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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 44114
(Address of principal executive office)
216-222-2000
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock as of the latest practicable date.
Common stock -- $4.00 Par Value
Outstanding as of April 30, 2003 -- 611,680,272
FINANCIAL REPORT AND FORM 10-Q
QUARTER ENDED MARCH 31, 2003
All reports filed electronically by National City Corporation (National
City or the Corporation) with the United States Securities and Exchange
Commission (SEC), including the annual report on Form 10-K, quarterly reports on
Form 10-Q, and current event reports on Form 8-K, as well as any amendments to
those reports, are accessible at no cost on the Corporation's Web site at
www.nationalcity.com/investorrelations. These filings are also accessible on the
SEC's Web site at www.sec.gov.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Financial Highlights 3
Item 1. Financial Statements:
Consolidated Statements of Income 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Consolidated Statements of Changes in Stockholders' Equity 7
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations:
Financial Review 41
Consolidated Average Balance Sheets 58
Daily Average Balances/Net Interest Income/Rates 59
Item 3. Quantitative and Qualitative Disclosures About Market Risk 56
Item 4. Controls and Procedures 57
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note 19 to the Consolidated Financial Statements under the
section heading "Contingent Liabilities and Guarantees" on page 31 of this report is
incorporated herein by reference.
Item 2. Changes in Securities and Use of Proceeds (None)
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders (None)
Item 5. Other Information (None)
Item 6. Exhibits and Reports on Form 8-K
Exhibits: The index of exhibits has been filed as separate pages of the March 31, 2003
Financial Report and Form 10-Q and is available on request from the Secretary of the
Corporation at the principal executive offices or through the SEC's Web site as listed
above.
Reports on Form 8-K: The following reports were filed by National City during the first
quarter of 2003 through the date of this Form 10-Q filing:
January 13, 2003 - National City issued a news release announcing the availability
of corporate officials to discuss the Corporation's dividend policy.
January 15, 2003 - National City issued a news release announcing its financial
results for the fourth quarter and fiscal year ended December 31, 2002.
January 31, 2003 - National City furnished signed certifications, pursuant
to 18 U.S.C. Section 1350, of David A. Daberko, Chairman and Chief Executive
Officer, and Jeffrey D. Kelly, Chief Financial Officer, with respect to National
City's Annual Report on Form 10-K for the fiscal year-ended December 31, 2002.
February 24, 2003 - National City issued a news release announcing the Board of
Directors authorized the repurchase of up to 25 million shares of National City's
issued and outstanding common stock, subject to a purchase limit of $800 million.
February 26, 2003 - National City issued a news release announcing the election of
Bernadine P. Healy, M.D. to the Board of Directors of National City Corporation.
March 10, 2003 - National City filed as exhibits an offering prospectus and a terms
agreement with Salomon Smith Barney, Inc. related to the issuance of $300 million,
3.20% Senior Notes due April 1, 2008, under National City's Form S-3 shelf registration
dated April 28, 1999.
March 12, 2003 - National City disclosed comments made by the Corporation's
Chairman and CEO David A. Daberko to reporters following a presentation
to the Cleveland Society of Security Analysts, whereby Mr. Daberko
discussed National City's 2003 business outlook and reaffirmed the 2003
Wall Street earnings per share consensus estimate of $2.60.
April 16, 2003 - National City issued a news release announcing its financial
results for the three-month period ended March 31, 2003.
