the next generation of
management for the company, with the creation of the Leadership Development
group. Leadership Development focuses on attracting, retaining, and developing
the future leaders of the company. During 2000, National City initiated the
first significant realignment of senior management since the company moved to a
functional organizational structure in 1998. The realignment was effectively
accomplished by a combination of transferring responsibilities and establishing
new positions. One of the most talented management teams in the organization's
history is now in place.
NATIONAL CITY INSTITUTE
To improve the retention and performance of employees, the National City
Institute was established in 2000. The Institute's training and development
programs are designed to improve customer service, reduce new-hire turnover and
enhance morale. Additionally, the Institute has been effective in establishing
guidelines and incorporating "best practices" in new-hire training across
National City's service area.
INVESTING IN THE COMMUNITIES WE SERVE
[PHOTO]
From affordable housing, to help for minority businesses, to education
assistance, to support for the arts, to health and human services, National
City's support has made a real difference. Investing in the communities we serve
is part of a 155-year tradition. That commitment runs deep within our corporate
culture and manifests itself even further through the tremendous amount of
volunteer work our employees perform. That work is not about to end. Each year,
our investments continue and the results are more widespread.
- - In October 2000, National City received the Corporate Hispanic Business
Advocate of the Year Award from the U.S. Hispanic Chamber of Commerce's Region
IV for making significant contributions to local Hispanic businesses.
- - In October, PCI Corporation, an Inc. Magazine 500 software and data analysis
company, named National City as the leading mortgage lender in the United
States to African-Americans for 1999.
- - Over the past decade, National City Community Development Corporation has
invested nearly $180 million in both inner city and rural community
development projects throughout National City's service area.
- - National City is the eighth largest Small Business Administration lender in
the country and for the second consecutive year was ranked as the No. 1 Small
Business Administration lender in our six-state footprint.
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NATIONAL CITY
2000 ANNUAL REPORT
8
FINANCIAL REVIEW
The Financial Review section discusses the financial condition and results of
operations of National City Corporation ("the Corporation" or "National City")
for each of the past three years and should be read in conjunction with the
accompanying Consolidated Financial Statements and Notes presented on pages 22
through 47.
This annual report contains certain forward-looking statements (as defined in
the Private Securities Litigation Reform Act of 1995), which reflect
management's beliefs and expectations based on information currently available.
These forward-looking statements are inherently subject to significant risks and
uncertainties, including changes in general economic and financial market
conditions, the Corporation's ability to effectively carry out its business
plans and changes in regulatory or legislative requirements. Other factors that
could cause or contribute to such differences are changes in competitive
conditions, continuing consolidation in the financial services industry and
pending or threatened litigation. Although management believes the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially.
EARNINGS SUMMARY
National City reported net income of $1,302.4 million, or $2.13 per diluted
share, in 2000, compared to $1,405.5 million, or $2.22 per diluted share in
1999, and $1,070.7 million, or $1.61 per diluted share in 1998. Included in
reported net income for 1998 were after-tax merger charges of $261.9 million, or
$.39 per diluted share. Returns on average common equity and average assets for
2000 were 21.3% and 1.52%, respectively, compared to returns of 22.6% and 1.67%,
respectively, in 1999 and, excluding merger charges, returns of 19.2% and 1.66%,
respectively, in 1998.
Several strategic initiatives were undertaken in 2000 and 1999 to more favorably
position the Corporation to achieve positive revenue and earnings momentum. Some
of the more critical steps taken included the restructuring of the balance sheet
to improve capital efficiency and reduce exposure to interest rate volatility,
the realignment and divestiture of certain business units to focus on
higher-growth-oriented and more profitable businesses, and the upgrade of
technological processes and training to enhance service quality. Further
discussion of these initiatives, along with their corresponding impact on the
Corporation's financial results, is contained throughout this Financial Review
section and in Notes 4 and 5 to the Consolidated Financial Statements.
NET INTEREST INCOME
The table beginning on page 8 presents net interest income, interest spread and
net interest margin for the five years 1996 through 2000, comparing daily
average outstanding balances of earning assets and interest bearing liabilities
with the associated interest income and expense and the corresponding average
rates earned and paid. To compare the tax-exempt asset yields to taxable
yields, amounts are adjusted to pretax equivalents based on the marginal
corporate Federal tax rate of 35%. The tax-equivalent adjustments to net
interest income for 2000, 1999 and 1998 were $33.7 million, $36.9 million and
$40.2 million, respectively. Average outstanding loan balances include
nonperforming loans and loans held for sale or securitization. Average
outstanding securities balances are computed based on amortized cost and
exclude unrealized gains and losses on securities available for sale.
In order to manage exposure to changes in interest rates, the Corporation enters
into various types of derivative instruments. The cash flows generated by
derivative instruments used to manage risk associated with earning assets and
interest bearing liabilities are recorded along with the interest of the hedged
item and consequently impact the yields on those assets and liabilities.
Information regarding the derivative instruments used and how they are accounted
for is presented in Notes 1 and 22 to the Consolidated Financial Statements. A
discussion of the effects of changing interest rates is included in the Market
Risk Management section beginning on page 18.
The primary source of the Corporation's traditional banking revenue is net
interest income. Net interest income is the difference between interest income
on earning assets, such as loans and securities, and the interest expense on
liabilities used to fund those assets, including interest bearing deposits and
other borrowings. The amount of net interest income is affected by both changes
in the level of interest rates and the amount and composition of earning assets
and interest bearing liabilities. Changes in net interest income are most often
measured through two statistics - interest spread and net interest margin. The
difference between the yields on earning assets and the rates paid for interest
bearing liabilities represents the interest spread. The net interest margin is
expressed as the percentage of net interest income to average earning assets.
Both the interest spread and net interest margin are presented on a
tax-equivalent basis. Because noninterest bearing sources of funds, or free
funding, principally demand deposits and stockholders' equity, also support
earning assets, the net interest margin exceeds the interest spread.
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NATIONAL CITY
2000 ANNUAL REPORT
9
Tax-equivalent net interest income in 2000 was $2,992.1 million, compared to
$3,037.0 million in 1999 and $2,951.9 million in 1998. The net interest margin
was 3.85% in 2000, down from 3.99% last year and 4.11% in 1998. Higher-cost
funding in a rising rate environment, combined with a liability sensitive
interest rate risk position through 1999 and early 2000 and highly competitive
lending markets were the primary factors behind the decline in net interest
income and the lower net interest margin in 2000.
During 2000, 1999 and 1998, National City repurchased 2.5 million, 52.6 million
and 10.0 million shares, respectively, of its common stock. These repurchases
resulted in estimated additional funding costs of $147 million in 2000 and $98
million in 1999, which reduced the net interest margin by 19 basis points in
2000 and 13 basis points in 1999. While the cost to fund these repurchases
reduced net interest income and the net interest margin, the lower average
outstanding share base increased earnings per share by an estimated $.06 in 2000
and an estimated $.05 in 1999.
Compared to 1998, a higher level of earning assets, partially offset by a lower
net interest margin, primarily reflecting the cost of funding the Corporation's
share repurchase program, led to the increase in 1999's net interest income.
During 2000, steps were taken to enrich the net interest margin and reduce
exposure to interest rate volatility. The steps included the sales of $2.0
billion of thin-spread student loans, $3.7 billion of fixed-rate debt
securities, and $1.0 billion of low-spread adjustable-rate mortgages. Through
the sale of these less capital-efficient assets, the Corporation's reliance on
purchased funding was reduced and the balance sheet was freed up for more
profitable investment.
To diversify its funding sources and provide for greater capital efficiency, the
Corporation also securitized $600 million of credit card receivables in 2000.
Asset securitization involves the sale of a pool of loan receivables to a trust,
which sells undivided interests to investors through the public or private
issuance of asset-backed securities. As loan receivables are securitized, the
Corporation's on-balance-sheet funding needs are reduced by the amount of
receivables securitized. No receivables were securitized in 1999 or 1998. During
2000, $470 million of previously securitized credit card receivables amortized
back into the Corporation's on-balance-sheet loan portfolio or matured, compared
to $270 million in 1999.
These actions, along with an improved contribution from free funds and a shift
in mix toward higher- yielding loans, primarily nonconforming residential
mortgages, stabilized the net interest margin in the second half of 2000.
Average earning assets were $77.8 billion in 2000, up from $76.1 billion in 1999
and $71.7 billion in 1998. Strong loan growth, mostly offset by the effect of
asset sales, led to the increase in average earning assets over 1999. Loan
growth also served as the primary contributor to the increase in average earning
assets from 1998 to 1999.
Average loans in 2000 were $65.3 billion. Excluding the effects of loans sold
and securitized in conjunction with the balance sheet restructuring initiatives,
average loans in 2000 grew 11.5% over 1999. Despite the loan sales and
securitization, higher commercial and residential loan production and growth in
home equity loans bolstered overall loan balances in 2000. Average residential
real estate loans include both conforming and nonconforming mortgages held in
portfolio and mortgages held for sale. The main driver of growth in average
residential real estate loans occurred in the nonconforming category as a result
of management's decision to retain in portfolio a majority of the production
generated by the Corporation's subsidiary, First Franklin Financial Corporation
("First Franklin"). First Franklin, which was acquired in the second half of
1999, is a wholesale originator of nonconforming residential mortgage loans. The
retention of these loans supports the overall strategy begun in 1999 to shift
the mix in earning assets into higher-yielding loans and away from
thinner-spread assets.
Average securities, at amortized cost, were $12.0 billion in 2000, compared to
$15.0 billion in 1999 and $13.9 billion in 1998. The decline in average
securities from 1999 was due to the previously mentioned sales of fixed-rate
debt securities.
Average interest bearing liabilities were $67.3 billion in 2000, up from $65.5
billion in 1999 and $61.9 billion in 1998. Funding needed to support loan growth
and share repurchases led to the increase in interest bearing liabilities in
both 2000 and 1999, with the mix shifting from lower-cost noninterest bearing
deposits and short-term borrowings to more expensive purchased deposits and
long-term debt.
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NATIONAL CITY
2000 ANNUAL REPORT
10
FINANCIAL REVIEW CONTINUED
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DAILY AVERAGE BALANCE
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(DOLLARS IN MILLIONS) 2000 1999 1998 1997 1996
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ASSETS
Earning assets:
Loans:
Commercial $24,830 $22,359 $20,135 $16,837 $14,899
Real estate - commercial 6,222 6,239 6,407 6,562 7,230
Real estate - residential 14,423 12,427 12,756 12,195 12,405
Consumer 13,215 13,831 12,589 11,257 11,406
Credit card 2,431 2,025 1,860 2,070 2,244
Home equity 4,204 3,312 3,102 2,702 2,258
- -------------------------------------------------------------------------------------------------------------
Total loans 65,325 60,193 56,849 51,623 50,442
Securities available for sale:
Taxable 11,195 14,139 12,967 12,298 12,705
Tax-exempt 793 866 941 781 662
- -------------------------------------------------------------------------------------------------------------
Total securities available for sale 11,988 15,005 13,908 13,079 13,367
Federal funds sold, security resale agreements and other
investments 469 923 990 557 726
- -------------------------------------------------------------------------------------------------------------
Total earning assets/total interest income/rates 77,782 76,121 71,747 65,259 64,535
Allowance for loan losses (987) (987) (983) (969) (958)
Fair value (depreciation) appreciation of securities
available
for sale (310) 129 530 316 170
Cash and demand balances due from banks 3,087 3,562 3,645 3,347 3,366
Properties and equipment, accrued income and other assets 5,978 5,466 5,114 3,989 3,811
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $85,550 $84,291 $80,053 $71,942 $70,924
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LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW and money market accounts $16,549 $16,804 $17,472 $15,467 $15,689
Savings accounts 3,207 3,818 4,158 5,037 5,190
Time deposits of individuals 15,457 14,898 16,619 17,802 19,454
Other deposits 2,936 3,053 4,009 3,161 2,799
Foreign deposits 3,128 2,679 1,715 1,052 859
Federal funds borrowed 3,043 3,258 3,124 2,044 1,351
Security repurchase agreements 3,846 4,821 4,118 2,975 3,252
Borrowed funds 2,687 2,879 3,005 2,771 2,309
Long-term debt and capital securities 16,454 13,316 7,698 4,972 3,611
- -------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/total interest
expense/rates 67,307 65,526 61,918 55,281 54,514
Noninterest bearing deposits 10,792 11,473 9,945 9,230 9,188
Accrued expenses and other liabilities 1,311 1,061 1,225 1,265 1,239
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 79,410 78,060 73,088 65,776 64,941
Preferred stock 30 31 28 -- 56
Common stock 6,110 6,200 6,937 6,166 5,927
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TOTAL STOCKHOLDERS' EQUITY 6,140 6,231 6,965 6,166 5,983
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $85,550 $84,291 $80,053 $71,942 $70,924
- -------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
- -------------------------------------------------------------------------------------------------------------
INTEREST SPREAD
Contribution of noninterest bearing sources of funds
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NET INTEREST MARGIN
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NATIONAL CITY
2000 ANNUAL REPORT
11
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INTEREST AVERAGE RATE
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2000 1999 1998 1997 1996 2000 1999 1998 1997 1996
---------------------------------------------------- ------------------------------------------
$2,194.8 $1,749.9 $1,641.1 $1,441.7 $1,265.3 8.84% 7.83% 8.15% 8.56% 8.49%
549.6 537.6 576.8 587.5 622.3 8.83 8.62 9.00 8.95 8.61
1,198.6 962.7 982.0 960.8 1,015.3 8.31 7.75 7.70 7.88 8.18
1,126.7 1,147.6 1,086.4 984.9 975.3 8.53 8.30 8.63 8.75 8.55
338.3 267.1 258.5 282.2 359.7 13.92 13.19 13.90 13.63 16.03
393.2 285.2 280.3 247.6 206.2 9.35 8.61 9.04 9.16 9.13
-------------------------------------------------------------------------------------------------
5,801.2 4,950.1 4,825.1 4,504.7 4,444.1 8.88 8.22 8.49 8.73 8.81
697.9 876.1 836.4 795.2 813.7 6.23 6.20 6.45 6.47 6.40
64.4 71.4 75.8 69.9 59.9 8.12 8.24 8.04 8.95 9.05
-------------------------------------------------------------------------------------------------
762.3 947.5 912.2 865.1 873.6 6.36 6.32 6.56 6.61 6.54
36.8 52.0 59.6 35.7 39.6 7.85 5.63 6.03 6.41 5.45
-------------------------------------------------------------------------------------------------
$6,600.3 $5,949.6 $5,796.9 $5,405.5 $5,357.3 8.49% 7.82% 8.08% 8.28% 8.30%
$ 621.3 $ 519.6 $ 542.0 $ 497.6 $ 459.5 3.76% 3.09% 3.10% 3.22% 2.93%
53.4 64.6 82.9 102.6 123.8 1.67 1.69 1.99 2.04 2.39
884.7 761.6 914.0 986.2 1,079.5 5.72 5.11 5.50 5.54 5.55
183.9 155.3 218.0 171.8 154.7 6.26 5.09 5.44 5.43 5.53
193.7 134.4 89.3 54.9 44.6 6.19 5.02 5.21 5.22 5.19
195.5 166.2 167.8 91.6 84.1 6.43 5.10 5.37 4.48 6.23
200.4 201.9 186.1 144.3 164.4 5.21 4.19 4.52 4.85 5.06
164.7 144.2 168.5 180.1 130.8 6.13 5.01 5.61 6.50 5.66
1,110.6 764.8 476.4 323.1 232.4 6.75 5.74 6.19 6.50 6.44
-------------------------------------------------------------------------------------------------
$3,608.2 $2,912.6 $2,845.0 $2,552.2 $2,473.8 5.36% 4.45% 4.59% 4.62% 4.54%
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
$2,992.1 $3,037.0 $2,951.9 $2,853.3 $2,883.5
-------------------------------------------------------------------------------------------------
3.13% 3.37% 3.49% 3.66% 3.76%
.72 .62 .62 .71 .71
-------------------------------------------------------------------------------------------------
3.85% 3.99% 4.11% 4.37% 4.47%
-------------------------------------------------------------------------------------------------
9
NATIONAL CITY
2000 ANNUAL REPORT
12
FINANCIAL REVIEW CONTINUED
The following table shows changes in tax-equivalent interest income, interest
expense and net interest income due to volume and rate variances for major
categories of earning assets and interest bearing liabilities. The change in
interest not solely due to changes in volume or rates has been allocated in
proportion to the absolute dollar amounts of the change in each.
- ---------------------------------------------------------------------------------------------------------------------------
2000 VS 1999 1999 VS 1998
------------------------------ ------------------------------
DUE TO CHANGE IN DUE TO CHANGE IN
------------------ NET ------------------ NET
(IN MILLIONS) VOLUME RATE CHANGE VOLUME RATE CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN TAX-EQUIVALENT INTEREST INCOME -
Loans:
Commercial $193.8 $ 251.1 $444.9 $179.6 $ (70.8) $108.8
Real estate - commercial (1.6) 13.6 12.0 (15.3) (23.9) (39.2)
Real estate - residential 155.0 80.9 235.9 (25.6) 6.3 (19.3)
Consumer (51.6) 30.7 (20.9) 106.5 (45.3) 61.2
Credit card 53.5 17.7 71.2 23.2 (14.6) 8.6
Home equity 76.9 31.1 108.0 19.4 (14.5) 4.9
Securities (190.0) 4.8 (185.2) 70.6 (35.3) 35.3
Federal funds sold, security resale agreements and other
investments (25.6) 10.4 (15.2) (3.9) (3.7) (7.6)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $210.4 $ 440.3 $650.7 $354.5 $(201.8) $152.7
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN INTEREST EXPENSE -
Deposits:
NOW and money market accounts $(7.8) $ 109.5 $101.7 $(20.7) $ (1.7) $(22.4)
Savings accounts (10.6) (.6) (11.2) (6.8) (11.5) (18.3)
Time deposits of individuals 28.6 94.5 123.1 (94.5) (57.9) (152.4)
Purchased deposits 16.7 71.2 87.9 .4 (18.0) (17.6)
Federal funds borrowed, security repurchase agreements
and borrowed funds (64.2) 112.5 48.3 33.9 (44.0) (10.1)
Long-term debt and capital securities 179.8 166.0 345.8 348.4 (60.0) 288.4
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $142.5 $ 553.1 $695.6 $260.7 $(193.1) $ 67.6
- ---------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN TAX-EQUIVALENT NET INTEREST
INCOME $(44.9) $ 85.1
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Details of noninterest income follow:
- -----------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- -----------------------------------------------------------------
Mortgage banking revenue $ 478,954 $ 389,292 $ 327,247
Deposit service charges 442,753 420,448 384,938
Item processing revenue 412,444 416,782 484,503
Trust and investment
management fees 334,627 325,856 311,050
Card-related fees 188,024 191,677 201,168
Other service fees 103,453 90,421 91,869
Brokerage revenue 98,157 104,031 90,477
Other 368,970 303,902 288,431
- -----------------------------------------------------------------
TOTAL FEES AND OTHER INCOME 2,427,382 2,242,409 2,179,683
Net securities gains 56,852 138,360 134,459
- -----------------------------------------------------------------
TOTAL NONINTEREST INCOME $2,484,234 $2,380,769 $2,314,142
- -----------------------------------------------------------------
Fees and other income for 2000 reached $2,427.4 million, up 8.2% from $2,242.4
million in 1999 with solid growth in mortgage banking revenue, deposit service
charges, trust and investment management fees and other service fees. Item
processing revenue in 2000, generated by National Processing, Inc. ("National
Processing"), National City's 87%-owned item processing subsidiary, also
improved significantly due to new and expanded customer relationships, but this
growth was masked by a decline in revenue related to business units divested in
1999, which had contributed $56.7 million to 1999 revenue. A higher level of
other income, driven mainly by gains on asset sales, also contributed to the
overall increase in fees and other income in 2000.
The increase in fees and other income in 1999 was supported by growth in most
fee income categories other than item processing revenue, which was unfavorably
affected by business line divestitures. Card-related fees also declined in 1999
as lower service fees were earned on securitized credit card receivables, which
had begun to amortize.
Mortgage banking revenue climbed 23.0% to $479.0 million in 2000, following a
19.0% increase to $389.3 million in 1999. Higher origination volumes and
servicing income drove the increases in both 2000 and 1999, due largely to
purchase acquisitions in the second half of 1999 of First Franklin Financial
Companies, Inc. and the conforming mortgage production units of Accubanc
Mortgage Corporation. Revenue in 2000 also benefited from gains of $13.6 million
and $10.6 million related to the sales of mortgage servicing rights and certain
low-spread adjustable-rate mortgage loans, respectively. Mortgage banking loan
originations were strong in 2000, totaling $22.0 billion, up from $17.9 billion
in 1999 and from $19.5 billion in 1998. The residential loan servicing portfolio
advanced to $57.4 billion at December 31, 2000, up from $46.7 billion at
December 31, 1999 and $35.3 billion at December 31, 1998. Gains on conforming
loans sold to the secondary market totaled $154.1 million in 2000, compared to
$170.0 million in 1999 and $165.5 million in 1998. Gains on nonconforming loans
sold to third parties by First Franklin were $52.4 million
10
NATIONAL CITY
2000 ANNUAL REPORT
13
in 2000, up slightly from $42.7 million in the four months following acquisition
in 1999, due to the Corporation's decision in 2000 to retain a substantial
portion of First Franklin's loan production. Although retaining this production
caused mortgage banking revenue to rise less than if the loans had been sold
outright at a premium, the Corporation expects to derive greater lifetime value
from holding these loans on the balance sheet.
Deposit service charges rose to $442.8 million in 2000, up from $420.4 million
in 1999 and $384.9 million in 1998. Higher cash management activity, increased
customer debit card usage and fewer waived fees led to the increase in deposit
service charges in 2000. Revenue in 1999 also benefited from an increase in
transaction volume and improved deposit fee management along with a more
standardized fee structure implemented following the Corporation's
reorganization along functional lines.
Item processing revenue was $412.4 million in 2000, compared to $416.8 million
in 1999 and $484.5 million in 1998. The totals for 1999 and 1998 include
revenues of $56.7 million and $153.5 million generated by the business units
National Processing divested in the first half of 1999. Excluding the effects of
the divested units, item processing revenue in 2000 grew 14.5% over 1999 core
revenue of $360.1 million, which had improved from core revenue in 1998 of
$331.0 million. National Processing's focus on winning new customers in both the
national and regional markets, the accelerating growth in debit card acceptance
and usage and the increasing preference for credit and debit cards as the
payment of choice over checks and cash have driven the increases in core revenue
during the past two years.
Trust and investment management fees, which includes both institutional trust
and personal wealth management, grew to $334.6 million in 2000, up from $325.9
million in 1999 and $311.1 million in 1998. A higher level of assets under
management supported the revenue increases in both 2000 and 1999. At December
31, 2000, National City had total assets under administration of $145.9 billion,
compared to $142.1 billion at the end of 1999. Assets under administration at
year-end 2000 included $68.0 billion of assets under management, which despite a
difficult year for the equity markets, were up 6.9% from $63.6 billion at the
end of 1999. Included in assets under management at December 31, 2000 were
proprietary Armada()(R) mutual fund balances of $16.9 billion.
Card-related fees declined in both 2000 and 1999 despite new business volume due
to reduced servicing income from certain credit card securitizations, which
began to wind down in 1998. As a credit card securitization winds down,
receivable balances are transferred back into the on-balance-sheet loan
portfolio and interest-related revenue streams shift from fee income to net
interest income. During 2000, the Corporation sold through securitization an
additional $600 million of credit card receivables. Fees for servicing these
receivables were included in card-related fee income.
Other service fees increased 14.4% to $103.5 million in 2000, following a modest
decline in service fees in 1999, due primarily to growth in fees from syndicated
lending activities.
Brokerage revenue, which decreased to $98.2 million in 2000 from $104.0 million
in 1999, was hampered in 2000 by weaker stock market conditions, which resulted
in reduced retail and investment banking activity. In contrast, revenue in 1999
benefited from growth in retail sales and investment banking transactions
brought about by strength in the equity markets.
Other income in 2000 included gains of $74.2 million on the sale of $2.0 billion
of low-spread student loans and $27.2 million on the securitization of credit
card receivables. In 1999, other income included gains of $101.8 million related
to the sales of certain equity interests partially offset by a $60.8 million
loss, net of minority interest, recognized in conjunction with the National
Processing business line divestitures. Also included in other income are gains
from venture capital investments, which increased to $37.1 million in 2000 from
$16.6 million in 1999. In comparison to 1998, the 1999 loss on business line
divestitures and reduced branch sale gains offset a large portion of the
increase in income attributable to the sales of equity interests.
Net realized securities gains and losses are summarized as follows:
- -----------------------------------------------------------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS) 2000 1999 1998
- -----------------------------------------------------------------
Net realized gains (losses):
Debt securities $(55,958) $ 12,187 $ 24,553
Equity securities 112,810 126,173 109,906
- -----------------------------------------------------------------
Net pretax gains 56,852 138,360 134,459
Tax expense 19,898 48,426 47,061
- -----------------------------------------------------------------
EFFECT ON NET INCOME $ 36,954 $ 89,934 $ 87,398
- -----------------------------------------------------------------
EFFECT ON NET INCOME PER DILUTED
SHARE $.06 $.14 $.13
- -----------------------------------------------------------------
Gains and losses on debt securities are generated mainly from the investment
portfolio maintained for interest rate risk and liquidity management purposes,
while equity securities gains are generated primarily from the Corporation's
internally-managed equity portfolio of bank and thrift common stock investments.
In conjunction with the Corporation's balance sheet restructuring efforts in
2000, the Corporation sold $3.7 billion of lower-yielding, fixed-rate debt
securities and recognized pretax losses of $56.3 million. The losses on an
after-tax basis were $36.6 million, or $.06 per diluted share.
In addition to gains from bank and thrift common stock investments, equity
securities gains in 1999 included a pretax gain of $32.1 million from the sale
of Concord EFS, Inc. common stock.
Further discussion on both transactions is discussed in Note 4 to the
Consolidated Financial Statements.
11
NATIONAL CITY
2000 ANNUAL REPORT
14
FINANCIAL REVIEW CONTINUED
NONINTEREST EXPENSE
Details of noninterest expense follow:
- ---------------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- ---------------------------------------------------------------------
Salaries $1,375,177 $1,281,524 $1,309,820
Benefits and other personnel 252,083 276,879 284,937
Equipment 229,476 209,774 212,871
Net occupancy 209,229 202,077 202,664
Third-party services 197,485 193,148 226,262
Card-related fees 167,657 149,260 139,416
Postage and supplies 121,453 125,880 141,525
Intangibles amortization 87,961 75,351 65,186
Marketing and public relations 83,747 64,548 63,608
Telephone 81,301 73,973 74,963
Travel and entertainment 59,505 51,847 52,621
State and local taxes 39,136 52,724 45,687
Merger charges -- -- 379,376
Other 279,699 225,519 178,177
- ---------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE $3,183,909 $2,982,504 $3,377,113
- ---------------------------------------------------------------------
Noninterest expense was $3,183.9 million in 2000, $2,982.5 million in 1999 and
$3,377.1 million in 1998. Noninterest expense in 2000 increased $201.4 million
over 1999 due to increased expenses and intangibles amortization from purchase
acquisitions in the second half of 1999, charges incurred in connection with
realignment of the consumer finance business line, expenditures related to
upgrading technology processes and product offerings, along with customer
quality and branding initiatives, and volume-driven expense increases related to
item processing activities. Somewhat offsetting these increases were reductions
in employee benefits and state and local tax expense, lower expenses stemming
from the 1999 business line divestitures at National Processing and charges
taken in 1999 pursuant to a plan to improve the cost-efficiency of branch office
facilities, along with certain unrelated executive contract obligations.
Merger charges of $379.4 million incurred in 1998 in connection with the
acquisitions of First of America Bank Corporation ("First of America") and Fort
Wayne National Corporation ("Fort Wayne") were the primary factor behind the
decline in noninterest expense from 1998 to 1999.
Salaries expense fell in 1999 due to merger-related synergies but were driven up
in 2000 by the effects of the purchase acquisitions in the second half of 1999.
These factors similarly affected benefits and other personnel costs with the
increase from purchase acquisitions being overshadowed in 2000 by expense
reductions related to benefit plans and the capitalization of internal software
development costs. Salaries expense in 1999 also included the aforementioned
executive contract obligations.
Volume increases in credit and debit card processing activity due to an expanded
customer base at National Processing resulted in the card-related fee increases
in both 2000 and 1999.
Marketing and public relations expense rose in 2000 as the Corporation stepped
up efforts to increase market awareness of the National City brand name and to
promote new and expanded product offerings.
State and local taxes declined in 2000 due to refunds received.
Other noninterest expense in 2000 was unfavorably affected by $44.0 million of
charges related to the fourth quarter realignment of the consumer finance
business line, a $7.1 million charge for goodwill and fixed-asset impairment
associated with divesting a small operating unit at National Processing, a $2.5
million charge for branch closings and consolidations at National City Mortgage
Company and a higher level of fraud and other operational losses. The $44.0
million of consumer finance charges included write-downs to automobile lease
residual values totaling $26.0 million and losses associated with the decision
to cease originating automobile leases and close certain nonconforming loan
production channels, including $9.0 million for goodwill impairment, $3.7
million for severance costs, $2.9 million for facilities closures and lease
obligations and $2.4 million for fixed-asset impairment and other costs. The
consumer finance realignment is discussed further in Note 4 to the Consolidated
Financial Statements. Other noninterest expense also includes an additional
$15.0 million write-down of automobile lease residual values in the second
quarter of 2000.
Other noninterest expense in 1999 included a $28.6 million charge pursuant to a
plan to improve the cost efficiency of branch office facilities.
Fluctuations in the remaining expense categories from 1999 to 2000 were
primarily due to purchase acquisitions in the second half of 1999 and from
merger synergies in comparing 1999 to 1998.
The efficiency ratio, which expresses expense as a percentage of tax-equivalent
net interest income and total fees and other income, was 58.8% in 2000, 56.5% in
1999 and, excluding merger charges, 58.4% in 1998. While the ratio showed
improvement from 1998 to 1999, a moderate decline in net interest income and a
higher level of expenses, including the consumer finance realignment charges,
caused modest slippage in the ratio in 2000.
12
NATIONAL CITY
2000 ANNUAL REPORT
15
LINE OF BUSINESS RESULTS
During 2000, National City's operations were managed along the following six
major lines of business: retail sales and distribution, corporate banking,
consumer finance, asset management, National City Mortgage and National
Processing. A description of each business, selected financial information and
the methodologies used to measure financial performance are presented in Note 23
to the Consolidated Financial Statements. During the third quarter of 2000,
National City announced several organizational changes, which, once
operationally complete, may result in changes to the presentation of the line of
business results in future periods.
Net income (loss) by line of business follows:
- ----------------------------------------------------------------
(IN MILLIONS) 2000 1999 1998
- ----------------------------------------------------------------
Retail sales and distribution $ 521.5 $ 519.3 $ 508.6
Corporate banking 429.7 390.5 419.4
Consumer finance 150.4 151.5 117.5
Asset management 144.8 146.6 126.7
National City Mortgage 61.4 77.7 69.5
National Processing 43.4 (37.4) 13.4
Parent and other (48.8) 157.3 (184.4)
- ----------------------------------------------------------------
CONSOLIDATED NET INCOME $1,302.4 $1,405.5 $1,070.7
- ----------------------------------------------------------------
Net income for retail sales and distribution was $521.5 million in 2000, a
modest increase over $519.3 million in 1999 and $508.6 million in 1998. Results
for retail sales and distribution in 2000 were dampened by lower net interest
income, a higher loan loss provision and a decline in noninterest income, offset
by lower noninterest expense. A reduced level of earning assets, due in part to
the sale of $1.0 billion of low-spread adjustable-rate mortgages, along with a
lower level of core deposits, held down net interest income growth in 2000,
while a higher level of net charge-offs drove the increased provision for loan
losses. Branch sale gains of $9.5 million and gains from a higher level of
intercompany servicing sales boosted 1999 noninterest income. Noninterest
expense has benefited over the past year from cost efficiencies achieved through
branch reconfiguration and ongoing functional centralization efforts. These cost
efficiencies, combined with merger integration savings related to National
City's merger with First of America, also led to the increase in net income over
1998.
Corporate banking net income in 2000 of $429.7 million improved over net income
of $390.5 million in 1999 and $419.4 million in 1998. Strong growth in
commercial loans and leases and improved spreads drove the increase, offset to
some extent by a higher loan loss provision. Expansion in the Detroit,
Philadelphia and Chicago markets and a focus on specialized lending products,
including syndications, were valuable contributors to the growth in loans. The
increase in the provision for loan losses resulted from a higher level of net
charge-offs. Syndicated lending activities also contributed to the increase in
noninterest income in 2000, along with growth in cash management fees.
Noninterest expense rose due to an increase in personnel-related costs. Results
in 1999 declined from 1998 principally due to an increase in the loan loss
provision and a reduction in net interest income caused by lower loan spreads.
Consumer finance net income was $150.4 million in 2000, compared to $151.5
million in 1999 and $117.5 million in 1998. Results for consumer finance in 2000
included the $74.2 million gain from the sale of student loans, write-downs to
automobile lease residual values totaling $41.0 million and other charges
totaling $18.0 million recorded in connection with management's decision to
close certain nonconforming loan production channels and exit the automobile
leasing business. Excluding these items, net income for 2000 was down compared
to 1999 due to tighter margins in the dealer finance business, the loss of
spread income as a result of the sale of the student loans and net overhead
attributable to the acquisition of First Franklin in the third quarter of 1999.
Compared to 1998, results in 1999 were boosted by record loan origination
volumes.
Asset management, which includes institutional trust, brokerage and personal
wealth management, reported net income of $144.8 million in 2000, essentially
flat with 1999 net income of $146.6 million, but up from net income in 1998 of
$126.7 million. Despite an increase in assets under management and loan growth,
results for asset management in 2000 were constrained primarily by reduced fee
income from brokerage activities. New business and the strength of the equity
markets drove the increase in net income in 1999.
Net income for National City Mortgage was $61.4 million in 2000, compared to
$77.7 million in 1999 and $69.5 million in 1998. Results for this business unit
in 2000 were affected by the higher level of interest rates prevalent throughout
most of the year.
Net income for National Processing was up significantly in 2000. Results for
1999 included a $69.9 million loss from the divestiture of four business lines.
Excluding this loss from last year's earnings, net income in 2000 increased over
1999 on the strength of revenue growth in the merchant card processing business.
13
NATIONAL CITY
2000 ANNUAL REPORT
16
FINANCIAL REVIEW CONTINUED
FINANCIAL CONDITION
Average earning assets increased in 2000 to $77.8 billion from $76.1 billion in
1999 and $71.7 billion in 1998. Solid growth in commercial, residential real
estate and home equity loans, offset in part by the sales or securitization of
loans and securities, fueled the year-over-year increase. Strong loan
originations and an increase in the securities portfolio contributed most
prominently to the increase in average earning assets during 1999.
LOANS: Loan balances by portfolio type at December 31 follow:
- ---------------------------------------------------------------------
(IN MILLIONS) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------
Commercial $26,704 $23,403 $22,243 $18,218 $15,739
Real estate -
commercial 6,511 6,012 6,252 6,411 6,817
Real estate -
residential 13,357 10,396 10,777 10,812 11,823
Consumer 12,101 14,367 13,710 11,532 11,350
Credit card 2,152 2,340 1,852 2,048 2,240
Home equity 4,779 3,686 3,177 2,973 2,473
- ---------------------------------------------------------------------
TOTAL LOANS $65,604 $60,204 $58,011 $51,994 $50,442
- ---------------------------------------------------------------------
The percentage of loans in each category to total loans at year end follows:
- ----------------------------------------------------------------
2000 1999 1998 1997 1996
- ----------------------------------------------------------------
Commercial 40.7% 38.9% 38.2% 35.1% 31.3%
Real estate - commercial 9.9 10.0 10.8 12.3 13.5
Real estate - residential 20.4 17.3 18.6 20.8 23.4
Consumer 18.4 23.8 23.7 22.2 22.5
Credit card 3.3 3.9 3.2 3.9 4.4
Home equity 7.3 6.1 5.5 5.7 4.9
- ----------------------------------------------------------------
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0%
- ----------------------------------------------------------------
Commercial: Commercial loans grew 14.1% in 2000 due to continued strong demand
in local markets, successful expansion in the Detroit, Chicago and Philadelphia
markets and a greater emphasis on specialized lending, including syndications.
The commercial lease portfolio, included in commercial loans, grew to $1.8
billion at December 31, 2000, up from $1.2 billion at December 31, 1999.
A maturity distribution and interest rate information for commercial loans at
December 31, 2000 follows:
- ----------------------------------------------------------------------
ONE YEAR ONE TO OVER
(IN MILLIONS) OR LESS FIVE YEARS FIVE YEARS TOTAL
- ----------------------------------------------------------------------
Variable-rate $ 8,552 $10,551 $2,495 $21,598
Fixed-rate 1,507 2,711 888 5,106
- ----------------------------------------------------------------------
TOTAL $10,059 $13,262 $3,383 $26,704
- ----------------------------------------------------------------------
Commercial Real Estate: At December 31, 2000, commercial real estate loans
totaled $6.5 billion, compared to $6.0 billion at year-end 1999. Profitable
lending opportunities, primarily in Ohio, prompted the growth in commercial real
estate in 2000. During 1999, the Corporation deliberately pared back this
portfolio to reduce exposure to certain markets and property types.
Activities in commercial real estate are based primarily on relationships with
developers who are active in National City's local markets, with more than 90%
of outstandings in National City's six-state banking market.
Residential Real Estate: The residential real estate category includes both
conforming and nonconforming mortgage loans. Nonconforming mortgages are
primarily generated by the Corporation's First Franklin and Altegra Credit
Company subsidiaries and represent loans that are not saleable in the secondary
market for conforming loans due to the characteristics of the borrower, the
underlying documentation, the loan-to-value ratio, or some combination thereof,
among other factors. As of December 31, 2000, nonconforming mortgage loans
generated by these subsidiaries comprised approximately 50% of the residential
real estate portfolio, compared to approximately 16% at the end of 1999. During
2000, as part of a focused effort to retain higher-value assets, $2.7 billion of
First Franklin's production was retained in the residential real estate
portfolio. The retention of these loans accounted for the majority of the
increase in the residential real estate portfolio from 1999 to 2000.
Conforming mortgage loans are originated primarily by National City Mortgage
through a network of retail offices and wholesale/broker branches, and by the
retail line of business through traditional banking channels. Substantially all
conforming loan originations are sold in the secondary market. The right to
service the loans and receive servicing fee income is generally retained by the
Corporation. The off-balance-sheet portfolio of loans serviced for other
investors grew to $57.4 billion at December 31, 2000, up 22.8% from $46.7
billion at December 31, 1999, due to strong conforming loan originations.
Consumer: Consumer loans were $12.1 billion at year- end 2000, down from $14.4
billion at year-end 1999 due principally to the sale of $2.0 billion of
lower-yielding student loans in 2000. At December 31, 2000, the consumer loan
portfolio consisted of 58% indirect installment loans, including auto, marine
and RV loans, 23% direct installment loans, 15% retail automobile leases and 4%
student loans. Exclusive of student loans, the mix of the portfolio was
comparable to 1999. In December 2000, National City announced its intention to
exit the automobile leasing business and ceased origination of new leases.
Credit Card: Credit card balances, including unsecured personal and business
lines of credit, declined in 2000 due to the securitization of $600 million of
credit card receivables during the year and the transfer of $425 million of
loans out of portfolio and into the held-for-securitization category at year
end, offset in part by loans being transferred back onto the balance sheet as
other securitizations unwound. Off-balance-sheet securitized credit card
receivables totaled $630 million at December 31, 2000, compared to $500 million
at December 31, 1999.
Home Equity: Home equity loans consist primarily of revolving lines of credit
and totaled $4.8 billion at December 31, 2000, up 29.7% from $3.7 billion at
December 31, 1999. Aggressive marketing campaigns and a heightened focus on
cross-selling these loans to mortgage customers led to the sharp growth in
balances. Growth in 1999 compared to 1998 was driven by the expansion of this
product offering through national distribution channels.
14
NATIONAL CITY
2000 ANNUAL REPORT
17
SECURITIES: Securities balances at December 31 follow:
- ---------------------------------------------------------------------
(IN MILLIONS) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------
U.S. Treasury and
Federal agency
debentures $1,125 $ 1,171 $ 1,212 $ 2,074 $ 3,171
Mortgage-backed
securities 5,515 9,629 9,719 8,224 7,420
Asset-backed and
corporate debt
securities 1,440 2,633 3,044 1,625 991
States and political
subdivisions 767 826 917 824 723
Other securities 964 921 809 519 1,015
- ---------------------------------------------------------------------
TOTAL AMORTIZED COST $9,811 $15,180 $15,701 $13,266 $13,320
- ---------------------------------------------------------------------
TOTAL FAIR VALUE $9,904 $14,904 $16,119 $13,798 $13,412
- ---------------------------------------------------------------------
The Corporation uses securities to generate interest and dividend revenue, to
manage interest rate risk and to provide liquidity to meet operating cash needs.
Securities balances declined in 2000 as a result of the sale of $3.7 billion of
primarily lower-yielding, fixed-rate debt securities and runoff due to normal
paydown and maturity activity. At December 31, 2000, the securities balance
included a net unrealized gain, representing the difference between the fair
value of the securities and their amortized cost, of $93.2 million, compared to
a net unrealized loss of $275.9 million at December 31, 1999. Unrealized gains
and losses in the securities portfolio are included in stockholders' equity, net
of tax. The sale of the lower-yielding, fixed-rate debt securities and a decline
in year-over-year long-term interest rates led to the appreciation in the fair
value of the securities in 2000. The weighted-average yield on debt securities
included in the portfolio at December 31, 2000 was 6.41%, compared to 6.44% at
December 31, 1999.
FUNDING: Core deposits, the most significant source of funding, include
noninterest bearing deposits, NOW and money market accounts, savings accounts
and time deposits of individuals. Core deposit balances in 2000 were relatively
stable compared to 1999. During 2000, the Corporation introduced several
branding and customer-retention initiatives aimed at growing the core deposit
base, which had declined in previous years as competition and shifting customer
preferences made it more difficult to retain this typically lower-cost source of
funding.
Short-term borrowings are comprised primarily of Federal funds purchased,
securities sold under agreements to repurchase, U.S. Treasury demand notes and
commercial paper. Short-term borrowings generally fund short-term,
rate-sensitive earning asset growth. Long-term debt and capital securities
include senior and subordinated debt issued by the Corporation and its bank
subsidiaries. During 2000 and 1999, the Corporation increased its reliance on
long-term debt, through the issuance of senior bank notes and subordinated debt,
to fund loan growth and its share repurchase program.
Average funding sources follow:
- ----------------------------------------------------------------------
(IN MILLIONS) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------
Core deposits $46,005 $46,993 $48,194 $47,536 $49,521
Purchased deposits 6,064 5,732 5,724 4,213 3,658
Short-term borrowings 9,576 10,958 10,247 7,790 6,912
Long-term debt and
capital securities 16,454 13,316 7,698 4,972 3,611
Stockholders' equity 6,140 6,231 6,965 6,166 5,983
- ----------------------------------------------------------------------
TOTAL FUNDING $84,239 $83,230 $78,828 $70,677 $69,685
- ----------------------------------------------------------------------
The percentage of each funding source to total funding follows:
- ----------------------------------------------------------------
2000 1999 1998 1997 1996
- ----------------------------------------------------------------
Core deposits 54.6% 56.4% 61.1% 67.3% 71.1%
Purchased deposits 7.2 6.9 7.3 6.0 5.2
Short-term borrowings 11.4 13.2 13.0 11.0 9.9
Long-term debt and
capital securities 19.5 16.0 9.8 7.0 5.2
Stockholders' equity 7.3 7.5 8.8 8.7 8.6
- ----------------------------------------------------------------
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0%
- ----------------------------------------------------------------
Further detail of average deposits follows:
- ----------------------------------------------------------------------
(IN MILLIONS) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------
Noninterest bearing
deposits $10,792 $11,473 $ 9,945 $ 9,230 $ 9,188
NOW and money market
accounts 16,549 16,804 17,472 15,467 15,689
Savings accounts 3,207 3,818 4,158 5,037 5,190
Time deposits of
individuals 15,457 14,898 16,619 17,802 19,454
- ----------------------------------------------------------------------
Core deposits 46,005 46,993 48,194 47,536 49,521
- ----------------------------------------------------------------------
Other deposits 2,936 3,053 4,009 3,161 2,799
Foreign deposits 3,128 2,679 1,715 1,052 859
- ----------------------------------------------------------------------
Purchased deposits 6,064 5,732 5,724 4,213 3,658
- ----------------------------------------------------------------------
TOTAL DEPOSITS $52,069 $52,725 $53,918 $51,749 $53,179
- ----------------------------------------------------------------------
Certificates of deposit of $100,000 or more totaled $6.2 billion at December 31,
2000, of which $1.3 billion mature within three months, $.5 billion mature
within three to six months, $2.0 billion mature within six months to one year
and $2.4 billion mature beyond one year.
15
NATIONAL CITY
2000 ANNUAL REPORT
18
FINANCIAL REVIEW CONTINUED
ASSET QUALITY
The Corporation's loan portfolios are subject to varying degrees of credit risk.
Credit risk is mitigated through portfolio diversification, limiting exposure to
any single industry or customer, requiring collateral and employing standard
lending policies and underwriting criteria across the Corporation. The following
tables provide information and statistics on the overall quality of National
City's loan portfolio. Note 1 to the Consolidated Financial Statements describes
the Corporation's accounting policies related to nonperforming loans and
charge-offs and describes the methodologies used to develop the allowance,
including both the allocated and unallocated components. The Corporation's
policies governing nonperforming loans and charge-offs are consistent with
regulatory standards.
NONPERFORMING ASSETS: Nonaccrual and restructured loans and other nonperforming
assets at December 31 follow:
- ------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------
Commercial:
Nonaccrual $183.1 $130.2 $ 95.4 $108.9 $119.6
Restructured .1 .2 .4 1.1 3.5
- ------------------------------------------------------------------
Total commercial 183.2 130.4 95.8 110.0 123.1
- ------------------------------------------------------------------
Real estate mortgage:
Nonaccrual 185.6 137.0 120.2 123.4 104.5
Restructured .2 1.8 2.6 4.4 6.1
- ------------------------------------------------------------------
Total real estate
mortgage 185.8 138.8 122.8 127.8 110.6
- ------------------------------------------------------------------
TOTAL NONPERFORMING
LOANS 369.0 269.2 218.6 237.8 233.7
Other real estate
owned (OREO) 33.3 19.9 29.9 35.5 48.7
- ------------------------------------------------------------------
TOTAL NONPERFORMING
ASSETS $402.3 $289.1 $248.5 $273.3 $282.4
- ------------------------------------------------------------------
LOANS 90 DAYS PAST DUE
ACCRUING INTEREST $341.8 $230.0 $209.5 $136.1 $133.8
- ------------------------------------------------------------------
NONPERFORMING LOANS
AND OREO AS A
PERCENT OF:
Loans and OREO .61% .48% .43% .53% .56%
Assets .45 .33 .28 .36 .39
Equity 5.94 5.05 3.54 4.44 4.54
- ------------------------------------------------------------------
At December 31, 2000, nonperforming assets totaled $402.3 million, compared with
$289.1 million at year-end 1999 and $248.5 million at year-end 1998.
Nonperforming assets increased in both 2000 and 1999 due to weakness in the
healthcare sector and higher delinquencies in residential real estate loans,
primarily due to growth in nonconforming mortgages. Growth in the nonconforming
mortgage portfolio also led to the increase in loans 90 days past due accruing
interest in both 2000 and 1999.
ALLOWANCE FOR LOAN LOSSES: A reconciliation of the allowance for loan losses
follows:
- ----------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------
BALANCE AT
BEGINNING OF
YEAR $ 970.5 $ 970.2 $ 941.9 $ 958.7 $ 947.0
Provision 286.8 249.7 201.4 225.4 239.9
Allowance related to
loans acquired
(sold or
securitized) (42.4) .1 27.4 (19.5) .1
Charge-offs:
Commercial 96.4 81.4 43.7 63.7 67.0
Real estate -
commercial 6.9 6.9 9.3 8.1 6.1
Real estate -
residential 24.5 16.8 17.2 14.6 18.9
Consumer 167.4 174.8 146.7 157.9 168.5
Credit card 105.6 101.0 95.7 111.8 115.3
Home equity 7.2 6.9 8.8 4.7 4.9
- ----------------------------------------------------------------------
Total charge-offs 408.0 387.8 321.4 360.8 380.7
- ----------------------------------------------------------------------
Recoveries:
Commercial 17.9 19.7 25.4 28.1 40.0
Real estate -
commercial 4.0 8.7 7.3 7.2 4.0
Real estate -
residential .9 1.8 1.2 2.3 7.1
Consumer 73.0 82.7 63.8 77.6 79.5
Credit card 22.2 21.4 19.8 21.2 20.5
Home equity 3.7 4.0 3.4 1.7 1.3
- ----------------------------------------------------------------------
Total recoveries 121.7 138.3 120.9 138.1 152.4
- ----------------------------------------------------------------------
NET CHARGE-OFFS 286.3 249.5 200.5 222.7 228.3
- ----------------------------------------------------------------------
BALANCE AT END OF
YEAR $ 928.6 $ 970.5 $ 970.2 $ 941.9 $ 958.7
- ----------------------------------------------------------------------
LOANS OUTSTANDING AT
DECEMBER 31 $65,604 $60,204 $58,011 $51,944 $50,442
- ----------------------------------------------------------------------
ALLOWANCE AS A
PERCENTAGE OF:
Loans 1.42% 1.61% 1.67% 1.81% 1.90%
Nonperforming loans 251.7 360.5 443.8 396.1 410.2
- ----------------------------------------------------------------------
National City maintains an allowance for loan losses sufficient to absorb
estimated probable losses inherent in the loan portfolio. The evaluation of each
element and the overall allowance are based on the size and current risk
characteristics of the loan portfolio and include an assessment of individual
problem loans, actual loss experience, economic trends in specific industries
and geographical areas, and other factors including regulatory guidance and
general economic conditions.
While management considers the Corporation's allowance for loan losses to be
adequate based on information currently available, future adjustments to the
allowance may be necessary due to changes in economic conditions, management's
assumptions as to future delinquencies or loss rates, and management's intent
with regard to asset disposition options. In addition, the Corporation's
allowance for loan losses is periodically reviewed by the bank regulatory
agencies as an integral part of their examination process. Based on their
review, the agencies may require the Corporation to adjust the allowance for
loan
16
NATIONAL CITY
2000 ANNUAL REPORT
19
losses based on their judgments about information available to them at the time
of their review.
As portfolio loans are identified for sale or securitization, the balances,
along with the attributable allowance for loan losses, are reclassified to a
held-for-sale or securitization classification on the balance sheet. In 2000,
$42.4 million of allowance, attributable to portfolio loans sold or securitized
during the year and additional loans planned for securitization in early 2001,
became direct adjustments to the bases of these loans.
Net charge-offs increased in 2000 due to portfolio growth, a shift in mix toward
nonconforming loans and weakness in commercial credits, particularly leveraged
transactions.
An allocation of the ending allowance for loan losses by portfolio type follows:
- ----------------------------------------------------------------------
(IN MILLIONS) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------
Commercial $349.0 $241.9 $217.8 $196.3 $197.0
Real estate(a) 128.8 93.1 102.0 93.7 96.3
Consumer and home
equity 127.3 132.7 121.7 145.6 147.3
Credit card 120.3 134.5 101.7 81.3 82.2
Unallocated 203.2 368.3 427.0 425.0 435.9
- ----------------------------------------------------------------------
TOTAL ALLOWANCE $928.6 $970.5 $970.2 $941.9 $958.7
- ----------------------------------------------------------------------
(a)Includes allowance allocated to both real estate - commercial and real
estate - residential loan categories.
The allowance is allocated to the individual loan portfolios based on the
specific risks and loss factors associated with each loan type. The allowance
allocated to the commercial loan portfolio increased in 2000 reflecting
increased risk in certain sectors, such as health care and leveraged
transactions, a slowing economy and portfolio growth. Additional allowance was
also allocated to the residential real estate portfolio due to a higher
concentration of nonconforming loans. The unallocated portion of the allowance
reflects estimated inherent but undetected losses within the portfolio that are
probable due to uncertainties in economic conditions, delays in obtaining
information, including unfavorable information about a borrower's financial
condition, and risk factors that have not yet manifested themselves in loss
allocation factors. The unallocated allowance has declined over the past two
years as allowance has been allocated for the aforementioned weakness in
commercial credits, particularly leveraged transactions, softer economic
conditions, increased loss experience as portfolios have seasoned, as well as
other factors.
Average loans by portfolio type follow:
- ----------------------------------------------------------------------
(IN MILLIONS) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------
Commercial $24,830 $22,359 $20,135 $16,837 $14,899
Real estate -
commercial 6,222 6,239 6,407 6,562 7,230
Real estate -
residential 11,721 9,922 10,634 11,472 12,112
Consumer 13,215 13,831 12,589 11,257 11,406
Credit card 2,430 2,025 1,860 2,070 2,244
Home equity 4,204 3,312 3,102 2,702 2,258
- ----------------------------------------------------------------------
TOTAL $62,622 $57,688 $54,727 $50,900 $50,149
- ----------------------------------------------------------------------
Net charge-offs as a percentage of average loans by portfolio type follow:
- --------------------------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------
Commercial .32% .28% .09% .21% .18%
Real estate - commercial .05 (.03) .03 .01 .03
Real estate - residential .20 .15 .15 .11 .10
Consumer .71 .67 .66 .71 .78
Credit card 3.43 3.93 4.08 4.37 4.23
Home equity .08 .09 .17 .11 .16
- --------------------------------------------------------------
TOTAL NET CHARGE-OFFS TO
AVERAGE LOANS .46% .43% .37% .44% .46%
- --------------------------------------------------------------
CAPITAL
The Corporation has consistently maintained regulatory capital ratios at or
above the "well-capitalized" standards. For further detail on capital ratios,
see Note 14 to the Consolidated Financial Statements.
Stockholders' equity was $6.8 billion at December 31, 2000, up 18.2% from $5.7
billion at December 31, 1999. Reduced share repurchase activity and appreciation
in the unrealized fair value of the securities portfolio in 2000 drove most of
the growth in stockholders' equity. Book value per common share increased to
$11.06 at December 31, 2000, from $9.39 at December 31, 1999. Book value per
common share at December 31, 2000 included after-tax net unrealized gains on
securities available for sale of $.10 compared to after-tax net unrealized
losses of $.30 at year-end 1999.