Signatures 63
Certification of Chief Executive Officer 64
Certification of Chief Financial Officer 65
2
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Amounts) 2003 2002
- ---------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31
Tax-equivalent net interest income $ 1,100,728 $ 1,005,350
Provision for loan losses 200,233 188,640
Fees and other income 866,291 690,861
Securities gains, net 170 53,532
Noninterest expense 1,008,866 874,889
Income tax expense and tax-equivalent adjustment 261,542 240,083
- ---------------------------------------------------------------------------------------------------------
Net income $ 496,548 $ 446,131
=========================================================================================================
Net income per common share
Basic $ .81 $ .73
Diluted .81 .73
Dividends paid per common share .305 .295
Return on average common equity 23.42% 24.03%
Return on average assets 1.73 1.77
Net interest margin 4.21 4.36
Efficiency ratio 51.29 51.58
Average equity to average assets 7.39 7.37
Annualized net charge-offs to average portfolio
loans .95 1.08
Average shares
Basic 611,521,806 607,815,387
Diluted 615,578,784 614,041,768
=========================================================================================================
AT MARCH 31
Assets $117,494,256 $100,077,684
Portfolio loans 74,932,986 68,089,316
Loans held for sale or securitization 21,740,191 12,296,059
Securities (at fair value) 8,464,144 9,036,019
Deposits 65,897,280 58,301,392
Stockholders' equity 8,587,163 7,672,211
Book value per common share $ 14.05 $ 12.61
Market value per common share 27.85 30.76
Equity to assets 7.31% 7.67%
Allowance for loan losses as a percentage of
period-end portfolio loans 1.51 1.47
Nonperforming assets to period-end
portfolio loans and other nonperforming assets 1.10 1.05
Common shares outstanding 610,971,942 608,395,463
Full-time equivalent employees 32,633 32,076
=========================================================================================================
3
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
- -------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts) 2003 2002
- -------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 1,398,244 $ 1,351,519
Securities:
Taxable 96,976 124,984
Exempt from Federal income taxes 8,564 9,291
Dividends 5,192 8,507
Federal funds sold and security resale agreements 504 518
Other investments 10,516 8,807
- -------------------------------------------------------------------------------------------------------------
Total interest income 1,519,996 1,503,626
INTEREST EXPENSE
Deposits 244,351 301,244
Federal funds borrowed and security repurchase agreements 41,585 41,929
Borrowed funds 8,998 13,256
Long-term debt and capital securities 131,771 149,680
- -------------------------------------------------------------------------------------------------------------
Total interest expense 426,705 506,109
- -------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 1,093,291 997,517
PROVISION FOR LOAN LOSSES 200,233 188,640
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 893,058 808,877
NONINTEREST INCOME
Mortgage banking revenue 393,708 195,217
Deposit service charges 134,736 118,787
Payment processing revenue 105,411 108,841
Trust and investment management fees 69,359 77,575
Card-related fees 41,081 32,136
Brokerage revenue 24,476 27,067
Other 97,520 131,238
- -------------------------------------------------------------------------------------------------------------
Total fees and other income 866,291 690,861
Securities gains, net 170 53,532
- -------------------------------------------------------------------------------------------------------------
Total noninterest income 866,461 744,393
NONINTEREST EXPENSE
Salaries, benefits, and other personnel 561,162 444,328
Equipment 64,692 62,299
Net occupancy 58,356 54,824
Third-party services 65,544 53,585
Card processing 52,326 53,816
Marketing and public relations 17,312 26,149
Other 189,474 179,888
- -------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,008,866 874,889
- -------------------------------------------------------------------------------------------------------------
Income before income tax expense 750,653 678,381
Income tax expense 254,105 232,250
- -------------------------------------------------------------------------------------------------------------
NET INCOME $ 496,548 $ 446,131
=============================================================================================================
NET INCOME PER COMMON SHARE
Basic $ .81 $ .73
Diluted .81 .73
AVERAGE COMMON SHARES OUTSTANDING
Basic 611,521,806 607,815,387
Diluted 615,578,784 614,041,768
=============================================================================================================
See Notes to Consolidated Financial Statements
4
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------
March 31 December 31 March 31
(In Thousands) 2003 2002 2002
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and demand balances due from banks $ 3,767,425 $ 3,756,426 $ 2,859,394
Federal funds sold and security resale agreements 68,616 136,343 67,994
Securities available for sale, at fair value 8,464,144 9,211,268 9,036,019
Other investments 498,148 869,147 744,981
Loans held for sale or securitization:
Commercial 12,591 14,840 --
Mortgage 21,727,600 24,723,549 12,296,059
- ---------------------------------------------------------------------------------------------------------------------
Total loans held for sale or securitization 21,740,191 24,738,389 12,296,059
Portfolio loans:
Commercial 25,128,632 24,722,060 25,733,598
Real estate -- commercial 9,507,893 9,384,851 7,868,692
Real estate -- residential 21,820,145 19,972,549 15,215,099
Home equity lines of credit 8,393,176 8,062,199 6,320,135
Credit card and other unsecured lines of credit 2,023,065 2,030,024 1,731,075
Other consumer 8,060,075 7,962,729 11,220,717