During 2000 and 1999, the Corporation repurchased 2.5 million and 2.6 million
shares, respectively, of its common stock in accordance with an October 1999
authorization by the Corporation's Board of Directors allowing for the
repurchase of up to 30 million shares of National City common stock, subject to
an aggregate purchase limit of $1.0 billion. As of December 31, 2000, 24.9
million shares remained available for repurchase under this authorization.
During 1999 and 1998, 50 million and 10 million shares, respectively, of the
Corporation's common stock were repurchased in accordance with an October 1998
authorization by the Board of Directors, which allowed for the repurchase of up
to 60 million shares of National City common stock, subject to an aggregate
purchase limit of $2.7 billion.
In connection with the October 1999 authorization, the Corporation entered into
an agreement with a third party that provides the Corporation with an option to
purchase up to $300 million of National City common stock through the use of
forward transactions. The forward transactions can be settled from time to time,
at the Corporation's election, on a physical, net cash or net share basis. In
the case of net cash or net share settlement, the amount at which these forward
purchases can be settled depends primarily on the number of shares to be settled
and the future market price of the Corporation's common stock as compared with
the forward purchase price per share. At December 31, 2000, the Corporation had
open forward transactions involving
17
NATIONAL CITY
2000 ANNUAL REPORT
20
FINANCIAL REVIEW CONTINUED
9.3 million shares of its common stock. These forward transactions were settled
in early January 2001 through physical share settlement whereby National City
paid cash of $166.2 million, or $17.84 per share, to the third party in exchange
for taking physical delivery of the 9.3 million shares. On the settlement date,
common shares outstanding and stockholders' equity were reduced. The Corporation
may, but is not obligated to, enter into further forward transactions with the
third party until the agreement's final maturity date of April 19, 2002.
At December 31, 2000, the Corporation's market capitalization was $17.5 billion,
and there were 68,981 common stockholders of record. National City's common
stock is traded on the New York Stock Exchange under the symbol "NCC."
The Corporation paid dividends of $1.14 per common share in 2000, representing a
7.5% increase over the $1.06 per share paid in 1999.
The dividend payout is continually reviewed by management and the Board of
Directors. The dividend payout ratio, which shows the percentage of earnings per
share declared to stockholders as dividends, has averaged over 50% for the past
five years. It is management's intention to migrate to a lower payout ratio over
time.
LIQUIDITY MANAGEMENT
Effective liquidity management ensures the cash flow requirements of depositors
and borrowers, as well as the operating cash needs of the Corporation, are met.
Funds are available from a number of sources, including the securities
portfolio, the core deposit base, the ability to acquire large deposits and
issue bank notes in the local and national markets, and the capability to
securitize or package loans for sale.
The parent company has four major sources of funding to meet its liquidity
requirements: dividends and returns of investment from its subsidiaries, the
commercial paper market, a revolving credit agreement and access to the capital
markets.
The main sources for parent company cash requirements have been dividends and
returns of investment from its subsidiaries. At January 1, 2001, the amount of
dividends the bank subsidiaries can pay to the parent company without prior
regulatory approval was $1.2 billion, versus $1.4 billion at January 1, 2000.
The subsidiary banks declared dividends to the parent company of $950.0 million
in 2000 and $432.8 million in 1999. In 1999, the bank subsidiaries also provided
liquidity to the parent company in the form of returns of capital totaling $1.4
billion.
As discussed in Note 14 to the Consolidated Financial Statements and Item 1 of
Form 10-K (page 49), subsidiary banks are subject to regulation and, among other
things, may be limited in their ability to pay dividends or transfer funds to
the parent company. Accordingly, consolidated cash flows as presented in the
Consolidated Statements of Cash Flows on page 26 may not represent cash
immediately available for the payment of cash dividends to stockholders.
Funds raised in the commercial paper market through the Corporation's
subsidiary, National City Credit Corporation, support short-term cash needs of
the parent company and non-bank subsidiaries.
National City has a $350 million revolving credit agreement with a group of
unaffiliated banks which serves as a back-up liquidity facility. The agreement
expires February 1, 2001, with a provision to extend the expiration date under
certain circumstances. No borrowings have occurred under this facility.
The parent company also has in place a $300 million shelf registration with the
Securities and Exchange Commission permitting ready access to the public debt
markets.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. Interest rate risk is National City's primary market risk and
results from timing differences in the repricing of assets, liabilities and
off-balance-sheet instruments, changes in relationships between rate indices and
the potential exercise of explicit or embedded options. The Asset/Liability
Management Committee (ALCO) meets monthly and is responsible for reviewing the
interest-rate-sensitivity position of the Corporation and establishing policies
to monitor and limit exposure to interest rate risk. The guidelines established
by ALCO are reviewed by the Investment Committee of the Corporation's Board of
Directors.
ASSET/LIABILITY MANAGEMENT: The primary goals of asset/liability management are
to maximize net interest income and the net value of the Corporation's future
cash flows within authorized interest rate risk limits.
Interest Rate Risk Measurement: Interest rate risk is monitored primarily
through the use of two complementary measures: earnings simulation modeling and
net present value estimation. While each of these interest rate risk
measurements has limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk in the Corporation,
the distribution of risk along the yield curve, the level of risk through time,
and the amount of exposure to changes in certain interest rate relationships.
The key assumptions employed by these measures are analyzed periodically and
reviewed by ALCO.
Earnings Simulation Modeling: The Corporation's net income is affected by
changes in the absolute level of interest rates. Net income is also subject to
changes in the shape of the yield curve. In general, a flattening of the yield
curve would result in a decline in earnings due to the compression of earning
asset yields and funding rates, while a steepening would result in increased
earnings as investment margins widen. Earnings are also
18
NATIONAL CITY
2000 ANNUAL REPORT
21
affected by changes in spread relationships between certain rate indices, such
as the prime rate and LIBOR.
The earnings simulation model forecasts the effects on income under a variety of
scenarios that incorporate changes in the absolute level of interest rates,
changes in the shape of the yield curve and changes in interest rate
relationships against earnings in a stable rate environment. This model includes
assumptions about how the balance sheet is likely to evolve through time in
different interest rate environments. Loan and deposit growth rate assumptions
are derived from historical analysis and management's outlook, as are the
assumptions used to project yields and rates for new loans and deposits.
Securities portfolio maturities and prepayments are assumed to be reinvested in
similar instruments. Mortgage loan prepayment assumptions are developed from
industry median estimates of prepayment speeds in conjunction with the
historical prepayment performance of the Corporation's own loans. Noncontractual
deposit growth rates and pricing are modeled on historical patterns.
The most recent earnings simulation model projects net income would increase by
approximately .7% of stable-rate net income if rates were to fall gradually by
two percentage points over the next year. It projects a decrease of
approximately 1.0% if the rates were to rise gradually by two percentage points
over the same period. The projected decrease is within the ALCO guideline of
minus 4.0%.
Net Present Value Estimation: The Net Present Value ("NPV") measure is used for
discerning levels of risk present in the balance sheet that might not be taken
into account in the earnings simulation model due to the shorter time horizon
used by that model. The NPV of the balance sheet, at a point in time, is defined
as the discounted present value of asset cash flows and derivative cash flows
minus the discounted value of liability cash flows. Interest rate risk analysis
using NPV involves changing the interest rates used in determining the cash
flows and in discounting the cash flows. The resulting percentage change in NPV
is an indication of the longer-term repricing risk and options risk embedded in
the balance sheet. In contrast to the earnings simulation model, which assumes
rates will experience a gradual change and then stabilize at a particular level
after one year, implied forward rates are used for the NPV measure. The NPV
measure also assumes a static balance sheet, versus the growth assumptions that
are incorporated into the earnings simulation measure and an unlimited time
horizon instead of the one-year horizon applied in the earnings simulation. As
with earnings simulation modeling, assumptions about the timing and variability
of balance sheet cash flows are critical in NPV analysis. Particularly important
are the assumptions driving mortgage prepayments and the assumptions about
expected growth in the core deposit portfolios. These assumptions are applied
consistently in both models.
Based on the most recent net present value estimation, a 150 basis point
immediate decrease in rates was estimated to reduce NPV by .7%. NPV was
projected to decline by 3.7% if rates immediately increased by 150 basis points.
Policy limits restrict the amount of the estimated decline in NPV to 7.0%.
Summary information about the interest-rate risk measures follows:
- ------------------------------------------------------------
2000 1999
- ------------------------------------------------------------
ONE-YEAR NET INCOME SIMULATION PROJECTION
- -200 bp Ramp vs. Stable Rate .7% 2.4%
+200 bp Ramp vs. Stable Rate -1.0% -2.2%
STATIC NET PRESENT VALUE CHANGE
- -150 bp Shock vs. Stable Rate -.7% 1.0%
+150 bp Shock vs. Stable Rate -3.7% -6.9%
- ------------------------------------------------------------
As the measures presented above indicate, during 2000 the Corporation shifted to
a less liability-sensitive position aided by asset sales, reduced reinvestment
in securities and the use of off-balance-sheet instruments.
Interest Rate Risk Management: Financial instruments used to manage interest
rate risk include on-balance-sheet investment securities and off-balance-sheet
interest rate derivatives, which include interest rate swaps, interest rate caps
and floors, and exchange-traded futures and options contracts. Interest rate
derivatives have characteristics similar to securities but possess the
advantages of customization of the risk-reward profile of the instrument,
minimization of balance sheet leverage and improvement of the liquidity
position. See Notes 1, 2 and 22 to the Consolidated Financial Statements for
further discussion of off-balance-sheet derivatives.
TRADING RISK MANAGEMENT: The Corporation maintains a trading account primarily
to provide investment products and risk management services to its customers
and, to a lesser extent, take proprietary risk positions. Trading risk is
monitored on a regular basis through the use of the value-at-risk methodology
("VAR"). The Corporation primarily uses the historical simulation VAR method.
VAR is defined as the potential overnight dollar loss from adverse market
movements, with 97.5% confidence, based on historical prices and market rates.
During 2000, the average, high and low VAR amounts were $.3 million, $.4 million
and $.2 million, respectively, within the limit established by ALCO of $2.3
million. During 1999, the average, high, and low VAR amounts were $.5 million,
$.6 million and $.4 million, respectively. Month-end VAR estimates are monitored
regularly. Income from trading activities, including interest income, totaled
$20.4 million in 2000, $18.6 million in 1999 and $23.1 million in 1998.
19
NATIONAL CITY
2000 ANNUAL REPORT
22
QUARTERLY DATA
FOURTH QUARTER SUMMARY
For the fourth quarter of 2000, net income was $308.0 million, or $.50 per
diluted share, down from $343.5 million, or $.55 per diluted share, in the 1999
fourth quarter. Included in the 2000 fourth quarter results were pretax charges
of $44.0 million, or $28.6 million after tax, incurred in connection with the
realignment of the Corporation's consumer finance business, as well as after-tax
charges of $4.0 million incurred in connection with the decision to close a
small operating unit of National Processing. The effect of these charges was
equivalent to $.05 per diluted share. Excluding these charges, net income
declined due to increases in noninterest expense and the provision for loan
losses, offset in part by increases in fees and other income and net securities
gains.
For the fourth quarter of 2000, returns on average common equity and average
assets were 18.8% and 1.44%, respectively, compared to 22.8% and 1.59%,
respectively, for the 1999 fourth quarter.
QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly results are summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
FULL
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH YEAR
- ---------------------------------------------------------------------------------------------------------------------------------
2000
CONDENSED INCOME STATEMENT
Interest income $1,580,019 $1,646,474 $1,651,957 $1,688,133 $6,566,583
Interest expense 847,563 905,819 914,424 940,415 3,608,221
Net interest income 732,456 740,655 737,533 747,718 2,958,362
Provision for loan losses 66,326 68,691 70,363 81,415 286,795
Fees and other income 557,366 674,328 590,878 604,810 2,427,382
Net securities gains (losses) 21,533 (42,780) 27,435 50,664 56,852
Noninterest expense 759,093 785,070 785,309 854,437 3,183,909
Income before income tax expense 485,936 518,442 500,174 467,340 1,971,892
Net income 321,343 342,387 330,636 308,011 1,302,377
FINANCIAL RATIOS
Return on average common equity 22.45% 23.13% 21.13% 18.75% 21.29%
Return on average assets 1.50 1.59 1.56 1.44 1.52
Net interest margin 3.79 3.80 3.90 3.90 3.85
Efficiency ratio 58.47 55.16 58.74 62.78 58.75
PER COMMON SHARE
Basic net income $.53 $.56 $.55 $.50 $2.14
Diluted net income .53 .56 .54 .50 2.13
Dividends declared -- .285 .285 .285 .855
Dividends paid .285 .285 .285 .285 1.14
- ---------------------------------------------------------------------------------------------------------------------------------
1999
CONDENSED INCOME STATEMENT
Interest income $1,460,490 $1,440,265 $1,464,734 $1,547,120 $5,912,609
Interest expense 704,355 691,321 717,255 799,656 2,912,587
Net interest income 756,135 748,944 747,479 747,464 3,000,022
Provision for loan losses 68,034 59,542 55,476 66,622 249,674
Fees and other income 590,891 543,631 528,614 579,273 2,242,409
Net securities gains 23,688 57,224 20,353 37,095 138,360
Noninterest expense 739,202 757,235 705,963 780,104 2,982,504
Income before income tax expense 563,478 533,022 535,007 517,106 2,148,613
Net income 351,019 354,488 356,462 343,516 1,405,485
FINANCIAL RATIOS
Return on average common equity 21.12% 22.96% 23.79% 22.84% 22.64%
Return on average assets 1.66 1.71 1.71 1.59 1.67
Net interest margin 4.02 4.04 4.03 3.87 3.99
Efficiency ratio 54.53 58.16 54.88 58.41 56.49
PER COMMON SHARE
Basic net income $.55 $.56 $.58 $.56 $2.25
Diluted net income .54 .56 .57 .55 2.22
Dividends declared .26 .27 .27 .285 1.085
Dividends paid .26 .26 .27 .27 1.06
- ---------------------------------------------------------------------------------------------------------------------------------
20
NATIONAL CITY
2000 ANNUAL REPORT
23
STATISTICAL DATA
CONSOLIDATED SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA(a)
- ---------------------------------------------------------------------------------------------------------------------------------
For the Calendar Year
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest Income:
Loans $5,790 $4,938 $4,812 $4,487 $4,425 $4,383 $3,673 $3,420
Securities 740 922 885 840 854 966 911 945
Other 37 53 60 36 40 52 20 14
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 6,567 5,913 5,757 5,363 5,319 5,401 4,604 4,379
Interest Expense:
Deposits 1,937 1,636 1,846 1,813 1,862 1,975 1,479 1,547
Borrowings and long-term debt 1,671 1,277 999 739 612 673 420 187
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,608 2,913 2,845 2,552 2,474 2,648 1,899 1,734
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 2,959 3,000 2,912 2,811 2,845 2,753 2,705 2,645
Provision for Loan Losses 287 250 201 225 240 205 196 228
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 2,672 2,750 2,711 2,586 2,605 2,548 2,509 2,417
Fees and Other Income 2,427 2,243 2,180 1,766 1,528 1,332 1,274 1,202
Net Securities Gains 57 138 134 81 109 42 35 59
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,484 2,381 2,314 1,847 1,637 1,374 1,309 1,261
Noninterest Expense Before Merger Charges 3,184 2,983 2,998 2,727 2,725 2,690 2,635 2,540
Merger Charges -- -- 379 66 75 24 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,184 2,983 3,377 2,793 2,800 2,714 2,635 2,540
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of accounting changes 1,972 2,148 1,648 1,640 1,442 1,208 1,183 1,138
Income Taxes 670 743 577 518 448 380 364 334
- ---------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
changes 1,302 1,405 1,071 1,122 994 828 819 804
Cumulative effect of accounting changes, net -- -- -- -- -- -- -- 60
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $1,302 $1,405 $1,071 $1,122 $ 994 $ 828 $ 819 $ 864
- ---------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Diluted net income $2.13 $2.22 $1.61 $1.71 $1.48 $1.22 $1.21 $1.25
Diluted net income before merger charges 2.13 2.22 2.00 1.77 1.55 1.25 1.21 1.25
Dividends declared .855 1.085 .97 .86 .94 .65 .59 .53
Dividends paid 1.14 1.06 .94 .84 .74 .65 .59 .53
Average diluted shares 612.63 632.45 665.72 655.47 673.10 676.48 674.85 691.68
FINANCIAL RATIOS
Return on average common equity 21.29% 22.64% 15.40% 18.20% 16.69% 15.44% 16.39% 18.38%
Return on average common equity before merger
charges 21.29 22.64 19.18 18.77 17.53 15.82 16.39 18.38
Return on average assets 1.52 1.67 1.34 1.56 1.40 1.15 1.23 1.37
Return on average assets before merger charges 1.52 1.67 1.66 1.61 1.47 1.18 1.23 1.37
Average stockholders' equity to average assets 7.18 7.39 8.70 8.57 8.44 7.59 7.62 7.88
Dividend payout ratio 40.14 48.87 60.25 50.29 63.51 53.28 48.76 42.40
Net interest margin 3.85 3.99 4.11 4.37 4.47 4.24 4.53 4.71
AT YEAR END
Assets $88,535 $87,121 $88,246 $75,779 $72,918 $74,142 $70,438 $66,395
Loans(b) 69,043 62,935 61,519 53,244 50,886 50,543 47,536 42,996
Securities (fair value) 9,904 14,904 16,119 13,798 13,412 15,384 15,338 16,441
Deposits 55,256 50,066 58,247 52,617 53,619 54,923 54,755 51,388
Long-term debt 18,145 15,038 9,689 6,297 3,516 3,515 2,693 1,515
Common stockholders' equity 6,740 5,698 6,977 6,158 6,216 5,706 4,851 5,120
Total stockholders' equity 6,770 5,728 7,013 6,158 6,216 5,892 5,039 5,318
Common shares outstanding 609.19 607.06 652.65 631.39 661.72 650.96 652.68 665.66
- ---------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------- ---------------------------
For the Calendar Year
- -------------------------------------------------- ---------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1992 1991 1990
- -------------------------------------------------- ---------------------------
SUMMARY OF OPERATIONS
Interest Income:
Loans $3,540 $3,869 $4,110
Securities 1,041 1,052 1,025
Other 56 120 128
- --------------------------------------------------------------------------------
Total interest income 4,637 5,041 5,263
Interest Expense:
Deposits 1,949 2,513 2,762
Borrowings and long-term debt 153 212 295
- --------------------------------------------------------------------------------
Total interest expense 2,102 2,725 3,057
- --------------------------------------------------------------------------------
Net Interest Income 2,535 2,316 2,206
Provision for Loan Losses 305 394 484
- --------------------------------------------------------------------------------
Net interest income after provision for loan
losses 2,230 1,922 1,722
Fees and Other Income 1,099 957 888
Net Securities Gains 100 50 --
- --------------------------------------------------------------------------------
Total noninterest income 1,199 1,007 888
Noninterest Expense Before Merger Charges 2,597 2,309 2,177
Merger Charges -- -- --
- --------------------------------------------------------------------------------
Total noninterest expense 2,597 2,309 2,177
- --------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of accounting changes 832 620 433
Income Taxes 256 161 143
- --------------------------------------------------------------------------------
Income before cumulative effect of accounting
changes 576 459 290
Cumulative effect of accounting changes, net (21) -- --
- --------------------------------------------------------------------------------
Net Income $ 555 $ 459 $ 290
- --------------------------------------------------------------------------------
PER COMMON SHARE
Diluted net income $.82 $.71 $.46
Diluted net income before merger charges .82 .71 .46
Dividends declared .47 .47 .47
Dividends paid .47 .47 .47
Average diluted shares 677.63 641.67 626.82
FINANCIAL RATIOS
Return on average common equity 13.72% 12.60% 8.11%
Return on average common equity before merger
charges 13.72 12.60 8.11
Return on average assets .91 .80 .53
Return on average assets before merger charges .91 .80 .53
Average stockholders' equity to average assets 7.27 7.00 6.96
Dividend payout ratio 57.32 66.20 102.17
Net interest margin 4.68 4.59 4.62
AT YEAR END
Assets $62,469 $61,443 $57,417
Loans(b) 39,708 38,723 37,492
Securities (fair value) 15,525 14,327 12,003
Deposits 51,228 50,370 47,537
Long-term debt 1,264 780 575
Common stockholders' equity 4,269 3,756 3,492
Total stockholders' equity 4,582 4,159 3,719
Common shares outstanding 653.40 608.65 611.14
- --------------------------------------------------------------------------------
(a)Prior period data have been restated for stock splits and
pooling-of-interests transactions.
(b)Includes loans held for sale or securitization.
21
NATIONAL CITY
2000 ANNUAL REPORT
24
REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF MANAGEMENT
The management of National City Corporation has prepared the accompanying
financial statements and is responsible for their integrity and objectivity. The
statements have been prepared in conformity with accounting principles generally
accepted in the United States and necessarily include amounts that are based on
management's best estimates and judgments. Management also prepared the other
information in the annual report and is responsible for its accuracy and
consistency with the financial statements.
National City Corporation maintains a system of internal control over financial
reporting designed to produce reliable financial statements. The system contains
self-monitoring mechanisms, and compliance is tested and evaluated through an
extensive program of internal audits. Actions are taken to correct potential
deficiencies as they are identified. Any internal control system has inherent
limitations, including the possibility that controls can be circumvented or
overridden. Further, because of changes in conditions, internal control system
effectiveness may vary over time.
The Audit Committee, consisting entirely of outside directors, meets regularly
with management, internal auditors and independent auditors, and reviews audit
plans and results, as well as management's actions taken in discharging
responsibilities for accounting, financial reporting and internal controls.
Ernst & Young LLP, independent auditors, and the internal auditors have direct
and confidential access to the Audit Committee at all times to discuss the
results of their examinations.
National City Corporation assessed its internal control system as of December
31, 2000, in relation to criteria for effective internal control over financial
reporting described in "Internal Control - Integrated Framework", issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 2000, its system of
internal control met those criteria.
/s/ David A. Daberko /s/ Jeffrey D. Kelly
DAVID A. DABERKO JEFFREY D. KELLY
Chairman and Chief Chief Financial Officer
Executive Officer
Cleveland, Ohio
January 24, 2001
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Stockholders
National City Corporation
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of National City
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of National City's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform our
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National City
Corporation and subsidiaries at December 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 24, 2001
22
NATIONAL CITY
2000 ANNUAL REPORT
25
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
DECEMBER 31
------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
- ----------------------------------------------------------------------------------------------
ASSETS
Loans:
Commercial $26,703,622 $23,402,556
Real estate - commercial 6,511,018 6,012,016
Real estate - residential 13,357,438 10,396,422
Consumer 12,100,567 14,367,133
Credit card 2,152,445 2,339,658
Home equity 4,779,359 3,686,119
- ----------------------------------------------------------------------------------------------
Total loans 65,604,449 60,203,904
Allowance for loan losses (928,592) (970,463)
- ----------------------------------------------------------------------------------------------
Net loans 64,675,857 59,233,441
Loans held for sale or securitization:
Mortgage loans held for sale 3,030,672 2,731,166
Credit card loans held for securitization 407,900 --
- ----------------------------------------------------------------------------------------------
Total loans held for sale or securitization 3,438,572 2,731,166
Securities available for sale, at fair value 9,904,533 14,904,343
Federal funds sold and security resale agreements 81,040 556,351
Other investments 687,732 231,099
Cash and demand balances due from banks 3,535,186 3,480,756
Properties and equipment 1,071,637 1,127,980
Accrued income and other assets 5,140,052 4,856,363
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $88,534,609 $87,121,499
- ----------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest bearing deposits $11,500,026 $11,182,681
NOW and money market accounts 17,262,587 16,561,494
Savings accounts 2,883,763 3,470,700
Time deposits of individuals 15,816,422 14,700,944
Other deposits 4,072,308 2,897,166
Foreign deposits 3,721,316 1,253,325
- ----------------------------------------------------------------------------------------------
Total deposits 55,256,422 50,066,310
Federal funds borrowed and security repurchase
agreements 5,677,643 5,182,506
Borrowed funds 903,725 9,772,611
Long-term debt 17,964,800 14,858,014
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trusts holding solely
debentures of the Corporation 180,000 180,000
Accrued expenses and other liabilities 1,782,198 1,334,325
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 81,764,788 81,393,766
- ----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock, stated value $50 per share, authorized
5,000,000 shares, outstanding 599,365 shares in 2000 and
604,652 shares in 1999 29,968 30,233
Common stock, par value $4 per share, authorized
1,400,000,000 shares, outstanding 609,188,668 shares in
2000 and 607,058,364 shares in 1999 2,436,755 2,428,234
Capital surplus 837,444 782,960
Retained earnings 3,405,077 2,665,674
Accumulated other comprehensive income (loss) 60,577 (179,368)
- ----------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,769,821 5,727,733
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $88,534,609 $87,121,499
- ----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
23
NATIONAL CITY
2000 ANNUAL REPORT
26
CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------
FOR THE CALENDAR YEAR
-------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $5,790,093 $4,938,372 $4,811,735
Securities:
Taxable 641,406 826,332 793,461
Exempt from Federal income taxes 43,450 48,000 48,831
Dividends 54,852 47,918 42,969
Federal funds sold and security resale agreements 18,854 37,862 43,793
Other investments 17,928 14,125 15,888
- -----------------------------------------------------------------------------------------------------------
Total interest income 6,566,583 5,912,609 5,756,677
INTEREST EXPENSE
Deposits 1,937,034 1,635,533 1,846,276
Federal funds borrowed and security repurchase agreements 395,935 368,061 353,882
Borrowed funds 164,716 144,232 168,507
Long-term debt and capital securities 1,110,536 764,761 476,364
- -----------------------------------------------------------------------------------------------------------
Total interest expense 3,608,221 2,912,587 2,845,029
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 2,958,362 3,000,022 2,911,648
PROVISION FOR LOAN LOSSES 286,795 249,674 201,400
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,671,567 2,750,348 2,710,248
NONINTEREST INCOME
Mortgage banking revenue 478,954 389,292 327,247
Deposit service charges 442,753 420,448 384,938
Item processing revenue 412,444 416,782 484,503
Trust and investment management fees 334,627 325,856 311,050
Card-related fees 188,024 191,677 201,168
Other 570,580 498,354 470,777
- -----------------------------------------------------------------------------------------------------------
Total fees and other income 2,427,382 2,242,409 2,179,683
Net securities gains 56,852 138,360 134,459
- -----------------------------------------------------------------------------------------------------------
Total noninterest income 2,484,234 2,380,769 2,314,142
NONINTEREST EXPENSE
Salaries, benefits and other personnel 1,627,260 1,558,403 1,594,757
Equipment 229,476 209,774 212,871
Net occupancy 209,229 202,077 202,664
Third-party services 197,485 193,148 226,262
Merger charges -- -- 379,376
Other 920,459 819,102 761,183
- -----------------------------------------------------------------------------------------------------------
Total noninterest expense 3,183,909 2,982,504 3,377,113
- -----------------------------------------------------------------------------------------------------------
Income before income tax expense 1,971,892 2,148,613 1,647,277
Income tax expense 669,515 743,128 576,596
- -----------------------------------------------------------------------------------------------------------
NET INCOME $1,302,377 $1,405,485 $1,070,681
- -----------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $2.14 $2.25 $1.64
Diluted 2.13 2.22 1.61
AVERAGE COMMON SHARES OUTSTANDING
Basic 607,378,801 623,623,811 652,011,504
Diluted 612,625,349 632,452,146 665,720,330
- -----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
24
NATIONAL CITY
2000 ANNUAL REPORT
27
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------
PREFERRED COMMON CAPITAL RETAINED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STOCK STOCK SURPLUS EARNINGS
- ---------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1998 $ -- $1,262,790 $ 1,108,920 $ 3,440,763
Comprehensive income:
Net income 1,070,681
Other comprehensive income, net of tax:
Change in unrealized gains and losses on
securities of $13,689, net of
reclassification adjustment for net gains
included in net income of $87,398
Total comprehensive income
Common dividends declared, $.97 per share (637,099)
Preferred dividends declared (2,182)
Issuances of 9,584,990 common shares under
stock-based compensation and dividend
reinvestment plans, including related tax
effects 19,170 185,835
Repurchase of 10,000,000 common shares (20,000) (17,041) (310,667)
Issuances of 21,620,168 common shares and
739,976 preferred shares pursuant to
acquisition 36,999 43,240 690,245 (130,824)
Conversions of 18,022 shares of preferred
stock to 54,590 common shares (901) 109 792
- ---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $36,098 $1,305,309 $ 1,968,751 $ 3,430,672
Comprehensive income:
Net income 1,405,485
Other comprehensive income, net of tax:
Change in unrealized gains and losses on
securities of $(361,512), net of
reclassification adjustment for net gains
included in net income of $89,934
Total comprehensive income
Common dividends declared, $1.085 per share (669,699)
Preferred dividends declared (1,749)
Issuances of 6,471,813 common shares under
stock-based compensation and dividend
reinvestment plans, including related tax
effects 16,776 121,455
Repurchases of 52,595,200 common shares (128,805) (82,225) (1,499,035)
Issuance of 171,719 common shares pursuant to
acquisition 687 3,381
Conversions of 117,302 shares of preferred
stock to 355,312 common shares (5,865) 745 5,120
Stock split 1,233,522 (1,233,522)
- ---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $30,233 $2,428,234 $ 782,960 $ 2,665,674
Comprehensive income:
Net income 1,302,377
Other comprehensive income, net of tax:
Change in unrealized gains and losses on
securities of $276,899, net of
reclassification adjustment for net gains
included in net income of $36,954
Total comprehensive income
Common dividends declared, $.855 per share (519,561)
Preferred dividends declared (1,342)
Issuances of 4,618,092 common shares under
stock-based compensation and dividend
reinvestment plans, including related tax
effects 18,472 56,598
Repurchases of 2,503,800 common shares (10,015) (2,315) (42,071)
Conversions of 5,287 shares of preferred stock
to 16,012 common shares (265) 64 201
- ---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $29,968 $2,436,755 $ 837,444 $ 3,405,077
- ---------------------------------------------------------------------------------------------------
- ------------------------------------------------ -----------------------------
ACCUMULATED
OTHER
COMPREHENSIVE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME (LOSS) TOTAL
- ------------------------------------------------ -----------------------------
BALANCE, JANUARY 1, 1998 $ 345,787 $ 6,158,260
Comprehensive income:
Net income 1,070,681
Other comprehensive income, net of tax:
Change in unrealized gains and losses on
securities of $13,689, net of
reclassification adjustment for net gains
included in net income of $87,398 (73,709) (73,709)
----------
Total comprehensive income 996,972
Common dividends declared, $.97 per share (637,099)
Preferred dividends declared (2,182)
Issuances of 9,584,990 common shares under
stock-based compensation and dividend
reinvestment plans, including related tax
effects 205,005
Repurchase of 10,000,000 common shares (347,708)
Issuances of 21,620,168 common shares and
739,976 preferred shares pursuant to
acquisition 639,660
Conversions of 18,022 shares of preferred
stock to 54,590 common shares --
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 272,078 $ 7,012,908
Comprehensive income:
Net income 1,405,485
Other comprehensive income, net of tax:
Change in unrealized gains and losses on
securities of $(361,512), net of
reclassification adjustment for net gains
included in net income of $89,934 (451,446) (451,446)
----------
Total comprehensive income 954,039
Common dividends declared, $1.085 per share (669,699)
Preferred dividends declared (1,749)
Issuances of 6,471,813 common shares under
stock-based compensation and dividend
reinvestment plans, including related tax
effects 138,231
Repurchases of 52,595,200 common shares (1,710,065)
Issuance of 171,719 common shares pursuant to
acquisition 4,068
Conversions of 117,302 shares of preferred
stock to 355,312 common shares --
Stock split --
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $(179,368) $ 5,727,733
Comprehensive income:
Net income 1,302,377
Other comprehensive income, net of tax:
Change in unrealized gains and losses on
securities of $276,899, net of
reclassification adjustment for net gains
included in net income of $36,954 239,945 239,945
----------
Total comprehensive income 1,542,322
Common dividends declared, $.855 per share (519,561)
Preferred dividends declared (1,342)
Issuances of 4,618,092 common shares under
stock-based compensation and dividend
reinvestment plans, including related tax
effects 75,070
Repurchases of 2,503,800 common shares (54,401)
Conversions of 5,287 shares of preferred stock
to 16,012 common shares --
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 60,577 $ 6,769,821
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
25
NATIONAL CITY
2000 ANNUAL REPORT
28
CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------
FOR THE CALENDAR YEAR
----------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,302,377 $ 1,405,485 $ 1,070,681
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 286,795 249,674 201,400
Depreciation and amortization of properties and
equipment 173,187 160,445 156,214
Amortization of intangibles and servicing rights 211,294 179,617 129,756
Amortization of premiums/discounts on securities and
debt (6,513) (10,697) 1,717
Net securities gains (56,852) (138,360) (134,459)
Other gains and losses, net (264,102) (294,898) (274,007)
Originations and purchases of mortgage loans held for
sale (22,004,534) (17,911,207) (19,468,702)
Proceeds from sales of mortgage loans held for sale 21,139,085 18,610,242 14,642,818
Provision for deferred income taxes 276,473 298,978 230,093
Increase in accrued interest receivable (89,312) (73,122) (8,180)
Increase (decrease) in accrued interest payable 179,995 104,464 (78,669)
Merger charges -- -- 379,376
Net change in other assets/liabilities 31,719 (590,261) (726,225)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,179,612 1,990,360 (3,878,187)
- --------------------------------------------------------------------------------------------------------------
LENDING AND INVESTING ACTIVITIES
Net decrease (increase) in federal funds sold, security
resale agreements and other investments 18,678 361,191 (509,633)
Purchases of available-for-sale securities (2,476,211) (5,140,076) (14,848,366)
Proceeds from sales of available-for-sale securities 5,929,403 2,734,712 9,957,772
Proceeds from maturities and prepayments of
available-for-sale securities 1,953,207 3,099,308 3,662,739
Net increase in loans (8,605,866) (2,793,683) (1,902,952)
Proceeds from sales of loans 2,342,499 802,251 285,289
Proceeds from securitization of credit card receivables 600,000 -- --
Net increase in properties and equipment (134,359) (141,005) (230,156)
(Acquisitions)/disposals, net -- (234,566) 157,632
- --------------------------------------------------------------------------------------------------------------
Net cash used in lending and investing activities (372,649) (1,311,868) (3,427,675)
- --------------------------------------------------------------------------------------------------------------
DEPOSIT AND FINANCING ACTIVITIES
Net increase (decrease) in Federal funds borrowed and
security repurchase agreements 495,137 (4,244,803) 4,331,739
Net (decrease) increase in borrowed funds (8,868,886) 7,333,108 (2,177,174)
Net increase (decrease) in deposits 5,190,112 (8,180,599) 3,079,540
Repayments of long-term debt and capital securities (6,372,300) (2,320,643) (1,770,596)
Proceeds from issuances of long-term debt, net 9,476,838 7,672,035 5,045,431
Dividends paid (694,103) (668,491) (596,193)
Issuances of common stock 75,070 138,231 205,005
Repurchases of common stock (54,401) (1,710,065) (347,708)
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by deposit and financing
activities (752,533) (1,981,227) 7,770,044
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and demand balances due from
banks 54,430 (1,302,735) 464,182
Cash and demand balances due from banks, January 1 3,480,756 4,783,491 4,319,309
- --------------------------------------------------------------------------------------------------------------
CASH AND DEMAND BALANCES DUE FROM BANKS, DECEMBER 31 $ 3,535,186 $ 3,480,756 $ 4,783,491
- --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Interest paid $ 3,428,226 $ 2,805,805 $ 2,992,709
Income taxes paid 382,030 389,938 242,892
Common and preferred stock issued in purchase
acquisitions -- 4,068 787,184
- --------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
26
NATIONAL CITY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF OPERATIONS
National City Corporation ("National City" or "the Corporation") is a financial
holding company headquartered in Cleveland, Ohio. National City operates banks
and other financial services subsidiaries principally in Ohio, Michigan,
Pennsylvania, Indiana, Kentucky and Illinois. Principal activities include
commercial and retail banking, consumer finance, asset management, mortgage
financing and servicing, and item processing.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of National City conform with accounting
principles generally accepted in the United States. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated
financial statements include the accounts of the Corporation and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated. Certain prior year amounts have been reclassified to conform with
the current year presentation.
STATEMENT OF CASH FLOWS: Cash and due from banks are considered "cash and cash
equivalents" for financial reporting purposes.
BUSINESS COMBINATIONS: Business combinations accounted for under the purchase
method of accounting include the results of operations of the acquired business
from the date of acquisition. Net assets of the companies acquired are recorded
at their estimated fair value as of the date of acquisition.
Other business combinations accounted for under the pooling-of-interests method
of accounting retroactively combine the assets, liabilities and stockholders'
equity of the merged entity with the Corporation's respective accounts at
recorded value. Prior period financial statements are restated to give effect to
business combinations accounted for under this method.
LOANS: Loans are generally reported at the principal amount outstanding, net of
unearned income. Loans held for sale or securitization are valued at the lower
of carrying cost or fair value.
Interest income is recognized on an accrual basis. Loan origination fees,
certain direct costs and unearned discounts are amortized as an adjustment to
the yield over the term of the loan. Loan commitment fees are generally deferred
and amortized into fee income on a straight-line basis over the commitment
period. Other credit-related fees, including letter and line of credit fees and
loan syndication fees, are recognized as fee income when earned.
Commercial loans and leases and loans secured by real estate are designated as
nonperforming when either principal or interest payments are 90 days or more
past due, terms are renegotiated below market levels, or when an individual
analysis of a borrower's creditworthiness indicates that a credit should be
placed on nonperforming status, unless the loan or lease is sufficiently
collateralized such that full repayment of both principal and interest is
assured and is in the process of collection. When a loan is placed on
nonperforming status, uncollected interest accrued in prior years is charged
against the allowance for loan losses, while uncollected interest accrued in the
current year is charged against interest income. Future interest income may only
be recorded on a cash basis after recovery of principal is reasonably assured.
Commercial loans and leases and loans secured by real estate are generally
charged off to the extent principal and interest due exceed the net realizable
value of the collateral no later than when the loan becomes 180 days past due.
Commercial and commercial real estate loans exceeding $1 million are evaluated
for impairment in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of
a Loan, which requires an allowance to be established as a component of the
allowance for loan losses when it is probable that all amounts due pursuant to
the contractual terms of the loan will not be collected and the recorded
investment in the loan exceeds its fair value. Fair value is measured using
either the present value of expected future cash flows discounted at the loan's
effective interest rate, the observable market price of the loan or the fair
value of the collateral if the loan is collateral dependent. All loans
considered impaired are included in nonperforming assets.
Consumer loans are subject to mandatory charge-off at a specified delinquency
date and are usually not classified as nonperforming prior to being charged off.
Closed-end consumer loans, which include installment and student loans and
automobile leases, are generally charged off in full no later than when the loan
becomes 120 days past due. Open-end unsecured consumer loans, such as credit
card loans, are generally charged off in full no later than when the loan
becomes 150 days past due.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
level believed adequate by management to absorb probable losses inherent in the
loan portfolio and is based on the size and current risk characteristics of the
loan portfolio, an assessment of individual problem loans, actual and
anticipated loss experience, current economic events in specific industries and
geographical areas, and other pertinent factors including regulatory guidance
and general economic conditions. Determination of the allowance is inherently
subjective as it requires significant estimates, including the amounts and
timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience and consideration
of economic trends, all of which may be
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
susceptible to significant change. Loan losses are charged off against the
allowance, while recoveries of amounts previously charged off are credited to
the allowance. A provision for loan losses is charged to operations based on
management's periodic evaluation of the factors previously mentioned, as well as
other pertinent factors. When loans are identified for sale or securitization,
attributed loan loss allowance is reclassified as a direct reduction to the
carrying value of the loans.
The allowance for loan losses consists of an allocated component and an
unallocated component. The components of allowance for loan losses represent an
estimation done pursuant to either SFAS No. 5, Accounting for Contingencies, or
SFAS No. 114. The allocated component of the allowance for loan losses reflects
expected losses resulting from analysis developed through specific credit
allocations for individual loans and historical loss experience for each loan
category. The specific credit allocations are based on a regular analysis of all
loans over a fixed-dollar amount where the internal credit rating is at or below
a predetermined classification. The historical loan loss element is determined
statistically using a loss migration analysis that examines loss experience and
the related internal gradings of loans charged off. The loss migration analysis
is performed quarterly and loss factors are updated regularly based on actual
experience. The allocated component of the allowance for loan losses also
includes management's determination of the amounts necessary for concentrations
and changes in portfolio mix and volume.
The unallocated portion of the allowance is determined based on management's
assessment of general economic conditions, as well as specific economic factors
in the individual markets in which National City operates. This determination
inherently involves a higher degree of uncertainty and considers current risk
factors that may not have yet manifested themselves in the Corporation's
historical loss factors used to determine the allocated component of the
allowance, and it recognizes knowledge of the portfolio may be incomplete.
TRADING ACCOUNT ASSETS AND SECURITIES: Assets purchased with the intention of
recognizing short-term profits are considered trading assets, carried at fair
value and included in short-term investments. Realized and unrealized gains and
losses are included in other income. Interest on trading account assets is
recorded in interest income.
Securities are classified as held to maturity when management has the positive
intent and ability to hold the securities to maturity. Securities held to
maturity, when present, are carried at amortized cost.
Securities not classified as held to maturity or trading are classified as
available for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately through accumulated other
comprehensive income, net of tax.
Interest and dividends on securities, including amortization of premiums and
accretion of discounts, are included in interest income. The adjusted cost of
specific securities sold is used to compute gains or losses on sales.
VENTURE CAPITAL INVESTMENTS: Venture capital investments are included in other
assets. These investments are carried at estimated fair value with changes in
fair value recognized in other noninterest income. The fair values of publicly
traded investments are determined using quoted market prices. Investments that
are not publicly traded are carried at cost together with any
other-than-temporary valuation adjustments determined appropriate by management.
This adjusted cost basis approximates fair value.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE: Securities purchased under agreements to resell and
securities sold under agreements to repurchase are generally treated as
collateralized financing transactions and are recorded at the amounts at which
the securities were acquired or sold plus accrued interest. Securities,
generally U.S. government and Federal agency securities, pledged as collateral
under these financing arrangements cannot be sold or repledged by the secured
party. The fair value of collateral either received from or provided to a third
party is continually monitored and additional collateral obtained or requested
to be returned to the Corporation as deemed appropriate.
INTANGIBLE ASSETS: Goodwill and other intangible assets, net of accumulated
amortization, are included in other assets in the Consolidated Balance Sheets
and totaled $1,124.0 million and $77.3 million, respectively, at December 31,
2000, and $1,210.4 million and $96.0 million, respectively, at December 31,
1999. Goodwill, which represents the excess of the cost of an acquisition over
the fair value of the net assets acquired, is amortized on a straight-line basis
over varying periods generally not exceeding 25 years. Certain goodwill related
to purchase acquisitions at the Corporation's 87%-owned item processing
subsidiary, National Processing, Inc., is amortized over 40 years. Other
intangibles are amortized on a straight-line basis over varying periods not
exceeding 10 years. When certain events or other changes occur, management
evaluates goodwill and other intangible assets for recoverability. In
circumstances that indicate the carrying value of these assets may not be
recoverable, an impairment charge is recorded.
MORTGAGE SERVICING ASSETS: The Corporation recognizes rights to service mortgage
loans as separate assets. The total cost of loans sold is allocated between
loans and servicing rights based on the relative fair values of each. Purchased
mortgaged servicing rights are initially recorded at cost. All servicing rights
are subsequently carried at the lower of the initial carrying value, adjusted
for amortization, and deferred hedge gains and losses, or fair value. Servicing
rights are amortized in proportion to estimated net servicing income. Hedge
gains and losses are generated from off-balance-sheet derivative instruments
which are used to protect the value of the servicing assets in a falling
interest rate environment. The fair value associated with these derivative
instruments is considered when
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31
evaluating the servicing assets for impairment. The fair value of the servicing
rights is determined by estimating the present value of future net cash flows,
taking into consideration market loan prepayment speeds, discount rates,
servicing costs and other economic factors. As of December 31, 2000 and 1999,
mortgage servicing assets with a carrying value of $999.7 million and $785.0
million, respectively, were included in other assets.
DEPRECIABLE ASSETS: Properties and equipment are stated at cost less accumulated
depreciation and amortization. Buildings and equipment, including costs related
to developing or obtaining software for internal use, are depreciated on a
straight-line basis over their useful lives. Leasehold improvements are
amortized over the lives of the leases. Maintenance and repairs are charged to
expense as incurred, while improvements which extend the useful life are
capitalized and depreciated over the remaining life.
Long-lived assets to be held and those to be disposed of and certain intangibles
are evaluated for impairment using the guidance provided by SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. The provisions of this statement establish when an impairment
loss should be recognized and how it should be measured.
DERIVATIVE FINANCIAL INSTRUMENTS:
Interest Rate Risk Management: As part of managing the Corporation's interest
rate risk, a variety of derivative financial instruments are used to protect
against the risk of adverse price or interest rate movements on the value of
certain assets and liabilities or on future cash flows. These derivative
financial instruments consist primarily of interest rate swaps, including
callable swaps, interest rate caps and floors, and interest rate futures. The
derivative instruments used to manage interest rate risk are linked with a
specific asset or liability or a group of related assets or liabilities or cash
flows at the inception of the derivative contract. Net amounts payable or
receivable from these derivative contracts are accrued as adjustments to
interest income or expense of the hedged asset or liability. Realized gains and
losses on contracts, either settled or terminated, are deferred and are recorded
as either an adjustment to the carrying value of the related on-balance-sheet
asset or liability or in other assets or other liabilities. Deferred amounts are
amortized into interest income or expense over either the remaining original
life of the derivative instrument or the expected life of the associated asset
or liability. Unrealized gains or losses on these contracts are not recognized
on the balance sheet, except for those contracts linked to available-for-sale
securities, which are carried at fair value with changes in fair value, net of
interest accruals, recorded as other comprehensive income within stockholders'
equity, net of tax.
Mortgage Servicing Asset Risk Management: Net cash flows related to derivative
financial instruments used to hedge the value of mortgage servicing assets are
recognized as adjustments to the carrying value of the mortgage servicing assets
and are amortized over the life of the mortgage servicing portfolio. Unrealized
gains and losses are not recognized on the balance sheet but are considered when
evaluating the recoverability of the servicing assets.
Trading: Derivatives not used in an interest rate risk or mortgage servicing
asset risk hedging strategy are considered trading derivatives and are carried
at fair value with changes in fair value (including payments and receipts)
included in other income. These transactions are executed primarily with the
Corporation's customers to facilitate their interest rate and foreign currency
risk management strategies. Derivative instruments used for trading purposes
typically include interest rate swaps, including callable swaps, interest rate
caps and floors, and interest rate and foreign exchange futures, forwards and
options.
STOCK-BASED COMPENSATION: The Corporation's stock-based compensation plans are
accounted for based on the intrinsic value method set forth in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Compensation expense for stock options is generally not
recognized if the exercise price of the option equals or exceeds the fair market
value of the stock on the date of grant. Compensation expense for restricted
share awards is recognized over the period of service, usually the restricted
period, based on the fair value of the stock on the date of grant.
INCOME TAXES: The Corporation and its subsidiaries file a consolidated Federal
income tax return. The provision for income taxes is based upon income in the
financial statements, rather than amounts reported on the Corporation's income
tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income or
expense in the period that includes the enactment date.
TREASURY STOCK: Acquisitions of treasury stock are recorded on the par value
method, which requires the cash paid to be allocated to common or preferred
stock, capital surplus and retained earnings.
ASSET SECURITIZATION: Asset securitization involves the sale, generally to a
trust, of a pool of loan receivables. The Corporation continues to own the
accounts which generate the loan receivables. In addition, the Corporation also
sells the rights to new loan receivables, including most fees generated by and
payments received from the accounts. The trust sells undivided interests in the
trust to investors, while the Corporation retains the remaining undivided
interest. The senior classes of the asset-backed securities receive an AAA or A
credit rating at the time of issuance. These ratings are generally achieved
through the creation and sale of lower-rated subordinated classes
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2000 ANNUAL REPORT
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
of asset-backed securities. The Corporation continues to service the accounts
and receives a servicing fee.
During the revolving period, which generally approximates 48 months, the trust
is not required to make principal payments to the investors. Instead, the trust
uses principal payments received on the accounts to purchase new loan
receivables. Therefore, the principal dollar amount of the investor's undivided
interest remains unchanged. Once the revolving period ends, the trust
distributes principal payments to the investors according to the terms of the
transaction.
Distribution of principal to the investors may begin earlier if the average
annualized yield on the receivables securitized (generally including interest
income, interchange and other fees, less principal credit losses during the
period) for three consecutive months drops below a minimum yield (generally
equal to the sum of the coupon rate payable to investors plus contractual
servicing fees), or certain other events occur.
In accordance with SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, gains are recognized in
income at the time of initial sale and each subsequent sale of loan receivables
in an asset securitization.
2. RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended,
requires all derivative instruments to be carried at fair value on the balance
sheet. This requirement is in contrast to previous accounting guidance, which
does not require unrealized gains and losses on derivatives used for hedging
purposes to be recorded in the financial statements. The new statement does
allow hedge accounting treatment for derivatives used to hedge various risks and
sets forth specific criteria to be used to determine when hedge accounting can
be applied. Hedge accounting treatment provides for changes in fair value or
cash flows of both the derivative and the hedged item to be recognized in
earnings in the same period. SFAS No. 133 does not change the accounting for
those derivative instruments not designated in a hedge accounting relationship,
considered trading derivatives, for which fair value changes are recorded
through earnings as they occur.
Derivative instruments used to hedge the exposure to changes in the fair value
of an asset, liability or firm commitment attributable to a particular risk,
such as interest rate risk, are considered fair value hedges under SFAS No. 133,
while derivative instruments used to hedge the exposure to variability in
expected future cash flows, or other types of forecasted transactions, are
considered cash flow hedges. Fair value hedges are accounted for by recording
the fair value related to the risk being hedged of both the derivative
instrument and the hedged asset or liability on the balance sheet with a
corresponding offset recorded in the income statement. Cash flow hedges are
accounted for by recording only the value of the derivative instrument on the
balance sheet as either an asset or liability with a corresponding offset
recorded in other comprehensive income within stockholders' equity, net of tax.
Amounts are reclassified from other comprehensive income to the income statement
in the period the hedged cash flow occurs. Under both scenarios, derivative
gains and losses not considered effective in hedging the change in fair value or
expected cash flows of the hedged item are recognized immediately in the income
statement.
As discussed in Note 22 to the Consolidated Financial Statements, the
Corporation uses derivative instruments to protect against the risk of adverse
price or interest rate movements on the value of certain assets and liabilities
or on future cash flows. The fair value of these derivative instruments is
currently not on the balance sheet. On January 1, 2001, the Corporation adopted
SFAS No. 133, and at that time, designated anew the derivative instruments used
for risk management into hedging relationships in accordance with the
requirements of the new standard. Derivative instruments used to hedge changes
in the fair value of assets and liabilities due to changes in interest rates or
other factors were designated in fair value hedge relationships. Derivative
instruments used to hedge the variability of forecasted cash flows attributable
to a specific risk, generally interest rate risk, were designated in cash flow
hedge relationships. Also on January 1, 2001, after-tax transition amounts
associated with establishing the fair values of the derivative instruments and
hedged items on the balance sheet of $5.1 million and $26.0 million were
recorded as reductions of net income and other comprehensive income,
respectively. The transition adjustments will be presented as cumulative effect
adjustments, as described in Accounting Principles Board Opinion No. 20,
Accounting Changes, in the 2001 Consolidated Financial Statements. The
transition amounts were determined based on the interpretive guidance issued by
the Financial Accounting Standards Board to date. The FASB continues to issue
interpretive guidance which could require changes in National City's application
of the standard and adjustments to the transition amounts.
SFAS No. 133, as applied to the Corporation's risk management strategies, may
increase or decrease reported net income and stockholders' equity prospectively,
depending on future levels of interest rates and other variables affecting the
fair values of derivative instruments and hedged items, but will have no effect
on cash flows or economic risk.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES: SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, was issued in September
2000 and replaces SFAS No. 125. The guidance in SFAS No. 140, while not changing
most of the guidance originally issued in SFAS No. 125, revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain additional disclosures related to transferred
assets.
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Certain provisions of the statement related to the recognition, reclassification
and disclosure of collateral, as well as the disclosure of securitization
transactions, became effective for the Corporation for 2000 year-end reporting.
Other provisions related to the transfer and servicing of financial assets and
extinguishments of liabilities are effective for transactions occurring after
March 31, 2001.
Based on current circumstances and after consideration of planned revisions to
existing securitization agreements to conform them to the requirements of SFAS
No. 140, management believes the application of the new rules will not have a
material impact on the Corporation's results of operations, financial position
or liquidity.
3. MERGERS AND ACQUISITIONS
On November 1, 1999, National City acquired the retail, wholesale and
telemarketing production units of AccuBanc Mortgage Corporation, a single-family
residential mortgage lender headquartered in Dallas, Texas, for $42.3 million.
Goodwill of $40.1 million was recorded at the time of acquisition and is being
amortized over 20 years.
On August 31, 1999, National City acquired First Franklin Financial Companies,
Inc., a wholesale originator of nonconforming residential mortgage loans
headquartered in San Jose, California, for $266.1 million. First Franklin was
accounted for as a purchase and included in the Consolidated Statements of
Income from the date of acquisition. Goodwill of $233.2 million was recorded in
connection with the acquisition and is being amortized over 20 years.
On March 31, 1998, National City merged with First of America Bank Corporation,
a $21 billion asset bank holding company headquartered in Kalamazoo, Michigan,
in a transaction accounted for as a pooling of interests. National City issued
209.8 million shares of common stock to the shareholders of First of America
based upon an exchange ratio of 2.4 shares of National City common stock for
each outstanding share of First of America common stock. The historical
Consolidated Financial Statements have been restated to reflect this
transaction.
On March 30, 1998, National City acquired Fort Wayne National Corporation, a $3
billion asset bank holding company headquartered in Fort Wayne, Indiana, in a
transaction accounted for as a purchase. Upon acquisition, each share of Fort
Wayne common stock outstanding was converted into 1.5 shares of National City
common stock. A total of 21.6 million shares of National City common stock were
issued. National City also issued .7 million shares of 6% Cumulative Convertible
Preferred Stock, Series 1 in exchange for all of the outstanding shares of Fort
Wayne's 6% Cumulative Convertible Class B Preferred Stock. Goodwill of $571.0
million and a core deposit intangible asset of $71.9 million were recorded in
connection with the acquisition and are being amortized on a straight-line basis
over 25 and seven years, respectively.
In 1998, pretax merger charges totaling $379.4 million, or $261.9 million after
tax, were incurred in connection with the First of America and Fort Wayne
transactions.