- ---------------------------------------------------------------------------------------------------------------------
Total portfolio loans 74,932,986 72,134,412 68,089,316
Allowance for loan losses (1,128,249) (1,098,588) (1,000,043)
- ---------------------------------------------------------------------------------------------------------------------
Net portfolio loans 73,804,737 71,035,824 67,089,273
Properties and equipment 1,032,617 1,036,937 1,059,445
Other real estate owned 115,739 114,931 65,562
Mortgage servicing assets 813,312 615,193 1,363,860
Goodwill 1,078,281 1,078,281 1,078,281
Other intangible assets 69,193 74,573 83,919
Derivative assets 1,469,869 1,468,381 493,847
Accrued income and other assets 4,571,984 4,122,722 3,839,050
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 117,494,256 $ 118,258,415 $ 100,077,684
=====================================================================================================================
LIABILITIES
Deposits:
Noninterest bearing $ 16,878,935 $ 16,156,081 $ 12,600,160
NOW and money market 24,361,618 23,022,449 19,786,170
Savings 2,437,801 2,477,067 2,629,316
Consumer time 14,179,957 14,686,005 15,180,008
Other 2,945,649 3,403,827 3,837,062
Foreign 5,093,320 5,373,339 4,268,676
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 65,897,280 65,118,768 58,301,392
Federal funds borrowed and security repurchase 12,744,562 6,528,258 10,586,323
agreements
Borrowed funds 1,735,932 11,493,909 1,109,360
Long-term debt 23,792,172 22,550,295 19,510,454
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trusts holding
solely debentures of the Corporation 180,000 180,000 180,000
Derivative liabilities 989,625 1,243,544 315,077
Accrued expenses and other liabilities 3,567,522 2,835,629 2,402,867
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 108,907,093 109,950,403 92,405,473
=====================================================================================================================
STOCKHOLDERS' EQUITY
Preferred stock -- -- 698
Common stock 2,443,888 2,445,966 2,433,582
Capital surplus 1,002,194 989,346 930,865
Retained earnings 5,085,060 4,805,520 4,236,947
Accumulated other comprehensive income 56,021 67,180 70,119
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,587,163 8,308,012 7,672,211
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 117,494,256 $ 118,258,415 $ 100,077,684
=====================================================================================================================
See Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
- -------------------------------------------------------------------------------------------------------------------------------
(In Thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 496,548 $ 446,131
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 200,233 188,640
Depreciation and amortization of properties and equipment 46,525 41,711
Amortization of intangible assets and mortgage servicing assets 153,316 74,256
Accretion of premiums and discounts on securities and debt (11,237) (3,001)
Mortgage servicing asset impairment recoveries (87,166) (13,009)
Ineffective hedge and other derivative (gains) losses, net (227,960) 15,187
Securities gains, net (170) (53,532)
Gains on loans sold or securitized, net (87,584) (218,537)
Other losses, net 52,550 16,617
Originations and purchases of loans held for sale or securitization (25,520,062) (14,848,016)
Principal payments on and proceeds from sales of loans held for sale or securitization 27,194,016 17,757,165
Decrease in accrued interest receivable 17,805 41,944
(Decrease) increase in accrued interest payable (30,384) 4,437
Net change in other assets and liabilities 1,001,397 307,882
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,197,827 3,757,875
- -------------------------------------------------------------------------------------------------------------------------------
LENDING AND INVESTING ACTIVITIES
Net decrease in federal funds sold, security resale agreements, and other investments 438,726 64,426
Purchases of available-for-sale securities (825,446) (1,435,267)
Proceeds from sales of available-for-sale securities 334,245 559,084
Proceeds from maturities, calls, and prepayments of available-for-sale securities 1,201,831 549,622
Net increase in loans (2,747,497) (122,770)
Proceeds from sales or securitizations of loans 142,852 1,145,864
Net increase in properties and equipment (40,519) (16,346)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by lending and investing activities (1,495,808) 744,613
- -------------------------------------------------------------------------------------------------------------------------------
DEPOSIT AND FINANCING ACTIVITIES
Net increase (decrease) in deposits 785,481 (4,820,290)
Net increase in federal funds borrowed and security repurchase agreements 6,216,304 3,992,935
Net decrease in borrowed funds (9,757,977) (7,469,382)
Repayments of long-term debt (2,490,367) (885,344)
Proceeds from issuances of long-term debt, net 3,761,777 3,288,010
Dividends paid (186,574) (179,233)
Issuances of common stock 17,965 26,248
Repurchases of common stock (37,629) --
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in deposit and financing activities (1,691,020) (6,047,056)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and demand balances due from banks 10,999 (1,544,568)
Cash and demand balances due from banks, January 1 3,756,426 4,403,962
- -------------------------------------------------------------------------------------------------------------------------------
CASH AND DEMAND BALANCES DUE FROM BANKS, MARCH 31 $ 3,767,425 $ 2,859,394
===============================================================================================================================
SUPPLEMENTAL INFORMATION
Cash paid for:
Interest $ 457,089 $ 501,672
Income taxes 234,262 83,596
Noncash item:
Transfers of loans to other real estate 43,257 28,842