4. DIVESTITURES AND REALIGNMENT CHARGES
During 2000, National City divested certain assets as part of a balance sheet
restructuring initiative intended to improve asset returns and capital position,
reduce reliance on purchased funding and lessen interest rate sensitivity. These
transactions included the sale of $3.7 billion of fixed-rate debt securities,
$2.0 billion of thin-spread student loans, and $1.0 billion of low-spread
adjustable rate mortgage loans.
Losses totaling $56.3 million pretax, or $36.6 million after tax, were incurred
related to the disposition of these securities and are included in net
securities gains. A pretax gain of $74.2 million, or $48.2 million after tax,
was recognized related to the sale of the student loans and is included in other
noninterest income. The sale of the adjustable-rate mortgage loans generated a
pretax gain of $10.6 million, or $6.9 million after tax, which is included in
mortgage banking revenue.
A portion of the debt securities, having a principal balance of $1.1 billion,
were sold to an unconsolidated qualified special purpose entity ("QSPE").
Through a receive-fixed interest rate swap, the Corporation receives the spread
between the yield earned on the debt securities and the commercial paper funding
cost. The interest rate swap is accounted for as a trading derivative. The
Corporation also provides certain services for which fees are earned. These fees
are included in other fee income. As of December 31, 2000, the QSPE held $2.0
billion of high grade fixed- and variable-rate securities.
On December 15, 2000, National City announced that, as part of a realignment of
the consumer finance business, it was closing its 69 Loan Zone(R) retail stores,
exiting the wholesale loan origination business of Altegra Credit Company, a
wholly-owned Pittsburgh-based subsidiary, and exiting the automobile leasing
business. Charges recorded in connection with this realignment totaled $44.0
million pretax, or $28.6 million after tax, and consisted of $26.0 million for
residual value write-downs on the Corporation's automobile lease portfolio, $3.7
million for severance costs, $9.0 million for goodwill impairment, $2.9 million
for facilities closures and lease obligations, and $2.4 million for fixed asset
impairment and other costs. The employees affected by this realignment were
individually notified of their status prior to December 31, 2000. These charges
are included in other noninterest expense.
Also in 2000, National Processing elected to divest of a small operating unit
and recorded a pretax charge of $7.1 million for goodwill and fixed-asset
impairment.
The following summarizes certain asset divestitures included in the
Corporation's 1999 results:
National City sold its 20% ownership interest in Electronic Payment Services,
Inc. ("EPS"), a provider of transaction
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
processing services, to Concord EFS, Inc. ("Concord") and recognized a pretax
gain of $95.7 million, or $62.2 million after tax. The gain on the sale of EPS
is included in other noninterest income. The transaction was effected by
exchanging common shares of EPS for shares of unregistered Concord common stock.
The shares were subsequently registered by Concord and National City sold its
holdings in Concord in the open market and recognized a pretax gain of $32.1
million, or $20.8 million after tax, which is included in net securities gains.
National Processing sold its freight payables, payables outsourcing, remittance
and merchant check services business lines. As a result, National City
recognized a loss, net of minority interest, of $60.8 million pretax, or $61.2
million after tax. The larger after-tax loss was the result of nondeductible
goodwill. The pretax impact of the National Processing business line
divestitures is included in other noninterest income.
National City also sold its interest in Stored Value Systems, Inc., a subsidiary
that had been involved in the development of smart card technology, for a gain
of $6.1 million pretax, or $4.0 million after tax. The gain is included in other
noninterest income.
5. ASSET SECURITIZATIONS
During 2000, the Corporation sold $600 million of credit card receivables in a
securitization transaction and recognized a pretax gain of $27.2 million, which
was recorded in other noninterest income, and was comprised of $25.0 million,
representing the attributed allowance for loan losses and $2.2 million,
reflecting the Corporation's recognition of its retained interest in the cash
flows of the trust. In the securitization, the Corporation retained servicing
responsibilities and subordinated interests. The Corporation receives annual
servicing fees approximating 2% of the outstanding credit card balances and the
rights to future cash flows arising after the investors in the securitization
trust have received the return for which they contracted. The investors and the
securitization trusts have no recourse to the Corporation's other assets for
failure of debtors to pay when due. The Corporation's retained interests are
subordinate to investor's interests. Their value is subject to credit,
prepayment, and interest rate risks on the transferred financial assets. The
retained interest is included in other assets. Transaction costs of $3.0 million
incurred in 2000 by the Corporation were deferred and will be amortized over the
five-year term of the trust as a reduction to card-related fee income. Card-
related fee income also includes other fees received by the Corporation for the
servicing of securitized and portfolio loans.
As of December 31, 2000, credit card portfolio loans of $425.0 million were
identified for securitization, and accordingly, the balances, along with the
attributable $17.1 million allowance for loan losses, were classified as loans
held for sale or securitization.
The Corporation uses certain assumptions and estimates in determining the fair
value allocated to the retained interest at the time of initial sale and each
subsequent sale in accordance with SFAS No. 125. These assumptions and estimates
include projections concerning the annual percentage rates charged to customers,
charge-off experience, loan repayment rates, the cost of funds, and discount
rates commensurate with the risks involved. These assumptions are reviewed
periodically by management. If these assumptions change, the related asset and
income would be affected.
For the credit card securitization completed during 2000, the fair value
assigned to the retained interest at the date of securitization was $2.2
million. Key economic assumptions used in measuring the retained interest at
this date were as follows: a monthly payment rate of 18.08%, a weighted average
life of 5.5 months, expected annual credit losses of 4.17%, a discount rate of
15.0%, a yield of 14.43% and a variable coupon rate to investors of 6.86%.
At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of residual cash flows on credit card receivables to
immediate 10% and 20% adverse changes in those assumptions follow:
- ------------------------------------------------------------
(DOLLARS IN MILLIONS)
- ------------------------------------------------------------
Carrying amount/fair value of retained interests $4.5
Weighted-average life (in months) 4.8
- ------------------------------------------------------------
PREPAYMENT SPEED ASSUMPTION (MONTHLY RATE) 17.84%
Decline in fair value of 10% adverse change $.4
Decline in fair value of 20% adverse change .7
- ------------------------------------------------------------
EXPECTED CREDIT LOSSES (ANNUAL RATE) 4.09%
Decline in fair value of 10% adverse change $1.0
Decline in fair value of 20% adverse change 2.1
- ------------------------------------------------------------
RESIDUAL CASH FLOWS DISCOUNT RATE (ANNUAL RATE) 15.0%
Decline in fair value of 10% adverse change $.02
Decline in fair value of 20% adverse change .04
- ------------------------------------------------------------
INTEREST RATES ON VARIABLE CONTRACTS (ANNUAL RATE) 14.80%
Decline in fair value of 10% adverse change $3.7
Decline in fair value of 20% adverse change 7.5
- ------------------------------------------------------------
These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a 10% variation in assumptions
generally cannot be extrapolated because the relationship of the change in the
assumption to the change in fair value may not be linear. Also, the effect of a
variation in a particular assumption on the fair value of the retained interest
is calculated without changing any other assumption; in reality, changes in one
factor may result in changes in another (for example, increases in market
interest rates may result in lower prepayments and increased credit losses),
which might magnify or counteract the sensitivities.
32
NATIONAL CITY
2000 ANNUAL REPORT
35
Certain cash flows received from and paid to securitization trusts follow:
- -----------------------------------------------------------------
FOR THE
CALENDAR YEAR
- -----------------------------------------------------------------
(IN MILLIONS) 2000 1999
- -----------------------------------------------------------------
Proceeds from new securitizations $600.0 $ --
Proceeds from collections reinvested in
previous credit card securitizations 927.2 1,024.5
Servicing fees received 9.1 11.8
Other cash flows received on retained
interests 23.0 40.3
Purchases of delinquent or foreclosed assets -- --
Servicing advances -- --
Repayments of servicing advances -- --
- -----------------------------------------------------------------
At December 31, 2000, investor principal in securitized loan receivables
scheduled to amortize into the Corporation's loan receivables in future years or
mature are $30 million in 2001 and $600 million after 2005. These amounts are
based upon estimated amortization periods, which are subject to change.
The average annualized yield and the minimum yield for the three-month period
ended December 31, 2000, presented on a cash basis, were 13.25% and 7.86%,
respectively, and included various credit card and other fees as specified in
the securitization agreements.
Quantitative information about delinquencies, net credit losses, and components
of managed credit card loans follows. This information excludes certain
unsecured personal and business lines of credit included in the caption "credit
card loans" presented elsewhere in this annual report.
- ---------------------------------------------------------------
(DOLLARS IN MILLIONS) 2000 1999 1998
- ---------------------------------------------------------------
Average credit card loans:
Loans held in portfolio $1,611.3 $1,401.9 $1,336.6
Loans securitized 477.9 601.3 855.8
- ---------------------------------------------------------------
Total managed loans $2,089.2 $2,003.2 $2,192.4
- ---------------------------------------------------------------
Year-end loans:
Loans held in portfolio $1,243.5 $1,618.1 $1,310.3
Loans held for
securitization 407.9 -- --
Loans securitized 630.0 500.0 770.0
- ---------------------------------------------------------------
Total managed loans $2,281.4 $2,118.1 $2,080.3
- ---------------------------------------------------------------
Net credit losses $ 84.9 $ 96.9 $ 115.1
Net credit losses to average
managed loans 4.06% 4.84% 5.25%
Delinquencies (30 days or
more) to year-end
managed loans 3.57% 3.80% 4.60%
- ---------------------------------------------------------------
6. LOANS AND ALLOWANCE FOR LOAN LOSSES
Total loans outstanding were recorded net of unearned income of $706.2 million
in 2000 and $667.9 million in 1999.
Activity in the allowance for loan losses follows:
- -----------------------------------------------------------------
FOR THE CALENDAR YEAR
- -----------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- -----------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 970,463 $ 970,243 $ 941,874
Provision 286,795 249,674 201,400
Allowance related to loans
acquired (sold or
securitized) (42,421) 45 27,501
Charge-offs (407,998) (387,779) (321,385)
Recoveries 121,753 138,280 120,853
- -----------------------------------------------------------------
Net charge-offs (286,245) (249,499) (200,532)
- -----------------------------------------------------------------
BALANCE AT END OF YEAR $ 928,592 $ 970,463 $ 970,243
- -----------------------------------------------------------------
In 2000, $42.4 million of the allowance was transferred to the bases of
portfolio loans sold or securitized during the year and additional loans held
for securitization in early 2001.
The Financial Review section provides detail regarding nonperforming loans. At
December 31, 2000 and
1999, impaired loans totaled $85.4 million and $24.9 million, respectively.
Average impaired loans for 2000, 1999 and 1998 totaled $59.4 million, $30.7
million and $21.5 million, respectively. All impaired loans are included in
nonperforming loans. The majority of the loans deemed impaired were evaluated
using the fair value of the collateral as the measurement method. The related
allowance allocated to impaired loans for 2000 and 1999 was $45.1 million and
$10.9 million, respectively. All impaired loans at December 31, 2000 and 1999
had an associated allowance. The contractual interest due and actual interest
recognized on nonperforming loans, including impaired loans, for 2000 was $33.1
million and $9.8 million, respectively, compared to $27.5 million and $11.4
million, respectively, for 1999, and $44.7 million and $10.2 million,
respectively, for 1998.
7. SECURITIES
Securities available for sale follow:
- ------------------------------------------------------------------------
DECEMBER 31, 2000
- ------------------------------------------------------------------------
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------
U.S. Treasury and
Federal agency
debentures $1,124,766 $ 8,052 $ 6,041 $1,126,777
Mortgage-backed
securities 5,514,642 16,578 55,079 5,476,141
Asset-backed and
corporate debt
securities 1,440,377 2,149 7,760 1,434,766
States and political
subdivisions 767,649 30,167 415 797,401
Other 963,903 107,093 1,548 1,069,448
- ------------------------------------------------------------------------
TOTAL SECURITIES $9,811,337 $164,039 $70,843 $9,904,533
- ------------------------------------------------------------------------
33
NATIONAL CITY
2000 ANNUAL REPORT
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------
DECEMBER 31, 1999
- --------------------------------------------------------------------------
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------
U.S. Treasury and
Federal agency
debentures $ 1,171,397 $ 137 $ 52,026 $ 1,119,508
Mortgage-backed
securities 9,629,200 13,638 291,041 9,351,797
Asset-backed and
corporate debt
securities 2,633,335 386 33,593 2,600,128
States and political
subdivisions 825,941 10,933 8,064 828,810
Other 920,376 84,829 1,105 1,004,100
- --------------------------------------------------------------------------
TOTAL SECURITIES $15,180,249 $109,923 $385,829 $14,904,343
- --------------------------------------------------------------------------
Other securities includes the Corporation's internally-managed equity portfolio
of bank and thrift common stock investments, which had an amortized cost and
fair value of $569.7 million and $668.8 million, respectively, at December 31,
2000, and $486.5 million and $550.9 million, respectively, at December 31, 1999.
The following table presents the amortized cost, fair value and weighted-average
yield of securities at December 31, 2000 by maturity:
- ------------------------------------------------------------------------------------
WEIGHTED
WITHIN 1 TO 5 5 TO 10 AFTER 10 AVERAGE
(DOLLARS IN MILLIONS) 1 YEAR YEARS YEARS YEARS TOTAL YIELD(a)
- ------------------------------------------------------------------------------------
U.S. Treasury and
Federal agency
debentures $ 30 $ 567 $ 528 $ -- $1,125 5.29%
Mortgage-backed
securities 14 2,265 3,195 41 5,515 6.32
Asset-backed and
corporate debt
securities 508 701 191 40 1,440 6.88
States and political
subdivisions 30 108 438 191 767 8.35
Other 76 -- -- 888 964 5.92
- ------------------------------------------------------------------------------------
AMORTIZED COST $658 $3,641 $4,352 $1,160 $9,811 6.41%
- ------------------------------------------------------------------------------------
FAIR VALUE $664 $3,634 $4,341 $1,265 $9,904
- ------------------------------------------------------------------------------------
Weighted Average
Yield(a) 4.13% 6.39% 6.37% 7.67% 6.41%
- ------------------------------------------------------------------------------------
(a) Yield on debt securities only; equity securities excluded.
Weighted-average yields are based on amortized cost. Yields on tax-exempt
securities are calculated on a tax-equivalent basis using the marginal Federal
income tax rate of 35%. Mortgage-backed securities are assigned to maturity
categories based on their estimated average lives. Equity securities are
included in other securities in the "after 10 years" category.
At December 31, 2000, the carrying value of securities pledged to secure public
and trust deposits, trading account liabilities, U.S. Treasury demand notes and
security repurchase agreements totaled $7.3 billion.
At December 31, 2000, there were no securities of a single issuer, other than
U.S. Treasury and other U.S. government agency securities, which exceeded 10% of
stockholders' equity.
In 2000, 1999 and 1998, gross securities gains of $124.3 million, $148.5 million
and $177.9 million and gross securities losses of $67.4 million, $10.1 million
and $43.4 million were recognized, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and relevant market information.
Where available, quoted market prices are used. In other cases, fair values are
based on estimates using present value or other valuation techniques. These
techniques are significantly affected by the assumptions used, including
discount rates and estimates of future cash flows. As such, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, further, may not be realizable in an immediate settlement of the
instruments.
The following table presents the estimates of fair value of financial
instruments at December 31, 2000 and 1999. Excluded are certain items not
defined as financial instruments including non-financial assets, intangibles and
future business growth, as well as certain liabilities such as obligations for
pension and other postretirement benefits, deferred compensation arrangements
and leases. Accordingly, the aggregate fair value amounts presented do not
purport to represent the underlying value of the Corporation.
34
NATIONAL CITY
2000 ANNUAL REPORT
37
- --------------------------------------------------------------------
2000 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $ 5,081 $ 5,081 $ 5,074 $ 5,074
Loans held for sale or
securitization 3,439 3,456 2,731 2,731
Loans, net of allowance
for loan losses 64,675 65,099 59,233 59,277
Securities 9,904 9,904 14,904 14,904
Other 384 384 253 253
- --------------------------------------------------------------------
FINANCIAL LIABILITIES
Deposits $(55,256) $(55,530) $(50,066) $(50,055)
Short-term borrowings (6,581) (6,581) (14,955) (14,955)
Long-term debt (18,145) (17,932) (15,038) (14,848)
Other (749) (749) (572) (572)
- --------------------------------------------------------------------
OFF-BALANCE-SHEET
FINANCIAL INSTRUMENTS
Interest rate swaps $ (24) $ 24 $ (6) $ (285)
Interest rate caps,
floors and futures 4 9 12 31
Trading account
derivatives 34 34 17 17
Commitments to extend
credit (48) (48) (33) (33)
Standby letters of credit (7) (7) (7) (7)
- --------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS: Due to their short-term nature, the carrying amounts
reported in the balance sheet approximate fair value for these assets. For
purposes of this disclosure only, cash equivalents include Federal funds sold,
security resale agreements, accrued interest receivable and other short-term
investments.
LOANS AND LOANS HELD FOR SALE OR SECURITIZATION: For performing variable rate
loans that reprice frequently and mortgage loans held for sale, estimated fair
values are based on carrying values. The fair value of credit card loans held
for securitization is based on the principal amount of the loans to be
securitized. The fair values for all other loans are estimated using a
discounted cash flow calculation that applies interest rates used to price new,
similar loans to a schedule of aggregated expected monthly maturities, adjusted
for market and credit risks.
SECURITIES: The fair values of securities are based primarily upon quoted market
prices.
DEPOSITS: The fair values disclosed for demand deposits (e.g., interest and
noninterest bearing checking, savings, and certain types of money market
accounts) are equal to the amounts payable on demand at the reporting date
(i.e., their carrying amounts). The carrying amounts for variable-rate money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
SHORT-TERM BORROWINGS: The carrying amounts of Federal funds borrowed, security
repurchase agreements, commercial paper, and other short-term borrowings
approximate their fair values.
LONG-TERM DEBT: The fair values of long-term borrowings (other than deposits)
are based on quoted market prices, where available, or are estimated using
discounted cash flow analyses based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: The amounts shown under carrying value
represent accruals or deferred income (fees) arising from the related
off-balance-sheet financial instruments. Fair values for off-balance-sheet
instruments (futures, swaps, forwards, options, guarantees and lending
commitments) are based on quoted market prices (futures); current settlement
values (financial forwards); quoted market prices of comparable instruments;
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing
(guarantees, loan commitments); or, if there are no relevant comparables, on
pricing models or formulas using current assumptions (interest rate swaps and
options).
9. PROPERTIES, EQUIPMENT AND LEASES
Properties and equipment follow:
- -----------------------------------------------------------------
DECEMBER 31
- -----------------------------------------------------------------
(IN THOUSANDS) 2000 1999
- -----------------------------------------------------------------
Land $ 138,235 $ 150,955
Buildings and leasehold improvements 939,835 994,953
Equipment 1,389,655 1,334,675
- -----------------------------------------------------------------
2,467,725 2,480,583
Less accumulated depreciation
and amortization 1,396,088 1,352,603
- -----------------------------------------------------------------
NET PROPERTIES AND EQUIPMENT $1,071,637 $1,127,980
- -----------------------------------------------------------------
The Corporation and certain of its subsidiary banks occupy their respective
headquarters offices and other facilities under long-term operating leases and,
in addition, lease certain data processing equipment. The aggregate minimum
annual rental commitments under these leases total approximately $101.7 million
in 2001, $91.9 million in 2002, $81.3 million in 2003, $70.5 million in 2004,
$61.8 million in 2005 and $269.0 million thereafter.
Total expense recorded under all operating leases in 2000, 1999 and 1998 was
$120.9 million, $103.2 million and $104.2 million, respectively.
35
NATIONAL CITY
2000 ANNUAL REPORT
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
10. FEDERAL FUNDS BORROWED AND SECURITY REPURCHASE AGREEMENTS
Detail of Federal funds borrowed and security repurchase agreements follows:
- ---------------------------------------------------------------
(DOLLARS IN MILLIONS) 2000 1999 1998
- ---------------------------------------------------------------
Balance at December 31:
Federal funds borrowed $1,786 $ 953 $4,303
Security repurchase agreements 3,892 4,230 5,124
Maximum outstanding at any month-end:
Federal funds borrowed $4,474 $4,949 $4,303
Security repurchase agreements 4,136 5,185 5,435
Daily average amount outstanding:
Federal funds borrowed $3,043 $3,258 $3,124
Security repurchase agreements 3,846 4,821 4,118
Weighted daily average interest rate:
Federal funds borrowed 6.43% 5.10% 5.37%
Security repurchase agreements 5.21 4.19 4.52
Weighted daily interest rate for
amounts outstanding at December 31:
Federal funds borrowed 5.82% 3.79% 4.78%
Security repurchase agreements 5.29 4.19 4.18
- ---------------------------------------------------------------
Federal funds borrowed and security repurchase agreements generally mature
within 30 days of the transaction date.
11. BORROWED FUNDS
Detail of borrowed funds follows:
- ----------------------------------------------------------------
DECEMBER 31
- ----------------------------------------------------------------
(IN THOUSANDS) 2000 1999
- ----------------------------------------------------------------
U.S. Treasury demand notes $413,947 $9,228,154
Commercial paper 368,619 313,396
Other 121,159 231,061
- ----------------------------------------------------------------
TOTAL BORROWED FUNDS $903,725 $9,772,611
- ----------------------------------------------------------------
U.S. Treasury demand notes represent secured borrowings from the U.S. Treasury.
These borrowings are collateralized by qualifying securities and loans. The
funds are placed with the banks at the discretion of the U.S. Treasury and may
be called at any time.
12. LONG-TERM DEBT
The composition of long-term debt, net of unamortized discount, follows:
- -----------------------------------------------------------------
DECEMBER 31
- -----------------------------------------------------------------
(Dollars in Thousands) 2000 1999
- -----------------------------------------------------------------
6.50% subordinated notes due 2000 $ -- $ 99,983
8.50% subordinated notes due 2002 99,967 99,943
6.625% subordinated notes due 2004 249,590 249,460
7.75% subordinated notes due 2004 199,082 198,825
8.50% subordinated notes due 2004 149,611 149,484
7.20% subordinated notes due 2005 249,872 249,843
5.75% subordinated notes due 2009 299,071 298,956
6.875% subordinated notes due 2019 698,870 698,809
Other 10,000 10,000
- -----------------------------------------------------------------
TOTAL PARENT COMPANY 1,956,063 2,055,303
- -----------------------------------------------------------------
6.50% subordinated notes due 2003 199,825 199,750
7.25% subordinated notes due 2010 223,435 223,271
6.30% subordinated notes due 2011 200,000 200,000
7.25% subordinated notes due 2011 197,869 197,672
6.25% subordinated notes due 2011 297,627 297,394
Other -- 1,142
- -----------------------------------------------------------------
TOTAL SUBSIDIARY 1,118,756 1,119,229
- -----------------------------------------------------------------
TOTAL LONG-TERM DEBT QUALIFYING FOR
TIER 2 CAPITAL 3,074,819 3,174,532
Senior bank notes 11,654,335 8,918,601
Federal Home Loan Bank advances 3,231,246 2,757,648
Other 4,400 7,233
- -----------------------------------------------------------------
TOTAL OTHER LONG-TERM DEBT 14,889,981 11,683,482
- -----------------------------------------------------------------
TOTAL LONG-TERM DEBT $17,964,800 $14,858,014
- -----------------------------------------------------------------
All of the subordinated notes of the parent and bank subsidiaries pay interest
semi-annually and may not be redeemed prior to maturity.
Long-term advances from the Federal Home Loan Bank (FHLB) are at fixed and
variable rates and have maturities ranging from 2001 to 2023. The weighted
average interest rate of the advances as of December 31, 2000 and 1999 was 6.59%
and 6.14%, respectively. Advances from the FHLB are collateralized by qualifying
residential mortgage loans.
The senior bank notes are at fixed and variable rates and have maturities
ranging from 2001 to 2078. The weighted average interest rate of the notes as of
December 31, 2000 and 1999 was 6.73% and 6.08%, respectively.
A credit agreement dated March 14, 1997, with a group of unaffiliated banks,
allows the Corporation to borrow up to $350 million until February 1, 2001, with
a provision to extend the expiration date under certain circumstances. The
Corporation pays an annual facility fee of 10 basis points on the amount of the
line. There were no borrowings outstanding under this agreement at
December 31, 2000.
Long-term debt maturities for the next five years are as follows: $6,414.1
million in 2001; $3,396.2 million in 2002; $1,527.7 million in 2003; $1,325.6
million in 2004, $1,407.3 million in 2005 and $3,906.0 million thereafter.
36
NATIONAL CITY
2000 ANNUAL REPORT
39
13. CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY DEBENTURES OF THE CORPORATION
- ---------------------------------------------------------------
DECEMBER 31
- ---------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- ---------------------------------------------------------------
8.12% capital securities of First of
America Capital Trust I due January 31,
2027 $150,000 $150,000
9.85% capital securities of Fort Wayne
Capital Trust I due April 15, 2027 30,000 30,000
- ---------------------------------------------------------------
TOTAL CAPITAL SECURITIES $180,000 $180,000
- ---------------------------------------------------------------
The corporation-obligated mandatorily redeemable capital securities (the
"capital securities") of subsidiary trusts holding solely junior subordinated
debt securities of the Corporation (the "debentures") were issued by two
statutory business trusts - First of America Capital Trust I and Fort Wayne
Capital Trust I, of which 100% of the common equity in each of the trusts is
owned by the Corporation. The trusts were formed for the purpose of issuing the
capital securities and investing the proceeds from the sale of such capital
securities in the debentures. The debentures held by each trust are the sole
assets of that trust. Distributions on the capital securities issued by each
trust are payable semi-annually at a rate per annum equal to the interest rate
being earned by the trust on the debentures held by that trust and are recorded
as interest expense by the Corporation. The capital securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures. The
Corporation has entered into agreements which, taken collectively, fully and
unconditionally guarantee the capital securities subject to the terms of each of
the guarantees.
The debentures held by First of America Capital Trust I and Fort Wayne Capital
Trust I qualify as Tier 1 capital under Federal Reserve Board guidelines and are
first redeemable, in whole or in part, by the Corporation on January 31, 2007
and April 15, 2007, respectively.
14. REGULATORY RESTRICTIONS AND CAPITAL RATIOS
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administrated by the federal banking agencies that involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. Failure to meet minimum
capital requirements can result in certain mandatory and possible additional
discretionary actions by regulators that could have a material effect on the
Corporation's financial statements and operations.
Regulatory and various other capital measures at December 31 follow:
- ------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------
(DOLLARS IN MILLIONS) AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------
Total equity(a) $6,769.8 7.65% $5,727.7 6.57%
Total common equity(a) 6,739.9 7.61 5,697.5 6.54
Tangible common equity(b) 5,538.7 6.34 4,391.1 5.12
Tier 1 capital(c) 5,554.5 6.91 4,828.0 6.61
Total risk-based capital(d) 9,108.8 11.34 8,190.2 11.22
Leverage(e) 5,554.5 6.60 4,828.0 5.72
- ------------------------------------------------------------------
(a) Computed in accordance with generally accepted accounting principles,
including unrealized fair value adjustment of securities available for sale.
(b) Common stockholders' equity less all intangible assets; computed as a ratio
to total assets less all intangible assets.
(c) Stockholders' equity plus qualifying capital securities and minority
interest less certain intangibles and other assets and the unrealized fair
value adjustment of securities available for sale; computed as a ratio to
risk-weighted assets, as defined.
(d) Tier 1 capital plus qualifying loan loss allowance and subordinated debt,
and 45% of unrealized holding gains on certain equity securities (Tier 2
capital); computed as a ratio to risk-weighted assets, as defined.
(e) Tier 1 capital; computed as a ratio to average total assets less certain
intangibles.
National City's Tier 1, total risk-based capital and leverage ratios for the
current period are based on preliminary data. Such ratios are above the required
minimum levels of 4.00%, 8.00% and 3.00%, respectively.
The capital levels at all of National City's subsidiary banks are maintained at
or above the well-capitalized minimums of 6.00%, 10.00% and 5.00% for the Tier 1
capital, total risk-based capital and leverage ratios, respectively. As of
December 31, 2000 and 1999, National City and each of its affiliate banks were
categorized as well-capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since December 31, 2000
that management believes have changed any entity's capital category.
The Corporation's subsidiary banks are required to maintain noninterest bearing
reserve balances with the Federal Reserve Bank. The consolidated average reserve
balance was $238.4 million for 2000.
Under current Federal Reserve regulations, the banking subsidiaries are limited
in the amount they may loan to the parent company and its nonbank subsidiaries.
Loans to a single affiliate may not exceed 10% and loans to all affiliates may
not exceed 20% of the bank's capital stock, surplus and undivided profits plus
the allowance for loan losses. Loans from subsidiary banks to nonbank
affiliates, including the parent company, are also required to be
collateralized.
Dividends that may be paid by subsidiary banks to the parent company are also
subject to certain legal and regulatory limitations and also may be impacted by
capital needs, as well as other factors. Without regulatory approval, the
subsidiary banks can pay dividends in 2001 of $1.2 billion, plus an additional
amount equal to their net profits for 2001, as defined by statute, up to the
date of any such dividend declaration.
37
NATIONAL CITY
2000 ANNUAL REPORT
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
15. STOCKHOLDERS' EQUITY
National City's preferred stock has a stated value of $50 per share. The holders
of the preferred shares are entitled to receive cumulative preferred dividends
payable quarterly at the annual rate of 6%. The preferred shares may be redeemed
by National City at its option at any time, or from time to time, on or after
April 1, 2002 at $50 per share, plus unpaid dividends. Such redemption may be
subject to prior approval by the Federal Reserve Bank. Holders of the preferred
shares have the right, at any time at their option, to convert each share of
preferred stock into 3.0291 shares of National City common stock. Except in
certain circumstances, the holders of the preferred stock have no voting rights.
During 2000 and 1999, the Corporation repurchased 2.5 million and 2.6 million
shares, respectively, of its common stock in accordance with an October 1999
authorization by the Corporation's Board of Directors allowing for the
repurchase of up to 30 million shares of National City common stock, subject to
an aggregate purchase limit of $1.0 billion. As of December 31, 2000, 24.9
million shares remained available for repurchase under this authorization.
During 1999 and 1998, 50 million and 10 million shares, respectively, of the
Corporation's common stock were purchased in accordance with an October 1998
authorization by the Board of Directors, which allowed for the repurchase of up
to 60 million shares of National City common stock, subject to an aggregate
purchase limit of $2.7 billion.
In connection with the October 1999 authorization, the Corporation entered into
an agreement with a third party that provides the Corporation with an option to
purchase up to $300 million of National City common stock through the use of
forward transactions. The forward transactions can be settled from time to time,
at the Corporation's election, on a physical, net cash or net share basis. In
the case of net cash or net share settlement, the amount at which these forward
purchases can be settled depends primarily on the number of shares to be settled
and the future market price of the Corporation's common stock as compared with
the forward purchase price per share. At December 31, 2000, the Corporation had
open forward transactions involving 9.3 million shares of its common stock.
These forward transactions were settled in early January 2001 through physical
share settlement whereby National City paid cash of $166.2 million, or $17.84
per share, to the third party in exchange for taking physical delivery of the
9.3 million shares. On the settlement date, common shares outstanding and
stockholders' equity were reduced. The Corporation may, but is not obligated to,
enter into forward transactions with the third party until the agreement's final
maturity date of April 19, 2002.
Common shares issued in connection with the Corporation's stock-based
compensation plans, including related tax effects, totaled 2.8 million, 4.9
million and 8.1 million in 2000, 1999 and 1998, respectively, while common
shares issued for the dividend reinvestment program totaled 1.8 million, 1.6
million and 1.5 million, respectively, for those same years. Beginning in late
2000, the dividend reinvestment program began purchasing shares of National City
common stock in the open market. Consequently, the Corporation no longer
directly issues shares of its common stock for this program.
On June 30, 1999, the Corporation declared a two-for-one stock split of its
common stock, which became effective July 26, 1999, to stockholders of record
July 9, 1999. The stock split was accounted for by a transfer of $1.2 billion
from capital surplus to common stock.
16. NET INCOME PER COMMON SHARE
Basic and diluted net income per common share calculations follow:
- ---------------------------------------------------------------------
FOR THE CALENDAR YEAR
- ---------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) 2000 1999 1998
- ---------------------------------------------------------------------
BASIC
Net income $1,302,377 $1,405,485 $1,070,681
Less preferred dividends 1,799 1,749 2,182
- ---------------------------------------------------------------------
Net income applicable to
common stock $1,300,578 $1,403,736 $1,068,499
- ---------------------------------------------------------------------
Average common shares
outstanding 607,378,801 623,623,811 652,011,504
- ---------------------------------------------------------------------
Net income per common
share - basic $2.14 $2.25 $1.64
- ---------------------------------------------------------------------
DILUTED
Net income $1,302,377 $1,405,485 $1,070,681
- ---------------------------------------------------------------------
Average common shares
outstanding 607,378,801 623,623,811 652,011,504
Stock option adjustment 3,429,063 6,958,873 12,040,250
Preferred stock adjustment 1,817,485 1,869,462 1,668,576
- ---------------------------------------------------------------------
Average common shares
outstanding - diluted 612,625,349 632,452,146 665,720,330
- ---------------------------------------------------------------------
Net income per common
share - diluted $2.13 $2.22 $1.61
- ---------------------------------------------------------------------
Basic net income per common share is calculated by dividing net income, less
dividend requirements on convertible preferred stock, by the weighted-average
number of common shares outstanding for the period.
Diluted net income per common share takes into consideration the pro forma
dilution assuming the Corporation's outstanding convertible preferred stock and
in-the-money outstanding stock options were converted or exercised into common
shares. Unsettled forward transactions to purchase the Corporation's common
stock may also affect diluted net income per common share. The forward
transactions entered into in 2000 and discussed in Note 15 had no dilutive
impact on diluted net income per common share during the year. Net income is not
adjusted for preferred dividend requirements since the preferred shares are
assumed to be converted from the beginning of the period. The average price of
the
38
NATIONAL CITY
2000 ANNUAL REPORT
41
Corporation's common stock for the period is used to determine the dilutive
effect of outstanding stock options.
17. INCOME TAXES
The composition of income tax expense follows:
- ------------------------------------------------------------------
FOR THE CALENDAR YEAR
- ------------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- ------------------------------------------------------------------
Current:
Federal $379,851 $428,492 $340,074
State 13,191 15,658 6,429
- ------------------------------------------------------------------
Total current 393,042 444,150 346,503
Deferred:
Federal 266,150 284,306 222,194
State 10,323 14,672 7,899
- ------------------------------------------------------------------
Total deferred 276,473 298,978 230,093
- ------------------------------------------------------------------
INCOME TAX EXPENSE $669,515 $743,128 $576,596
- ------------------------------------------------------------------
INCOME TAX EXPENSE APPLICABLE TO
SECURITIES TRANSACTIONS $ 19,898 $ 48,426 $ 47,061
- ------------------------------------------------------------------
The effective tax rate differs from the statutory Federal tax rate applicable to
corporations as a result of permanent differences between accounting and taxable
income as shown below:
- ------------------------------------------------------------------
FOR THE CALENDAR YEAR
- ------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------
Statutory Federal tax rate 35.0% 35.0% 35.0%
Life insurance (1.2) (1.0) (2.0)
Tax-exempt income (1.3) (1.2) (1.6)
Merger charges and goodwill .9 1.8 3.0
Other .6 -- .6
- ------------------------------------------------------------------
EFFECTIVE TAX RATE 34.0% 34.6% 35.0%
- ------------------------------------------------------------------
Significant components of deferred tax liabilities and assets as of December 31
follow:
- ---------------------------------------------------------------
(IN THOUSANDS) 2000 1999
- ---------------------------------------------------------------
Deferred tax liabilities:
Mortgage servicing $ 264,761 $191,209
Leasing 676,878 532,929
Depreciation 20,765 22,212
Mark-to-market adjustments 37,989 --
Other, net 198,479 173,400
- ---------------------------------------------------------------
Total deferred tax liabilities 1,198,872 919,750
Deferred tax assets:
Provision for loan losses 327,016 340,759
Employee benefits 4,904 32,325
Mark-to-market adjustments -- 102,800
Other, net 148,263 132,016
- ---------------------------------------------------------------
Total deferred tax assets 480,183 607,900
- ---------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 718,689 $311,850
- ---------------------------------------------------------------
For the years ended 2000, 1999 and 1998, income tax benefits of $6.7 million,
$36.4 million and $41.0 million, respectively, were credited to stockholders'
equity related to the exercise of nonqualified employee stock options.
18. OTHER CONTINGENT LIABILITIES
During the fourth quarter of 1999, the Corporation was notified by the Internal
Revenue Service ("IRS") of adjustments relating to its corporate-owned life
insurance ("COLI") programs proposed in the Revenue Agent's Reports for the
Corporation's Federal income tax returns for the years 1990 through 1995. These
proposed adjustments involve the disallowance of certain deductions, which, with
the expected effect on tax returns for years subsequent to 1995, represent an
exposure for tax and interest of approximately $200 million. In the first
quarter of 2000, the Corporation made payments of taxes and interest
attributable to COLI interest deductions for years 1990 through 1995 to avoid
the potential assessment by the IRS of any additional above-market rate interest
on the contested amount. The payments to the IRS are included on the balance
sheet in other assets pending the resolution of this matter. Management does not
agree with the proposed adjustments, will vigorously contest the IRS claim, and
will seek refund, either administratively or through litigation, of all amounts
paid plus interest. In the event that resolution of this matter is unfavorable,
it may have a material adverse effect on the Corporation's net income for the
period in which such unfavorable resolution occurs.
National City or its subsidiaries are also involved in a number of legal
proceedings arising out of their businesses and regularly face various claims,
including unasserted claims, which may ultimately result in litigation.
Exclusive of the aforementioned claim by the IRS, it is management's opinion the
Consolidated Financial Statements would not be materially affected by the
outcome of any present legal proceedings, commitments or asserted claims.
39
NATIONAL CITY
2000 ANNUAL REPORT
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
19. PARENT COMPANY
At December 31, 2000 and 1999, retained earnings of the parent company included
$5.0 billion and $4.7 billion, respectively, of equity in undistributed earnings
of subsidiaries.
Condensed parent company financial statements, which include transactions with
subsidiaries, follow:
BALANCE SHEETS
- ----------------------------------------------------------------
DECEMBER 31
- ----------------------------------------------------------------
(IN THOUSANDS) 2000 1999
- ----------------------------------------------------------------
ASSETS
Cash and demand balances
due from banks $ 1,686 $ 11,870
Loans to and receivables
from subsidiaries 232,233 257,848
Securities 1,142,187 975,790
Investments in:
Subsidiary banks 7,444,621 6,250,281
Nonbank subsidiaries 442,694 763,028
Goodwill, net of accumulated
amortization 79,852 86,738
Other assets 709,463 479,897
- ----------------------------------------------------------------
TOTAL ASSETS $10,052,736 $8,825,452
- ----------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt and capital
securities $ 2,146,031 $2,245,673
Borrowed funds 360,500 --
Accrued expenses and other
liabilities 776,384 852,046
- ----------------------------------------------------------------
Total liabilities 3,282,915 3,097,719
Stockholders' equity 6,769,821 5,727,733
- ----------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $10,052,736 $8,825,452
- ----------------------------------------------------------------
STATEMENTS OF INCOME
- ------------------------------------------------------------------
FOR THE CALENDAR YEAR
- ------------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- ------------------------------------------------------------------
INCOME
Dividends from:
Subsidiary banks $ 950,000 $ 432,774 $ 752,217
Nonbank subsidiaries 39,738 19,964 21,000
Interest on loans to
subsidiaries 28,510 16,891 28,034
Interest and dividends
on securities 45,821 36,279 33,590
Net securities gains 112,810 126,173 109,906
Other income 30,149 173,758 116,980
- ------------------------------------------------------------------
TOTAL INCOME 1,207,028 805,839 1,061,727
- ------------------------------------------------------------------
EXPENSE
Interest on debt and
other borrowings 194,436 182,980 129,586
Goodwill amortization 6,886 6,886 7,389
Other expense 14,731 15,793 413,500
- ------------------------------------------------------------------
TOTAL EXPENSE 216,053 205,659 550,475
- ------------------------------------------------------------------
Income before tax (benefit)
expense and equity in
undistributed net income of
subsidiaries 990,975 600,180 511,252
Income tax (benefit) expense (7,508) 39,913 (60,621)
- ------------------------------------------------------------------
Income before equity in
undistributed net income of
subsidiaries 998,483 560,267 571,873
Equity in undistributed net
income of subsidiaries 303,894 845,218 498,808
- ------------------------------------------------------------------
NET INCOME $1,302,377 $1,405,485 $1,070,681
- ------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------
FOR THE CALENDAR YEAR
- --------------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,302,377 $1,405,485 $1,070,681
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Equity in undistributed
net income of
subsidiaries (303,894) (845,218) (498,808)
Amortization of goodwill 6,886 6,886 7,389
Depreciation and
amortization of
properties and
equipment 1,596 1,596 1,596
Decrease in receivables
from subsidiaries 157,482 22,415 481,003
Net securities gains (112,810) (126,173) (109,906)
Increase in accrued
expenses and other
liabilities 94,724 231,084 44,108
Other, net (200,247) (34,596) (174,433)
- --------------------------------------------------------------------
Net cash provided
by operating activities 946,114 661,479 821,630
- --------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities (585,134) (588,913) (577,267)
Proceeds from sales and
maturities of securities 553,529 610,037 460,391
Principal collected on
loans to subsidiaries 132,697 59,780 260,721
Loans to subsidiaries (264,564) (212,298) (233,147)
Investments in
subsidiaries (5,384,850) (274,438) (192,707)
Returns of investment
from subsidiaries 5,004,600 1,373,000 310,000
- --------------------------------------------------------------------
Net cash (used in) provided
by investing activities (543,722) 967,168 27,991
- --------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of corporate
long-term debt and
capital securities (99,642) (568,951) (15,043)
Proceeds from issuance
of long-term debt, net -- 1,000,000 --
Net increase in borrowed
funds 360,500 -- --
Dividends paid (694,103) (668,491) (596,193)
Issuances of common stock 75,070 138,231 205,005
Purchases of common stock (54,401) (1,710,065) (347,708)
- --------------------------------------------------------------------
Net cash used
in financing activities (412,576) (1,809,276) (753,939)
- --------------------------------------------------------------------
(Decrease) increase in cash
and demand balances due
from banks (10,184) (180,629) 95,682
Cash and demand balances due
from banks, January 1 11,870 192,499 96,817
- --------------------------------------------------------------------
CASH AND DEMAND BALANCES DUE
FROM BANKS,
DECEMBER 31 $ 1,686 $ 11,870 $ 192,499
- --------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Interest paid $ 192,741 $ 166,759 $ 132,590
Common and preferred stock
issued in purchase
acquisitions -- 4,068 787,184
- --------------------------------------------------------------------
40
NATIONAL CITY
2000 ANNUAL REPORT
43
20. STOCK OPTIONS AND AWARDS
National City maintains various incentive and non-qualified stock-based
compensation plans that allow for the granting of restricted shares, stock
options or other stock-based awards to eligible employees and directors.
STOCK OPTION PLANS: The stock option plans under which options may currently be
granted authorize the issuance to officers and key employees of up to 50,000,000
options to purchase shares of common stock at the fair market value of the
common stock on the date of grant. These options generally become exercisable to
the extent of 50% annually beginning one year from the date of grant and expire
not later than ten years from the date of grant. In addition, stock options may
be granted that include the right to receive additional options not exceeding
the number of options exercised under the original grant if certain criteria are
met. The exercise price of an additional option is equal to the fair market
value of the common stock on the date the additional option is granted.
Additional options vest six months from the date of grant and have a contractual
term equal to the remaining term of the original option.
In 1995, National City granted 5.6 million options to purchase common stock at
the fair market value of the common stock on the date of grant to virtually all
employees in commemoration of National City's 150th anniversary. The options
became exercisable to the extent of 33% per year beginning two years from the
date of grant. As of December 31, 2000, 1.3 million of these options remained
outstanding and all were exercisable.
RESTRICTED STOCK PLANS: National City's restricted stock plans provide for the
issuance of up to 5,000,000 shares of common stock to officers, key employees
and outside directors. In general, restrictions on outside directors' shares
expire after nine months and restrictions on shares granted to key employees and
officers expire within a four-year period. The Corporation generally recognizes
compensation expense over the restricted period. Compensation expense recognized
in 2000, 1999 and 1998 totaled $6.9 million, $9.8 million and $5.8 million,
respectively, related to shares issued under these plans. Compensation expense
in 1999 included $4.3 million related to certain one-time executive contract
obligations.
OPTION AND RESTRICTED STOCK AWARD ACTIVITY: Stock option and restricted stock
award activity follow:
- -----------------------------------------------------------------------
SHARES
------------------------------------
AVAILABLE WEIGHTED-
FOR GRANT AVERAGE
----------- OUTSTANDING OPTION
AWARDS & ---------------------- PRICE PER
OPTIONS AWARDS OPTIONS SHARE
- -----------------------------------------------------------------------
January 1, 1998 33,673,082 1,163,904 34,538,864 $16.83
Options acquired -- -- 997,118
Cancelled 303,592 (32,096) (668,496) 20.65
Exercised -- (269,722) (8,643,776) 14.58
Granted (8,895,198) 499,410 9,525,446 34.10
- -----------------------------------------------------------------------
December 31, 1998 25,081,476 1,361,496 35,749,156 21.91
- -----------------------------------------------------------------------
Cancelled 785,437 (74,313) (977,412) 27.25
Exercised -- (537,217) (5,896,671) 14.18
Granted (8,418,024) 446,584 8,926,407 28.11
- -----------------------------------------------------------------------
December 31, 1999 17,448,889 1,196,550 37,801,480 24.38
- -----------------------------------------------------------------------
Cancelled 1,286,940 (96,908) (1,404,340) 26.49
Exercised -- (242,899) (2,489,526) 13.28
Granted (12,563,754) 979,896 12,040,430 18.17
- -----------------------------------------------------------------------
DECEMBER 31, 2000 6,172,075 1,836,639 45,948,044 $23.29
- -----------------------------------------------------------------------
Cancelled activity includes both forfeited and expired awards and options.
Information about stock options outstanding at December 31, 2000 follows:
- -------------------------------------------------------------------------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING WEIGHTED
AVERAGE CONTRACTUAL AVERAGE
RANGE OF EXERCISE LIFE EXERCISE
EXERCISE PRICES OUTSTANDING PRICE (IN YEARS) EXERCISABLE PRICE
- -------------------------------------------------------------------------------
$3.47-$11.99 1,962,726 $ 9.91 1.2 1,962,726 $ 9.91
12.00-16.99 5,584,593 14.08 1.6 5,584,593 14.08
17.00-21.99 15,127,456 17.81 8.4 3,749,971 17.59
22.00-26.99 1,633,406 24.66 5.1 1,239,808 24.28
27.00-31.99 13,167,267 28.29 7.5 8,616,279 28.45
32.00-37.81 8,472,596 34.21 7.3 7,760,267 34.22
- -------------------------------------------------------------------------------
TOTAL 45,948,044 $23.29 6.7 28,913,644 $24.38
- -------------------------------------------------------------------------------
At December 31, 2000, 1999 and 1998, options for 28,913,644, 22,289,080 and
18,687,238 shares of common stock, respectively, were exercisable.
PRO FORMA DISCLOSURES: For purposes of providing the pro forma disclosures
required under SFAS No. 123, Accounting for Stock-Based Compensation, the fair
value of stock options granted from 1995 through 2000 were estimated at the date
of grant using a Black-Scholes option pricing model. The Black-Scholes option
pricing model was originally developed for use in estimating the fair value of
traded options, which have different characteristics from the Corporation's
employee stock options. The model is also sensitive to changes in the subjective
assumptions, which can materially affect the fair value estimate. As a result,
management believes the Black-Scholes model may not necessarily provide a
reliable single measure of the fair value of employee stock options.
41
NATIONAL CITY
2000 ANNUAL REPORT
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
The following weighted-average assumptions were used in the option pricing model
for options granted in each of the last three years: a risk-free interest rate
of 5.01%, 6.33% and 4.54% for 2000, 1999 and 1998, respectively; an expected
life of the option of four years for 2000, 1999 and 1998; an expected dividend
yield of 3.50% for 2000, 4.00% for 1999 and 3.00% for 1998; and expected
volatility of 22.1% for 2000 and 1999 and 20.8% for 1998. The weighted-average
grant date fair value of options granted during 2000, 1999 and 1998 was $3.11,
$4.97 and $5.61, respectively. For purposes of the pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
Had compensation cost for the Corporation's stock option plans been determined
consistent with SFAS No. 123, net income and net income per share would have
been as follows:
- -------------------------------------------------------------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS) 2000 1999 1998
- -------------------------------------------------------------------
Pro forma net income $1,265,978 $1,371,182 $1,043,044
Pro forma net income per
share:
Basic $2.08 $2.20 $1.60
Diluted 2.07 2.17 1.57
- -------------------------------------------------------------------
21. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
National City has a noncontributory, defined benefit retirement plan covering
substantially all employees. Retirement benefits are derived from a cash balance
formula adopted in 1998, whereby credits based on salary, age and years of
service are credited to employee accounts. Actuarially-determined pension costs
are charged to current operations. The funding policy is to pay at least the
minimum amount required by the Employee Retirement Income Security Act of 1974.
National City also has a benefit plan, which offers post-retirement medical and
life insurance benefits. The medical portion of the plan is contributory and the
life insurance coverage is noncontributory to the participants. The Corporation
has no plan assets attributable to the plan and funds the benefits as claims
arise. Benefit costs related to this plan are recognized in the periods
employees provide service for such benefits. The Corporation reserves the right
to terminate or make plan changes at any time.
Plan asset and benefit obligation activity for each of the plans follows:(a)
- -----------------------------------------------------------------------
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------------- ---------------------
(DOLLARS IN THOUSANDS) 2000 1999 2000 1999
- -----------------------------------------------------------------------
CHANGE IN FAIR VALUE
OF PLAN ASSETS
Balance at beginning
of measurement
period $1,459,918 $1,294,517 $ -- $ --
Actual return on plan
assets 195,623 221,798 -- --
Employer contribution -- -- 9,070 9,699
Participant
contributions -- -- 6,105 5,548
Expenses paid (5,043) (5,161) -- --
Benefits paid (60,602) (51,236) (15,175) (15,247)
- -----------------------------------------------------------------------
BALANCE AT END OF
MEASUREMENT PERIOD $1,589,896 $1,459,918 $ -- $ --
- -----------------------------------------------------------------------
CHANGE IN BENEFIT
OBLIGATION
Balance at beginning
of measurement
period $ 932,528 $ 957,992 $ 111,847 $ 107,152
Service cost 39,405 37,278 2,174 2,268
Interest cost 68,225 65,864 8,008 7,622
Participant
contributions -- -- 6,105 5,548
Actuarial (gains)
losses 31,934 (77,370) 1,230 4,504
Benefits paid (60,602) (51,236) (15,175) (15,247)
- -----------------------------------------------------------------------
BALANCE AT END OF
MEASUREMENT PERIOD $1,011,490 $ 932,528 $ 114,189 $ 111,847
- -----------------------------------------------------------------------
Funded status $ 578,406 $ 527,390 $(114,189) $(111,847)
Unrecognized prior
service cost (61,859) (67,916) 796 (1,986)
Unrecognized net
actuarial (gain)
loss (335,463) (328,144) 15,301 12,781
Unrecognized net
(asset) obligation (8,500) (14,377) 15,877 21,440
- -----------------------------------------------------------------------
PREPAID (ACCRUED)
BENEFIT COST $ 172,584 $ 116,953 $ (82,215) $ (79,612)
- -----------------------------------------------------------------------
WEIGHTED-AVERAGE
ASSUMPTIONS FOR THE
MEASUREMENT PERIOD
Discount rate 7.25% 7.25% 7.25% 7.25%
Rate of compensation
increase 2.75-7.50 2.75-7.50 2.75-7.50 2.75-7.50
Expected return on
plan assets 10.00 10.00 -- --
- -----------------------------------------------------------------------
(a) Using a measurement date of October 31, 2000 and 1999 for the pension plan
and October 31, 2000 and December 31, 1999 for the postretirement plan.
Plan assets of the defined benefit retirement plan consisted primarily of
marketable equity securities and bonds, including $144.2 million and $28.3
million of National City common stock at December 31, 2000 and 1999,
respectively.
42
NATIONAL CITY
2000 ANNUAL REPORT
45
Components of net defined benefit pension plan and other postretirement benefit
plan costs follow:(a)
- -------------------------------------------------------------------
(IN THOUSANDS) 2000 1999 1998
- -------------------------------------------------------------------
PENSION BENEFITS
Service cost $ 39,405 $ 37,278 $ 34,192
Interest cost 68,225 65,864 64,753
Expected return on plan assets (138,352) (126,815) (110,585)
Amortization of prior service
cost (6,057) (5,850) (3,454)
Transition benefit (5,778) (5,778) (5,778)
Recognized net actuarial gain (13,074) (1,504) (6,531)
- -------------------------------------------------------------------
NET PERIODIC BENEFIT $ (55,631) $ (36,805) $ (27,403)
- -------------------------------------------------------------------
OTHER POSTRETIREMENT BENEFITS
Service cost $ 2,174 $ 2,268 $ 2,072
Interest cost 8,008 7,622 7,363
Amortization of prior service
cost (819) (819) (648)
Transition obligation 1,923 1,923 1,923
Recognized net actuarial gain 386 331 125
- -------------------------------------------------------------------
NET PERIODIC COST $ 11,672 $ 11,325 $ 10,835
- -------------------------------------------------------------------
(a) Using a measurement date of October 31, 2000 and 1999 for the pension plan
and October 31, 2000 and December 31, 1999 for the postretirement plan.
The health care trend rate assumption only affects those participants retired
under the plan prior to April 1, 1989. The 2000 health care trend rate is
projected to be 8.5% for participants under age 65 and 5.5% for participants
over 65. These rates are assumed to decrease incrementally by one half of a
percentage point per year until they reach 5.0% and remain at that level
thereafter. The health care trend rate assumption does not have a significant
effect on the medical plan; therefore, a one percentage point change in the
trend rate is not material in the determination of the accumulated
postretirement benefit obligation or the ongoing expense.
The Corporation also maintains nonqualified supplemental retirement plans for
certain key employees. All benefits provided under these plans are unfunded and
any payments to plan participants are made by the Corporation. At December 31,
2000 and 1999, obligations of $64.3 million and $56.1 million, respectively,
were included in accrued expenses and other liabilities for these plans. For the
years ended December 31, 2000, 1999 and 1998, expense related to these plans was
$16.1 million, $12.3 million and $24.9 million, respectively. The expense for
1998 included a $14.4 million curtailment charge relating to supplemental
executive retirement plans for former key employees of First
of America.
Substantially all employees with one or more years of service are eligible to
contribute a portion of their pretax salary to a defined contribution plan. The
Corporation may make contributions to the plan in varying amounts depending on
the level of employee contributions.
For the years ended 2000, 1999 and 1998, the expense related to this plan was
$35.5 million, $44.4 million and $39.2 million, respectively.
22. OFF-BALANCE-SHEET FINANCIAL AGREEMENTS
The Corporation uses a variety of off-balance-sheet financial instruments such
as interest rate swaps, futures, options, forwards, and cap and floor contracts.
These financial agreements, frequently called interest rate derivatives, enable
the Corporation to manage its exposure to changes in interest rates.
As with any financial instrument, derivatives have inherent risks. Market risk
includes the risk of gains and losses that result from changes in interest
rates. These gains and losses may be offset by other on- or off-balance-sheet
transactions. Credit risk is the risk that a counterparty to a derivative
contract with an unrealized gain fails to perform according to the terms of the
agreement. Credit risk can be measured as the cost of acquiring a new derivative
agreement with cash flows identical to those of a defaulted agreement in the
current interest rate environment. Credit exposure with counterparties is
managed by limiting the aggregate amount of net unrealized gains in agreements
outstanding, monitoring the size and the maturity structure of the derivatives
portfolio, applying uniform credit standards maintained for all activities with
credit risk, and collateralizing unrealized gains. The Corporation has
established bilateral collateral agreements with its major off-balance-sheet
counterparties that provide for exchanges of marketable securities to
collateralize either party's unrealized gains. On December 31, 2000, these
collateral agreements covered approximately 90% of the notional amount of the
derivatives portfolio, and the Corporation held net U.S. government and agency
securities with a fair value of $5.8 million from various counterparties to
collateralize unrealized gains. The Corporation has never experienced a credit
loss associated with any interest rate derivative.
Note 1 to the Consolidated Financial Statements includes a summary of how
derivative instruments used for interest rate and mortgage servicing risk
management are accounted for in the financial statements. In 2001, the
accounting for these instruments will change to comply with the requirements of
SFAS No. 133, which was adopted by the Corporation on January 1, 2001. The new
accounting requirements are discussed in Note 2 to the Consolidated Financial
Statements.
INTEREST RATE RISK MANAGEMENT: As part of managing interest rate risk, a variety
of derivative instruments are used to protect against the risk of interest rate
movements on the value of certain assets and liabilities or on future cash
flows. The nature and volume of derivative instruments used by the Corporation
to manage interest rate risk related to loans, investment securities and funding
products depend on the level and type of these on-balance-sheet items and the
Corporation's risk management strategies given the current and anticipated
interest rate environment.
The fair values of fixed-rate funding products were hedged against changes in
interest rates primarily through the use of receive-fixed interest rate swaps,
while the fair values of fixed-rate loans were hedged against
43
NATIONAL CITY
2000 ANNUAL REPORT
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
changes in interest rates through the use of pay-fixed interest rate swaps,
interest rate futures and interest rate caps and floors. Cash flow variability
stemming from adjustable-rate loan and funding products was hedged primarily
through the use of receive-fixed interest rate swaps and pay-fixed interest rate
swaps, respectively. Basis swaps were also used to manage risk associated with
certain variable cash flows.
The notional amounts of interest rate derivatives used for interest-rate risk
management purposes at December 31 follow:
- ---------------------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------------
NOTIONAL AMOUNT NOTIONAL AMOUNT
APPLICABLE TO HEDGED APPLICABLE TO HEDGED
ASSET/LIABILITY ASSET/LIABILITY
------------------------ TOTAL --------------------------------------
(IN THOUSANDS) LOANS FUNDING NOTIONAL LOANS SECURITIES FUNDING
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS
Receive-fixed swaps $ 130,000 $6,104,250 $ 6,234,250 $ 961,488 $ -- $ 4,792,000
Pay-fixed swaps 2,812,049 3,775,000 6,587,049 2,690,841 156,000 1,000,000
Basis swaps -- -- -- 2,000,000 -- 4,091,000
- ---------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps 2,942,049 9,879,250 12,821,299 5,652,329 156,000 9,883,000
INTEREST RATE CAPS AND FLOORS
Eurodollar caps purchased 3,396 -- 3,396 3,605 70,000 1,500,000
Eurodollar caps sold 390,000 -- 390,000 35,000 -- --
Eurodollar floors purchased -- -- -- 665,000 525,000 --
Eurodollar floors sold 10,000 -- 10,000 10,000 -- --
Prime caps sold 50,000 -- 50,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total interest rate caps and floors 453,396 -- 453,396 713,605 595,000 1,500,000
INTEREST RATE FUTURES
Futures purchased 627,000 -- 627,000 637,000 -- --
Futures sold 2,738,000 -- 2,738,000 808,000 10,756,000 --
- ---------------------------------------------------------------------------------------------------------------------------
Total interest rate futures 3,365,000 -- 3,365,000 1,445,000 10,756,000 --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST RATE SWAPS, CAPS,
FLOORS AND FUTURES $6,760,445 $9,879,250 $16,639,695 $7,810,934 $11,507,000 $11,383,000
- ---------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------ -----------
1999
-----------
TOTAL
(IN THOUSANDS) NOTIONAL
- ------------------------------------------ -----------
INTEREST RATE SWAPS
Receive-fixed swaps $ 5,753,488
Pay-fixed swaps 3,846,841
Basis swaps 6,091,000
- -------------------------------------------------------
Total interest rate swaps 15,691,329
INTEREST RATE CAPS AND FLOORS
Eurodollar caps purchased 1,573,605
Eurodollar caps sold 35,000
Eurodollar floors purchased 1,190,000
Eurodollar floors sold 10,000
Prime caps sold --
- -------------------------------------------------------
Total interest rate caps and floors 2,808,605
INTEREST RATE FUTURES
Futures purchased 637,000
Futures sold 11,564,000
- -------------------------------------------------------
Total interest rate futures 12,201,000
- -------------------------------------------------------
TOTAL INTEREST RATE SWAPS, CAPS,
FLOORS AND FUTURES $30,700,934
- -------------------------------------------------------
Summary information regarding the interest rate derivatives portfolio used for
interest rate risk management purposes at December 31, 2000 follows:
- -----------------------------------------------------------------------------------------------
TOTAL UNREALIZED UNREALIZED
(DOLLARS IN THOUSANDS) NOTIONAL GAINS LOSSES
- -----------------------------------------------------------------------------------------------
INTEREST RATE SWAPS
Receive-fixed swaps $ 4,452,250 $38,198 $ (13,912)
Pay-fixed swaps 6,505,698 15,563 (79,804)
Receive-fixed callable swaps 1,782,000 10,376 (18,831)
Pay-fixed callable swaps 81,351 1,183 (2,678)
- -----------------------------------------------------------------------------------------------
Total interest rate swaps 12,821,299 65,320 (115,225)
INTEREST RATE CAPS AND FLOORS
One-month Eurodollar caps purchased 3,396 -- (68)
Three-month Eurodollar caps sold 390,000 9,302 (3,700)
Three-month Eurodollar floors sold 10,000 358 (556)
Prime caps sold 50,000 1,295 (373)
- -----------------------------------------------------------------------------------------------
Total interest rate caps and floors 453,396 10,955 (4,697)
INTEREST RATE FUTURES
Eurodollar futures purchased 627,000 436 --
Eurodollar futures sold 2,738,000 46 (1,960)
- -----------------------------------------------------------------------------------------------
Total interest rate futures 3,365,000 482 (1,960)
- -----------------------------------------------------------------------------------------------
TOTAL INTEREST RATE SWAPS, CAPS, FLOORS AND
FUTURES $16,639,695 $76,757 $(121,882)
- -----------------------------------------------------------------------------------------------
- ------------------------------------------ -------------------------------------
WEIGHTED AVERAGE
-------------------------------------
RECEIVE PAY STRIKE LIFE
(DOLLARS IN THOUSANDS) RATE(a) RATE(a) RATE(a) (YEARS)
- ------------------------------------------ -------------------------------------
INTEREST RATE SWAPS
Receive-fixed swaps 6.38% 6.64% -- 5.6
Pay-fixed swaps 6.65 6.40 -- 2.5
Receive-fixed callable swaps 6.99 6.79 -- 3.0
Pay-fixed callable swaps 6.81 6.35 -- 5.4
- ---------------------------------------------------------------------------------
Total interest rate swaps
INTEREST RATE CAPS AND FLOORS
One-month Eurodollar caps purchased -- -- 9.00% 11.2
Three-month Eurodollar caps sold -- -- 7.12 4.4
Three-month Eurodollar floors sold -- -- 6.52 5.9
Prime caps sold -- -- 10.00 4.1
- ---------------------------------------------------------------------------------
Total interest rate caps and floors
INTEREST RATE FUTURES
Eurodollar futures purchased -- -- -- --
Eurodollar futures sold -- -- -- --
- ---------------------------------------------------------------------------------
Total interest rate futures
- ---------------------------------------------------------------------------------
TOTAL INTEREST RATE SWAPS, CAPS, FLO
FUTURES
- ---------------------------------------------------------------------------------
(a) The weighted average rates are those in effect in the specified contracts at
December 31, 2000.
44
NATIONAL CITY
2000 ANNUAL REPORT
47
The expected notional maturities of off-balance-sheet instruments used for
interest-rate risk management at December 31, 2000 follow:
- ---------------------------------------------------------------------------------------------------------------------------------
GREATER
LESS THAN 1 TO 3 3 TO 5 5 TO 10 THAN 10
(IN THOUSANDS) 1 YEAR YEARS YEARS YEARS YEARS
- ---------------------------------------------------------------------------------------------------------------------------------
Receive-fixed swaps $2,869,250 $ 935,000 $ 365,000 $ 645,000 $1,420,000
Pay-fixed swaps 779,962 4,083,342 1,001,205 721,465 1,075
Caps purchased -- -- -- -- 3,396
Caps sold -- -- 430,000 10,000 --
Floors sold -- -- -- 10,000 --
Futures purchased 185,000 317,000 125,000 -- --
Futures sold 1,261,000 494,000 374,000 609,000 --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $5,095,212 $5,829,342 $2,295,205 $1,995,465 $1,424,471
- ---------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SERVICING ASSET RISK MANAGEMENT: The Corporation uses off-balance-sheet
derivative contracts to hedge the fair value of its mortgage servicing
portfolio. The fair value of the mortgage servicing portfolio is adversely
affected when mortgage interest rates decline and mortgage loan prepayments
increase. To hedge this exposure, the Corporation enters into receive-fixed
interest rate swaps and purchases interest rate caps and floors. The Corporation
also enters into interest rate swaps where the Corporation receives the periodic
total return of principal only mortgage-backed securities and pays a variable
rate based on one-month Eurodollar rates.
Information regarding the interest rate derivatives portfolio used for hedging
mortgage servicing assets follows:
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
----------------------------------------------------------------------------------
WEIGHTED AVERAGE DECEMBER 31,
----------------------------- 1999
NOTIONAL UNREALIZED UNREALIZED RECEIVE PAY STRIKE LIFE NOTIONAL
(DOLLARS IN THOUSANDS) AMOUNT GAINS LOSSES RATE(a) RATE(a) RATE(a) (YEARS) AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS
Receive-fixed swaps $3,153,000 $ 71,428 $ (18,235) 6.31% 6.68% -- 6.7 $1,808,000
Principal-only swaps 482,707 71,164 (26,031) -- 6.85 -- 1.4 364,792
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest rate
swaps 3,635,707 142,592 (44,266) 2,172,792
INTEREST RATE CAPS AND FLOORS
Ten-year U.S. Treasury caps
purchased 3,175,000 209 (6,679) -- -- 6.71% 1.8 2,690,000
Ten-year U.S. Treasury
floors purchased 270,000 1,164 -- -- -- 5.39 1.0 700,000
Three-month Eurodollar
floors purchased 1,190,000 5,781 -- -- -- 5.50 2.6 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest rate
caps and floors 4,635,000 7,154 (6,679) 3,390,000
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST RATE
SWAPS, CAPS AND
FLOORS $8,270,707 $149,746 $ (50,945) $5,562,792
- ---------------------------------------------------------------------------------------------------------------------------------
(a) The weighted average rates are those in effect in the specified contracts at
December 31, 2000.
TRADING ACTIVITIES: The Corporation also enters into off-balance-sheet financial
instruments for its trading account. These transactions are executed primarily
with customers to facilitate their interest rate and foreign currency risk
management strategies. Customer trading activity consists of a portfolio of
derivative contracts with the Corporation's customers and offsetting derivative
instruments, futures, forwards, option contracts and cash securities, which
effectively reduce the risk of fair value fluctuations in the portfolio caused
by changes in market conditions.
At December 31, 2000, the total notional amount of derivative contracts held for
trading was $13.5 billion with a net fair value of $33.6 million, compared to
$6.3 billion in notional and a net fair value of $17.0 million at December 31,
1999. Total trading revenue was $18.2 million, $17.8 million and $22.5 million
in 2000, 1999 and 1998, respectively.
All off-balance-sheet contracts in the preceding tables are valued using cash
flow projection models either acquired from third parties or developed in-house.
Pricing models used for valuing derivative instruments are regularly validated
by testing through comparison with other third parties. Valuations and notional
maturities presented above are based on yield curves, forward yield curves, and
implied volatilities that were observable in the cash and derivatives markets on
December 31, 2000.
45
NATIONAL CITY
2000 ANNUAL REPORT
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
OTHER OFF-BALANCE-SHEET COMMITMENTS: In the normal course of business, the
Corporation makes various commitments to extend credit which are not reflected
in the balance sheet. A summary of these commitments follows:
- ---------------------------------------------------------------
DECEMBER 31
- ---------------------------------------------------------------
(IN MILLIONS) 2000 1999
- ---------------------------------------------------------------
Commitments to extend credit $43,070 $38,243
Standby letters of credit 3,420 3,152
- ---------------------------------------------------------------
The credit risk associated with loan commitments and standby letters of credit
is essentially the same as that involved in extending loans to customers and is
subject to normal credit policies. Collateral is obtained based on management's
credit assessments of the customer.
The Corporation also enters into forward contracts related to its mortgage
banking business. At December 31, 2000 and 1999, the Corporation had commitments
to sell residential real estate loans totaling $3.7 billion and $2.5 billion,
respectively. These contracts mature in less than one year.
23. LINE OF BUSINESS RESULTS
National City operates six major lines of business: retail sales and
distribution, corporate banking, consumer finance, asset management, National
City Mortgage and National Processing. During the third quarter of 2000,
National City announced several organizational changes, which, once
operationally complete, may result in changes to the presentation of the line of
business results in future periods.
Retail sales and distribution includes direct lending, deposit gathering and
small business services. Corporate banking includes lending and related
financial services to large- and medium-sized corporations. Consumer finance is
comprised of credit card lending, education finance, dealer finance, national
home equity lending and nonconforming residential lending. Asset management
includes the institutional trust, brokerage and personal wealth management
businesses. National City Mortgage represents conforming mortgage banking
activities conducted through the Corporation's wholly-owned subsidiary, National
City Mortgage Company. National Processing consists of merchant credit card
processing services and corporate outsourcing services conducted through
National Processing, Inc., National City's 87%-owned subsidiary.
The business units are identified by the product or services offered and the
channel through which the product or service is delivered. The accounting
policies of the individual business units are the same as those of the
Corporation. Prior period amounts have been reclassified to conform with the
current year's presentation.
The reported results reflect the underlying economics of the businesses.
Expenses for centrally provided services are allocated based upon estimated
usage of those services. The business units' assets and liabilities are
match-funded and interest rate risk is centrally managed. Transactions between
business units are primarily conducted at fair value, resulting in profits that
are eliminated for reporting consolidated results of operations.
Parent and other is comprised of several smaller business units, the results of
investment funding activities, intersegment revenue (expense) eliminations and
unallocated amounts. Operating results of the business units are discussed in
the Line of Business Results section of Financial Review. Selected financial
information by line of business is included in the table on the next page.
46
NATIONAL CITY
2000 ANNUAL REPORT
49
- ---------------------------------------------------------------------------------------------------
NATIONAL
RETAIL SALES CORPORATE CONSUMER ASSET CITY
(IN THOUSANDS) AND DISTRIBUTION BANKING FINANCE MANAGEMENT MORTGAGE
- ---------------------------------------------------------------------------------------------------
2000
Net interest income (expense)(a) $1,483,564 $944,695 $636,496 $100,911 $39,687
Provision (benefit) for loan
losses 43,583 69,459 179,933 9,633 --
---------- -------- -------- -------- --------
Net interest income (expense)
after provision 1,439,981 875,236 456,563 91,278 39,687
Noninterest income 548,831 225,593 221,871 476,313 402,905
Noninterest expense 1,143,148 410,722 437,068 337,803 343,317
---------- -------- -------- -------- --------
Income (loss) before taxes 845,664 690,107 241,366 229,788 99,275
Income tax expense (benefit)(a) 324,176 260,436 90,916 85,016 37,878
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 521,488 $429,671 $150,450 $144,772 $61,397
- ---------------------------------------------------------------------------------------------------
Intersegment revenue (expense) $ 14,316 $ -- $ -- $ 28,599 $10,333
Average assets (in millions) 16,105 28,318 18,587 2,558 3,559
- ---------------------------------------------------------------------------------------------------
1999
Net interest income (expense)(a) $1,490,583 $865,304 $592,823 $ 90,067 $58,654
Provision (benefit) for loan
losses 39,243 55,188 179,903 2,533 --
---------- -------- -------- -------- --------
Net interest income (expense)
after provision 1,451,340 810,116 412,920 87,534 58,654
Noninterest income 553,600 203,414 145,528 477,676 314,698
Noninterest expense 1,169,257 391,380 317,309 334,190 246,958
---------- -------- -------- -------- --------
Income (loss) before taxes 835,683 622,150 241,139 231,020 126,394
Income tax expense (benefit)(a) 316,367 231,674 89,640 84,466 48,658
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 519,316 $390,476 $151,499 $146,554 $77,736
- ---------------------------------------------------------------------------------------------------
Intersegment revenue (expense) $ 37,670 $ -- $ -- $ 32,219 $10,405
Average assets (in millions) 17,260 26,076 15,794 2,313 3,087
- ---------------------------------------------------------------------------------------------------
1998
Net interest income (expense)(a) $1,480,331 $880,330 $556,189 $ 72,983 $42,244
Provision (benefit) for loan
losses 34,637 17,118 192,684 2,074 --
---------- -------- -------- -------- --------
Net interest income (expense)
after provision 1,445,694 863,212 363,505 70,909 42,244
Noninterest income 586,064 197,636 89,127 455,581 279,433
Noninterest expense 1,224,471 395,163 266,169 326,256 214,373
---------- -------- -------- -------- --------
Income (loss) before taxes 807,287 665,685 186,463 200,234 107,304
Income tax expense (benefit)(a) 298,697 246,304 68,991 73,489 37,772
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 508,590 $419,381 $117,472 $126,745 $69,532
- ---------------------------------------------------------------------------------------------------
Intersegment revenue (expense) $ 20,771 $ -- $ -- $ 39,441 $11,861
Average assets (in millions) 18,570 24,753 13,502 1,947 2,726
- ---------------------------------------------------------------------------------------------------
- ---------------------------------- -------------------------------------
NATIONAL PARENT CONSOLIDATED
(IN THOUSANDS) PROCESSING AND OTHER TOTAL
- ---------------------------------- -------------------------------------
2000
Net interest income (expense)(a) $ 9,187 $(222,449) $2,992,091
Provision (benefit) for loan
losses -- (15,813) 286,795
-------- --------- ----------
Net interest income (expense)
after provision 9,187 (206,636) 2,705,296
Noninterest income 419,446 189,275 2,484,234
Noninterest expense 358,180 153,671 3,183,909
-------- --------- ----------
Income (loss) before taxes 70,453 (171,032) 2,005,621
Income tax expense (benefit)(a) 27,066 (122,244) 703,244
- ------------------------------------------------------------------------
Net income (loss) $ 43,387 $(48,788) $1,302,377
- ------------------------------------------------------------------------
Intersegment revenue (expense) $ 11,631 $(64,879) $ --
Average assets (in millions) 385 16,038 85,550
- ------------------------------------------------------------------------
1999
Net interest income (expense)(a) $ 5,024 $(65,498) $3,036,957
Provision (benefit) for loan
losses -- (27,193) 249,674
-------- --------- ----------
Net interest income (expense)
after provision 5,024 (38,305) 2,787,283
Noninterest income 354,849 331,004 2,380,769
Noninterest expense 379,613 143,797 2,982,504
-------- --------- ----------
Income (loss) before taxes (19,740) 148,902 2,185,548
Income tax expense (benefit)(a) 17,678 (8,420) 780,063
- ------------------------------------------------------------------------
Net income (loss) $(37,418) $157,322 $1,405,485
- ------------------------------------------------------------------------
Intersegment revenue (expense) $ 12,608 $(92,902) $ --
Average assets (in millions) 400 19,361 84,291
- ------------------------------------------------------------------------
1998
Net interest income (expense)(a) $ 6,948 $(87,152) $2,951,873
Provision (benefit) for loan
losses -- (45,113) 201,400
-------- --------- ----------
Net interest income (expense)
after provision 6,948 (42,039) 2,750,473
Noninterest income 493,070 213,231 2,314,142
Noninterest expense 476,884 473,797 3,377,113
-------- --------- ----------
Income (loss) before taxes 23,134 (302,605) 1,687,502
Income tax expense (benefit)(a) 9,713 (118,145) 616,821
- ------------------------------------------------------------------------
Net income (loss) $ 13,421 $(184,460) $1,070,681
- ------------------------------------------------------------------------
Intersegment revenue (expense) $ 9,628 $(81,701) $ --
Average assets (in millions) 506 18,049 80,053
- ------------------------------------------------------------------------
(a) Includes tax-equivalent adjustment for tax-exempt interest income.
47
NATIONAL CITY
2000 ANNUAL REPORT
50
FORM 10-K
The Annual Report includes the materials required in Form 10-K filed with the
Securities and Exchange Commission. The integration of the two documents gives
stockholders and other interested parties timely, efficient and comprehensive
information on 2000 results. Portions of the Annual Report are not required by
the Form 10-K report and are not filed as part of the Corporation's Form 10-K.
Only those portions of the Annual Report referenced in the cross-reference index
are incorporated in the Form 10-K. The report has not been approved or
disapproved by the Securities and Exchange Commission, nor has the Commission
passed upon its accuracy or adequacy.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______ to ______
Commission File Number 1-10074
NATIONAL CITY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware
---------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)
34-1111088
---------------------------------------------------------
(I.R.S. Employer Identification No.)
1900 East Ninth Street, Cleveland, Ohio
---------------------------------------------------------
(Address of Principal Executive Offices)
44114-3484
---------------------------------------------------------
(ZIP Code)
Registrant's telephone number, including area code: 216-575-2000
Securities registered pursuant to Section 12(b) of the Act:
National City Corporation Common Stock, $4.00 Per Share
- --------------------------------------------------------------------------------
(Title of Class)
New York Stock Exchange
- --------------------------------------------------------------------------------
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: none
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting common stock held by nonaffiliates of
the Registrant as of December 31, 2000 - $17,374,835,367
The number of shares outstanding of each of the Registrant's classes of common
stock, as of December 31, 2000:
Common Stock, $4.00 Per Share - 609,188,668
Documents Incorporated By Reference:
Portions of the Registrant's Proxy Statement (to be dated approximately March 8,
2001) are incorporated by reference into Item 10. Directors and Executive
Officers of the Registrant; Item 11. Executive Compensation; Item 12. Security
Ownership of Certain Beneficial Owners and Management; and Item 13. Certain
Relationships and Related Transactions, of Part III.
48
NATIONAL CITY
2000 ANNUAL REPORT
51
FORM 10-K CROSS REFERENCE INDEX
PAGES
- ------------------------------------------------------------------
PART I
Item 1 - Business
Description of Business 49
Average Balance Sheets/Interest/Rates 8-9
Volume and Rate Variance Analysis 10
Securities 15, 33-34
Loans 14
Risk Elements of Loan Portfolio 14, 16-17
Interest-bearing Liabilities 8-9, 15, 36
Line of Business Results 13
Financial Ratios 21
Item 2 - Properties 50
Item 3 - Legal Proceedings 50
Item 4 - Submission of Matters to a Vote of
Security Holders - None
- ------------------------------------------------------------------
PART II
Item 5 - Market for the Registrant's Common 18, 20
Stock and Related Stockholder inside
Matters back
cover
Item 6 - Selected Financial Data 21
Item 7 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 6-19
Item 7A - Quantitative and Qualitative
Disclosures About Market Risk 18-19
Item 8 - Financial Statements and Supplementary
Data 20, 22-47
Item 9 - Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure - None
- ------------------------------------------------------------------
PART III
Item 10 - Directors and Executive Officers of
the Registrant - Note (1)
Executive Officers 50-51
Compliance with Section 16(a) of the
Securities Exchange Act - Note (1)
Item 11 - Executive Compensation - Note (1)
Item 12 - Security Ownership of Certain
Beneficial Owners and Management -
Note (1)
Item 13 - Certain Relationships and Related
Transactions - Note (1)
- ------------------------------------------------------------------
PART IV
Item 14 - Exhibits, Financial Statement
Schedules and Reports on Form 8-K
Report of Ernst & Young LLP,
Independent Auditors 22
Consolidated Financial Statements 23-47
Signatures 51
- ------------------------------------------------------------------
Reports on Form 8-K filed in the fourth quarter of 2000:
October 16, 2000 - National City issued a news release reporting earnings for
the third quarter and first nine months of fiscal year 2000.
December 15, 2000 - National City issued a news release announcing that National
City, as part of a realignment of the consumer finance business, would be
closing its 69 Loan Zone(R) retail stores in the United States, exiting the
wholesale loan origination business of its Pittsburgh-based Altegra subsidiary,
and exiting the automobile leasing business.
Exhibits - The index of exhibits has been filed as separate pages of the 2000
Form 10-K and is available to stockholders on request from the Secretary of the
Corporation at the principal executive offices. Copies of exhibits may be
obtained at a cost of 30 cents per page.
Financial Statement Schedules - Omitted due to inapplicability or because
required information is shown in the Financial Statements or the Notes thereto.
- --------------------------------------------------------------------------------
Note (1) - Incorporated by reference from the Corporation's Proxy Statement to
be dated approximately March 8, 2001.
- --------------------------------------------------------------------------------
BUSINESS
National City Corporation ("National City" or "the Corporation") is an $89
billion financial holding company headquartered in Cleveland, Ohio. The company
provides a full range of banking and financial services to individuals and
businesses, including commercial and retail banking, consumer finance, asset
management, mortgage financing and servicing, and item processing. Operations
are primarily conducted through more than 1,200 banking offices in Ohio,
Pennsylvania, Indiana, Kentucky, Illinois, and Michigan and over 350 retail
mortgage offices located throughout the United States. National City and its
subsidiaries had 36,097 full-time equivalent employees at December 31, 2000.
COMPETITION
The financial services business is highly competitive. The banking subsidiaries
of National City compete actively with national and state banks, thrift
institutions, securities dealers, mortgage bankers, finance companies, insurance
companies and other financial service entities.
SUPERVISION AND REGULATION
National City is a financial holding company and, as such, is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). The BHC Act requires the prior approval of the Federal Reserve Board for
a financial holding company to acquire or hold more than a 5% voting interest in
any bank, and restricts interstate banking activities. The BHC Act allows
interstate bank acquisitions anywhere in the country and interstate branching by
acquisition and consolidation in those states that had not opted out by January
1, 1997.
The BHC Act restricts National City's nonbanking activities to those which are
determined by the Federal Reserve Board to be financial in nature, incidental to
such financial activity, or complementary to a financial activity. The BHC Act
does not place territorial restrictions on the
49
NATIONAL CITY
2000 ANNUAL REPORT
52
FORM 10-K CONTINUED
activities of nonbank subsidiaries of bank holding companies. National City's
banking subsidiaries are subject to limitations with respect to transactions
with affiliates.
The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act") represented
a pivotal point in the history of the financial services industry. The GLB Act
swept away large parts of a regulatory framework that had its origins in the
Depression Era of the 1930s. Effective March 11, 2000, new opportunities became
available for banks, other depository institutions, insurance companies and
securities firms to enter into combinations that permit a single financial
services organization to offer customers a more complete array of financial
products and services. The GLB Act provides a new regulatory framework for
regulation through the financial holding company, which has as its umbrella
regulator the Federal Reserve Board. Functional regulation of the financial
holding company's separately regulated subsidiaries is conducted by their
primary functional regulator. The GLB Act requires "satisfactory" or higher
Community Reinvestment Act compliance for insured depository institutions and
their financial holding companies in order for them to engage in new financial
activities. The GLB Act provides a federal right to privacy of non-public
personal information of individual customers. National City and its subsidiaries
are also subject to certain state laws that deal with the use and distribution
of non-public personal information.
A substantial portion of the Corporation's cash revenue is derived from
dividends paid by its subsidiary banks. These dividends are subject to various
legal and regulatory restrictions as summarized in Note 14 to the Corporation's
Consolidated Financial Statements.
The subsidiary banks are subject to the provisions of the National Bank Act or
the banking laws of their respective states, are under the supervision of, and
are subject to periodic examination by, the Comptroller of the Currency (the
"OCC") or the respective state banking departments, and are subject to the rules
and regulations of the OCC, Board of Governors of the Federal Reserve System and
the Federal Deposit Insurance Corporation ("FDIC").
National City's subsidiary banks are also subject to certain laws of each state
in which such bank is located. Such state laws may restrict branching of banks
within the state and acquisition or merger involving banks located in other
states. Ohio, Kentucky, Illinois, Indiana, Michigan and Pennsylvania have all
adopted nationwide reciprocal interstate banking.
The Financial Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides
that a holding company's controlled insured depository institutions are liable
for any loss incurred by the FDIC in connection with the default of any
FDIC-assisted transaction involving an affiliated insured bank or savings
association.
During 2000, the Securities and Exchange Commission issued Regulation FD which
established affirmative disclosure requirements on public corporations such that
material nonpublic information must be widely, rather than selectively,
disseminated. Regulation FD is based on the premise that full and fair
disclosure is the cornerstone of an efficient market system. National City is
subject to Regulation FD. Through Regulation FD, the Securities and Exchange
Commission seeks to encourage broad public disclosure in order to increase
investor confidence in the integrity of the capital markets.
The monetary policies of regulatory authorities, including the Federal Reserve
Board and the FDIC, have a significant effect on the operating results of banks
and holding companies. The nature of future monetary policies and the effect of
such policies on the future business and earnings of National City and its
subsidiaries cannot be predicted.
PROPERTIES
National City and its significant subsidiaries occupy their headquarters offices
under long-term leases. The Corporation also owns freestanding operations
centers in Columbus and Cleveland, Ohio and Kalamazoo and Royal Oak, Michigan
and leases operations centers in Pittsburgh, Pennsylvania and Chicago, Illinois.
Branch office locations are variously owned or leased.
LEGAL PROCEEDINGS
The information contained in Note 18 to the Consolidated Financial Statements on
page 39 of this Annual Report is incorporated herein by reference.
EXECUTIVE OFFICERS
The Executive Officers of National City (as of January 24, 2001) are as follows:
NAME AGE POSITION
- ------------------------------------------------------------------
David A. Daberko 55 Chairman and Chief Executive
Officer
Vincent A. DiGirolamo 63 Vice Chairman
Robert G. Siefers 55 Vice Chairman
William E. MacDonald III 54 Senior Executive Vice President
James R. Bell III 44 Executive Vice President
Paul G. Clark 47 Executive Vice President
Gary A. Glaser 56 Executive Vice President
Thomas W. Golonski 58 Executive Vice President
Jon L. Gorney 50 Executive Vice President
Jeffrey D. Kelly 47 Executive Vice President and
Chief Financial Officer
Timothy J. Lathe 45 Executive Vice President
Herbert R. Martens, Jr. 48 Executive Vice President
Robert J. Ondercik 54 Executive Vice President
A. Joseph Parker 46 Executive Vice President
J. Armando Ramirez 45 Executive Vice President
Peter E. Raskind 44 Executive Vice President
Phillip L. Rice 42 Executive Vice President
Frederick W. Schantz 65 Executive Vice President
Shelley J. Seifert 46 Executive Vice President
Stephen A. Stitle 55 Executive Vice President
David L. Zoeller 51 Executive Vice President,
General Counsel and Secretary
James P. Gulick 42 Senior Vice President and
General Auditor
Thomas A. Richlovsky 49 Senior Vice President and
Treasurer
- ------------------------------------------------------------------
50
NATIONAL CITY
2000 ANNUAL REPORT
53
The term of office for executive officers is one year.
There is no family relationship between any of the executive officers.
Except as noted below, each of the officers listed above has been an executive
officer of the Corporation or one of its subsidiaries during the past five
years.
Mr. Lathe was appointed president and chief executive officer of National City
Bank of Michigan/Illinois in 2000. Prior to that time he was executive vice
president of National City Bank for the syndications division from 1998 to 2000
and the structured finance division from 1997 to 1998. Prior to 1997, he was
senior vice president of the multinational division.
Mr. Ramirez was appointed an executive vice president in 2000. Prior to that
time he was senior vice president of corporate planning.
Mr. Raskind was appointed an executive vice president in 2000. Prior to that
time he was vice chairman of U.S. Bancorp.
Mr. Rice was appointed an executive vice president and president of National
City Bank in 2000. Prior to that time, he was executive vice president of the
northcoast region from 1997 to 2000. Prior to 1997, he was senior vice president
of the Metro/Ohio division of National City Bank.
Ms. Seifert was appointed an executive vice president of corporate human
resources in 2000. Prior to that time, she was senior vice president of
corporate human resources.
Mr. Schantz was appointed an executive vice president in 1999. Since 1998, he
has been president and chief executive officer of National City Bank of
Kentucky. Prior to 1998, he was chief executive officer of National City Bank's
Southwest region.
Mr. Stitle was appointed an executive vice president in 1999. Since 1995, he has
been chairman, president and chief executive officer of National City Bank of
Indiana.
Mr. Parker was appointed an executive vice president in 1998. Prior to that time
he was the Retail Business Line Manager of the Corporation.
Mr. Clark was appointed an executive vice president in 1998. Prior to that time,
he was president and chief executive officer of National City Bank of Michigan/
Illinois. Prior to 1998, he was executive vice president of National City Bank
of Pennsylvania.
Mr. Martens was appointed an executive vice president in 1997. He has been
chairman of NatCity Investments, Inc. since 1995.
Mr. Golonski was appointed an executive vice president in 1996. Prior to that
time he was the president of Integra Bank.
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 24, 2001.
National City Corporation
/s/ David A. Daberko
- ---------------------------------------
David A. Daberko
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated, on January 24, 2001.
/s/ David A. Daberko
- ---------------------------------------
David A. Daberko
Chairman and Chief Executive Officer
/s/ Robert G. Siefers
- ---------------------------------------
Robert G. Siefers
Vice Chairman
/s/ Vincent A. DiGirolamo
- ---------------------------------------
Vincent A. DiGirolamo
Vice Chairman
/s/ Jeffrey D. Kelly
- ---------------------------------------
Jeffrey D. Kelly
Executive Vice President and Chief Financial Officer
/s/ Thomas A. Richlovsky
- ---------------------------------------
Thomas A. Richlovsky
Senior Vice President and Treasurer
The Directors of National City Corporation (listed on page 52, except John W.
Brown) executed a power of attorney appointing David L. Zoeller, Carlton E.
Langer and Thomas A. Richlovsky their attorneys-in-fact, empowering them to sign
this report on their behalf.
/s/ David L. Zoeller
- ---------------------------------------
By David L. Zoeller
Attorney-in-fact
51
NATIONAL CITY
2000 ANNUAL REPORT
54
BOARD OF DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
DAVID A. DABERKO (2,3) DANIEL E. EVANS (1,5) MICHAEL A. SCHULER (1,6)
Chairman & CEO Chairman Chairman, President & CEO
National City Corporation Bob Evans Farms, Inc. Zippo Manufacturing Company
JON E. BARFIELD (1,4,6) JOSEPH T. GORMAN (5,7) JEROME F. TATAR (1,4,7)
Chairman & President Chairman & CEO Chairman, President & CEO
The Bartech Group, Inc. TRW Inc. The Mead Corporation
EDWARD B. BRANDON (2,3,6) BERNADINE P. HEALY, M.D. (3,6,7) MORRY WEISS (3,4,6)
Retired Chairman President & CEO Chairman & CEO
National City Corporation American Red Cross American Greetings Corporation
HONORARY DIRECTORS
JOHN G. BREEN (3,4,5) DOROTHY A. JOHNSON (1,4,6) CLAUDE M. BLAIR
Retired Chairman President Retired Chairman
The Sherwin-Williams Company Ahlburg Company National City Corporation
JAMES S. BROADHURST (1,5) President-Emeritus JULIEN L. MCCALL
Chairman & CEO Council of Michigan Foundations Retired Chairman
Eat'n Park Hospitality Group, Inc. National City Corporation
PAUL A. ORMOND (3,5,7)
JOHN W. BROWN (3,4,5) President & CEO COMMITTEES:
Chairman, President & CEO Manor Care, Inc.
Stryker Corporation (1) Audit
ROBERT A. PAUL (2,3,7) (2) Dividend
DUANE E. COLLINS (2,3,5) President & CEO (3) Executive
Chairman & CEO Ampco-Pittsburgh Corporation (4) Nominating and Board of Directors
Parker Hannifin Corporation Governance
WILLIAM F. ROEMER (2,6) (5) Compensation & Organization
SANDRA AUSTIN CRAYTON (2,4,7) Retired Chairman (6) Public Policy
President & CEO National City Bank of Pennsylvania (7) Investment
PhyServ LLC
- ---------------------------------------------------------------------------------------------------------------------------------
OFFICERS
Office of the Chairman HERBERT R. MARTENS, JR. MARY H. GRIFFITH
DAVID A. DABERKO Private Investment Advisors Corporate Communications and Marketing
Chairman & CEO ROBERT J. ONDERCIK JAMES P. GULICK
VINCENT A. DIGIROLAMO Credit Administration General Auditor, Risk Management
Vice Chairman A. JOSEPH PARKER JOSEPH J. HERR
ROBERT G. SIEFERS Retail Sales & Distribution Loan Review
Vice Chairman J. ARMANDO RAMIREZ JAMES A. HUGHES
Senior Executive Vice President Corporate Planning Information Services
WILLIAM E. MACDONALD III PETER E. RASKIND J. MICHAEL KEARNEY
Corporate Banking, Regional Banking Consumer Finance Properties
Executive Vice Presidents PHILLIP L. RICE JANIS E. LYONS
JAMES R. BELL III Ohio Banking Comptroller
Capital Markets FREDERICK W. SCHANTZ BRUCE A. MCCRODDEN
PAUL G. CLARK Kentucky Banking Public Affairs
Fee Businesses SHELLEY J. SEIFERT MICHAEL J. MINNAUGH
GARY A. GLASER Human Resources Institutional Trust
Ohio Banking STEPHEN A. STITLE GARY P. OBERS
THOMAS W. GOLONSKI Indiana Banking Corporate Services
Pennsylvania Banking DAVID L. ZOELLER THOMAS A. RICHLOVSKY
JON L. GORNEY General Counsel & Secretary Treasurer
Information Services & Operations Senior Vice Presidents WILLIAM H. SCHECTER
JEFFREY D. KELLY JEFFREY M. BIGGAR Merchant Banking
Chief Financial Officer Sterling THOMAS H. SCHROTH
TIMOTHY J. LATHE WILLIAM I. CORNETT, JR. Operations
Michigan/Illinois Banking Corporate Banking JEFFREY T. SILER
RICHARD J. DEKASER Dealer Finance
Economist
52
NATIONAL CITY
2000 ANNUAL REPORT
55
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3484
(216) 575-2000
www.national-city.com
TRANSFER AGENT AND REGISTRAR
National City Bank
Corporate Trust Operations
Department 5352
P.O. Box 92301
Cleveland, Ohio 44193-0900
1-800-622-6757
INVESTOR INFORMATION
Derek Green
Vice President
Investor Relations
Department 2101
P.O. Box 5756
Cleveland, Ohio 44101-0756
1-800-622-4204
COMMON STOCK LISTING
National City Corporation common stock is traded on the New York Stock Exchange
under the symbol "NCC." The stock is
abbreviated in financial publications as
"NtlCity."
National City's 87%-owned item processing subsidiary, National Processing, Inc.,
is traded on the New York Stock Exchange
under the symbol "NAP." The stock is
abbreviated in financial publications as
"NtlProc."
ANNUAL MEETING
The Annual Meeting of Stockholders will be on Monday, April 23, 2001 at 10:00
a.m. Eastern Time
National City Corporation
National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3484
DIVIDEND REINVESTMENT AND
STOCK PURCHASE PLAN
National City Corporation offers stockholders a convenient way to increase their
investment through the National City
Corporation Amended and Restated Dividend
Reinvestment and Stock Purchase Plan (the
"Plan"). Under the Plan, investors can elect
to acquire shares by reinvesting dividends
and through optional cash payments. National
City absorbs fees and brokerage commissions
on shares acquired through the Plan. To
obtain a Plan prospectus and authorization
card, please call 1-800-622-6757.
DIRECT DEPOSIT OF DIVIDENDS
The direct deposit program, which is offered at no charge, provides for
automatic deposit of quarterly dividends
directly to a checking or savings account.
For information regarding this program, call
1-800-622-6757.
NAIC
National City is a proud sponsor of the National Association of Investors
Corporation (NAIC) and participates in its
Low-Cost Investment Plan. To receive more
information on NAIC, call (248) 583-NAIC.
DEBT RATINGS
- ---------------------------------------------------------------
MOODY'S
FITCH IBCA, INVESTORS STANDARD
DUFF & PHELPS SERVICE & POOR'S
- ---------------------------------------------------------------
NATIONAL CITY CORPORATION A/B
COMMERCIAL PAPER F1+ P-1 A-1
SENIOR DEBT AA- A1 A
SUBORDINATED DEBT A+ A2 A-
- ---------------------------------------------------------------
BANK SUBSIDIARIES
CERTIFICATES OF DEPOSIT AA Aa3 A+
SUBORDINATED BANK NOTES A+ A1 A
COMMON STOCK INFORMATION
- ------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------------------------------
2000
DIVIDENDS PAID $ .285 $ .285 $ .285 $ .285 $ 1.14
HIGH 23.56 22.75 23.13 29.75 29.75
LOW 17.19 16.00 17.19 18.50 16.00
CLOSE 20.63 17.06 22.00 28.75 28.75
- ------------------------------------------------------------------
1999
DIVIDENDS PAID $ .26 $ .26 $ .27 $ .27 $ 1.06
HIGH 37.81 36.75 33.38 31.44 37.81
LOW 33.09 31.44 26.13 22.13 22.13
CLOSE 33.19 32.75 26.69 23.69 23.69
56
[NATIONAL CITY LOGO] Bulk Rate
U.S. Postage
1900 East Ninth Street PAID
Cleveland, OH 44114 National City
Corporation
74-0549-00(Rev. 01/01)
57
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 Restated Certificate of Incorporation of National City
Corporation, as amended (filed as Exhibit 3.1 to National
City Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and incorporated herein by
reference).
3.2 Amended and Restated Certificate of Incorporation of
National City Corporation dated April 13, 1999 (filed as
Exhibit 3.2 to Registrant's Quarterly Report on Form 10-Q
for the quarter and nine months ended September 30, 2000 and
incorporated herein by reference).
3.3 National City Corporation First Restatement of By-laws
adopted April 27, 1987 (As Amended through October 24, 1994)
(filed as Exhibit 3.2 to Registrant's Form S-4 Registration
Statement No. 33-56539 dated November 18, 1994 and
incorporated herein by reference).
4.1 The Company agrees to furnish upon request to the Commission
a copy of each instrument defining the rights of holders of
Senior and Subordinated debt of the Company.
4.2 Credit Agreement dated as of February 2, 1996 by and between
National City and the banks named therein (filed as Exhibit
4.2 to Registrant's Form S-4 Registration Statement No.
333-01697 dated March 15, 1996 and incorporated herein by
reference).
4.3 Certificate of Stock Designation dated as of February 2,
1998 designating National City Corporation's 6% Cumulative
Convertible Preferred Stock, Series 1, without par value,
and fixing the powers, preferences, rights, qualifications,
limitations and restrictions thereof (filed as Appendix D to
Registrant's Form S-4 Registration Statement No. 333-45609
dated February 19, 1998 and incorporated herein by
reference) in addition to those set forth in National City
Corporation's Restated Certificate of Incorporation, as
amended (filed as Exhibit 3.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter and nine months ended
September 30, 2000 and incorporated herein by reference).
10.1 Amendment No. 7 to the National City Savings and Investment
Plan, As Amended and Restated Effective July 1, 1992 (filed
as Exhibit 10.1).
10.2 Amendment No. 6 to the National City Savings and Investment
Plan No. 2, As Amended and Restated Effective January 1,
1992 (filed as Exhibit 10.2).
10.3 National City Corporation's Amended 1984 Stock Option Plan
(filed as Exhibit No. 10.2 to National City's Annual Report
on Form 10-K for the fiscal year ended December 31, 1987 and
incorporated herein by reference).
10.4 National City Corporation 1989 Stock Option Plan (filed as
Exhibit 10.7 to National City's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989, and
incorporated herein by reference).
10.5 National City Corporation's 1993 Stock Option Plan (filed as
Exhibit 10.5 to Registration Statement No. 33-49823 and
incorporated herein by reference).
10.6 National City Corporation 150th Anniversary Stock Option
Plan (filed as Exhibit 10.9 to Registrant's Form S-4
Registration Statement No. 33-59487 dated May 19, 1995 and
incorporated herein by reference).
10.7 National City Corporation Plan for Deferred Payment of
Directors' Fees, As Amended (filed as Exhibit 10.5 to
Registration Statement No. 2-914334 and incorporated herein
by reference).
10.8 National City Corporation Supplemental Executive Retirement
Plan, As Amended and Restated Effective January 1, 1997
(filed as Exhibit 10.12 to Registrant's Form S-4
Registration Statement No. 333-46571 dated February 19, 1998
and incorporated herein by reference).
10.9 National City Corporation Executive Savings Plan, As Amended
and Restated Effective January 1, 2001 (filed as Exhibit
10.35 to Registrant's Quarterly Report on Form 10-Q for the
quarter and nine months ended September 30, 2000 and
incorporated herein by reference.).
10.10 National City Corporation Amended and Second Restated 1991
Restricted Stock Plan (filed as Exhibit 10.9 to Registration
Statement No. 33-49823 and incorporated herein by
reference).
10.11 Form of grant made under National City Corporation 1991
Restricted Stock Plan in connection with National City
Corporation Supplemental Executive Retirement Plan As
Amended (filed as Exhibit 10.10 to National City's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992, and incorporated herein by reference).
58
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.12 Merchants National Corporation Director's Deferred
Compensation Plan, As Amended and Restated August 16, 1983
(filed as Exhibit 10(3) to Merchants National Corporation's
Form S-2 Registration Statement dated June 28, 1985, and
incorporated herein by reference).
10.13 Merchants National Corporation Supplemental Pension Plan
dated November 20, 1984; First Amendment to the Supplemental
Pension Plans dated January 21, 1986; Second Amendment to
the Supplemental Pension Plans dated July 3, 1989; and Third
Amendment to the Supplemental Pension Plans dated November
21, 1990 (filed respectively as Exhibit 10(n) to Merchants
National Corporation Annual Report on Form 10-K for the year
ended December 21, 1984; as Exhibit 10(q) to the Merchants
National Corporation Annual Report on Form 10-K for the year
ended December 31, 1985; as Exhibit 10(49) to Merchants
National Corporation Annual Report on Form 10-K for the year
ended December 31, 1990; and as Exhibit 10(50) to the
Merchants National Corporation Annual Report on Form 10-K
for the year ended December 31, 1990; all incorporated
herein by reference).
10.14 Merchants National Corporation Employee Benefit Trust
Agreement, effective July 1, 1987 (filed as Exhibit 10(27)
to Merchants National Corporation Annual Report on Form 10-K
for the year ended December 31, 1987, and incorporated
herein by reference).
10.15 Merchants National Corporation Non-Qualified Stock Option
Plan, effective January 20, 1987, and the First Amendment to
that Merchants National Non-Qualified Stock Option Plan,
effective October 16, 1990 (filed respectively as Exhibit
10(23) to Merchants National Corporation Annual Report on
Form 10-K for the year ended December 31, 1986, and as
Exhibit 10(55) to Merchants National Corporation Annual
Report on Form 10-K for the year ended December 31, 1990,
both of which are incorporated herein by reference).
10.16 Merchants National Corporation 1987 Non-Qualified Stock
Option Plan, effective November 17, 1987, and the First
Amendment to effective October 16, 1990 (filed respectively
as Exhibit 10(30) to Merchants National Corporation Annual
Report on Form 10-K for the year ended December 31, 1987,
and as Exhibit 10(61) to Merchants National Corporation
Annual Report on Form 10-K for the year ended December 31,
1990, both of which are incorporated herein by reference).
10.17 Merchants National Corporation Directors Non-Qualified Stock
Option Plan and the First Amendment to Merchants National
Corporation Directors Non-qualified Stock Option Plan
effective October 16, 1990 (filed respectively as Exhibit
10(44) to Merchants National Corporation Annual Report on
Form 10-K for the year ended December 31, 1988, and as
Exhibit 10(68) to Merchants National Corporation Annual
Report on Form 10-K for the year ended December 31, 1990,
both of which are incorporated herein by reference).
10.18 Central Indiana Bancorp Option Plan effective March 15, 1991
(filed as Exhibit 10.26 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference).
10.19 Central Indiana Bancorp 1993 Option Plan effective October
12, 1993 (filed as Exhibit 10.27 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
10.20 Form of contracts with David A. Daberko, Vincent A.
DiGirolamo, William E. MacDonald III, Jon L. Gorney, Robert
G. Siefers, Robert J. Ondercik, Jeffrey D. Kelly, David L.
Zoeller, Thomas A. Richlovsky, James P. Gulick, Gary A.
Glaser, Herbert R. Martens, Jr., Thomas W. Golonski, Stephen
A. Stitle, James R. Bell III, Peter E. Raskind, Phillip L.
Rice, Timothy J. Lathe, J. Armando Ramirez and Shelley J.
Seifert (filed as Exhibit 10.29 to Registrant's Form S-4
Registration Statement No. 333-46571 dated February 19, 1998
and incorporated herein by reference).
10.21 Split Dollar Insurance Agreement effective January 1, 1994
between National City Corporation and those individuals
listed in Exhibit 10.27 and other key employees filed as
exhibit 10.28 to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 and incorporated
herein by reference).
59
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.22 Restated First of America Bank Corporation 1987 Stock Option
Plan (filed as Exhibit 4.4 to Registrant's Post-Effective
Amendment No. 2 (on Form S-8) to Form S-4 Registration
Statement No. 333-46571), Amended and Restated First of
America Bank Corporation Stock Compensation Plan (filed as
Exhibit 4.5 to Registrant's Post-Effective Amendment No. 2
(on Form S-8) to Form S-4 Registration Statement No.
333-46571) and First of America Bank Corporation Directors
Stock Compensation Plan (filed as Exhibit 4.6 to
Registrant's Post-Effective Amendment No. 2 (on Form S-8 to
Form S-4 Registration Statement No. 333-46571) and each
incorporated herein by reference).
10.23 Fort Wayne National Corporation 1985 Stock Incentive Plan
(filed as Exhibit 4.4 to Registrant's Post-Effective
Amendment No. 1 (on Form S-8) to Form S-4 Registration
Statement No. 333-45609), Fort Wayne National Corporation
1994 Stock Incentive Plan (filed as Exhibit 4.5 to
Registrant's Post-Effective Amendment No. 1 (on Form S-8) to
Form S-4 Registration Statement No. 333-45609) and Fort
Wayne National Corporation 1994 Nonemployee Director Stock
Incentive Plan (filed as Exhibit 4.6 to Registrant's
Post-Effective Amendment No. 1 (on Form S-8 to Form S-4
Registration Statement No. 333-45609) and each incorporated
herein by reference).
10.24 National City Corporation 1997 Stock Option Plan (filed as
Exhibit 4.4 to Registrant's Form S-8 Registration Statement
No. 333-58923, dated July 10, 1998, and incorporated herein
by reference).
10.25 National City Corporation 1997 Restricted Stock Plan (filed
as Exhibit 4.4 to Registrant's Form S-8 Registration
Statement No. 333-60411, dated July 31, 1998, and
incorporated herein by reference).
10.26 National City Corporation Long-Term Supplemental Incentive
Compensation Plan for Executive Officers (filed as Exhibit
10.40 to National City Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1999 and
incorporated herein by reference).
10.27 Integra Financial Corporation Employee Stock Option Plan
(filed as Exhibit 4.3 to Registrant's Form S-8 Registration
Statement No. 333-01697, dated April 30, 1996 and
incorporated herein by reference).
10.28 Integra Financial Corporation Management Incentive Plan
(filed as Exhibit 4.4 to Registrant's Form S-8 Registration
Statement No. 333-01697, dated April 30, 1996 and
incorporated herein by reference).
10.29 Integra Financial Corporation Non-Employee Directors Stock
Option Plan (filed as Exhibit 4.5 to Registrant's Form S-8
Registration Statement No. 333-01697, dated April 30, 1996
and incorporated herein by reference).
10.30 National City Corporation Amended and Restated Long-Term
Incentive Compensation Plan for Senior Officers as Amended
and Restated Effective January 1, 2001 (filed as Exhibit
10.32 to Registrant's Quarterly Report on Form 10-Q for the
quarter and nine months ended September 30, 2000 and
incorporated herein by reference).
10.31 National City Corporation Management Incentive Plan for
Senior Officers as Amended and Restated Effective January 1,
2001 (filed as Exhibit 10.33 to Registrant's Quarterly
Report on Form 10-Q for the quarter and nine months ended
September 30, 2000 and incorporated herein by reference).
10.32 National City Corporation Supplemental Cash Balance Pension
Plan (filed as Exhibit 10.34 to Registrant's Quarterly
Report on Form 10-Q for the quarter and nine months ended
September 30, 2000 and incorporated herein by reference).
10.33 The National City Corporation Deferred Compensation Plan,
Effective January 1, 2001 (filed as Exhibit 10.36 to
Registrant's Quarterly Report on Form 10-Q for the quarter
and nine months ended September 30, 2000 and incorporated
herein by reference).
12.1 Computation of Ratio of Earnings to Fixed Charges (filed as
Exhibit 12.1).
21.1 Subsidiaries (filed as Exhibit 21.1)
23.1 Consent of Ernst & Young LLP, Independent Auditors for
National City Corporation (filed as Exhibit 23.1)
24.1 Power of Attorney (filed as Exhibit 24.1)