===============================================================================================================================
See Notes to Consolidated Financial Statements
6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Preferred Common Capital Retained Comprehensive
(Dollars in Thousands, Except Per Share Amounts) Stock Stock Surplus Earnings Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2002 $698 $2,429,419 $ 908,780 $3,970,049 $ 72,277 $7,381,223
Comprehensive income:
Net income 446,131 446,131
Other comprehensive income, net of tax:
Change in unrealized gains and losses on
securities, net of reclassification adjustment
for net gains included in net income (22,803) (22,803)
Change in unrealized gains and losses on derivative
instruments used in cash flow hedging
relationships, net of reclassification adjustment
for net losses included in net income 20,645 20,645
------
Total comprehensive income 443,973
Common dividends declared, $.295 per share (179,223) (179,223)
Preferred dividends declared (10) (10)
Issuance of 1,040,734 common shares under stock-based
compensation plans, including related tax effects 4,163 22,085 26,248
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 $698 $2,433,582 $ 930,865 $4,236,947 $ 70,119 $7,672,211
===================================================================================================================================
Balance, January 1, 2003 $ -- $2,445,966 $ 989,346 $4,805,520 $ 67,180 $8,308,012
Comprehensive income:
Net income 496,548 496,548
Other comprehensive income, net of tax:
Change in unrealized gains and losses on
securities, net of reclassification adjustment for
net gains included in net income (31,593) (31,593)
Change in unrealized gains and losses on derivative
instruments used in cash flow hedging
relationships, net of reclassification adjustment
for net losses included in net income 20,434 20,434
------
Total comprehensive income 485,389
Common dividends declared, $.305 per share (186,574) (186,574)
Issuance of 861,883 common shares under stock-based
compensation plans, including related tax effects 3,447 14,518 17,965
Repurchase of 1,381,300 common shares (5,525) (1,670) (30,434) (37,629)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2003 $ -- $2,443,888 $1,002,194 $5,085,060 $ 56,021 $8,587,163
===================================================================================================================================
See Notes to Consolidated Financial Statements
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 through
an extensive distribution network in Ohio, Michigan, Pennsylvania, Indiana,
Kentucky, and Illinois and also conducts selected consumer lending businesses
and other financial services on a nationwide basis. Its primary businesses
include commercial and retail banking, consumer finance, asset management,
mortgage financing and servicing, and payment processing.
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of the
Corporation and its subsidiaries. All significant intercompany transactions and
balances have been eliminated. Certain prior period amounts have been
reclassified to conform with the current period presentation.
Investments in companies in which the Corporation has significant influence over
operating and financing decisions (principally defined as owning a voting or
economic interest of 20% to 50%) and limited partnership investments are
generally accounted for by the equity method of accounting. These investments
are normally included in other assets and National City's proportionate share of
income or loss is included in other noninterest income.
The Corporation, on a limited basis, uses special-purpose entities (SPEs),
primarily securitization trusts, to diversify its funding sources and to provide
financial services to its corporate customers. SPEs are not operating entities,
generally have no employees, and usually have a limited life. The basic SPE
structure involves the Corporation transferring assets to the SPE. The SPE funds
the purchase of those assets by issuing asset-backed securities to investors.
The legal documents governing the SPE describe how the cash received on the
assets held in the SPE must be allocated to the investors and other parties that
have rights to these cash flows. National City structures these SPEs to be
bankruptcy remote, thereby insulating investors from the impact of the creditors
of other entities, including the transferor of the assets.
7
Where the Corporation is a transferor of assets to an SPE, the assets sold to
the SPE are no longer recorded on the Corporation's balance sheet and the SPE is
not consolidated when the SPE is a qualifying special-purpose entity (QSPE).
Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
provides specific criteria for determining when a SPE meets the definition of
an QSPE. In determining whether to consolidate non-qualifying SPEs where assets
are legally isolated from National City's creditors, the Corporation considers
such factors as the amount of third-party equity, the retention of risks and
rewards, and the extent of control available to third parties. The Corporation
currently services certain credit card receivables and automobile loans that
were sold to two separate securitization trusts. Both trusts meet the applicable
QSPE criteria under SFAS 140, and accordingly, are not consolidated on the
Corporation's balance sheet. Further discussion regarding these securitization
trusts is included in Note 5.
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, assumptions, and judgments that affect the amounts
reported in the financial statements and accompanying notes. Actual realized
amounts could differ materially from those estimates. These interim financial
statements have been prepared in accordance with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X and serve to update National City's 2002 Annual
Report on Form 10-K (Form 10-K). These financial statements may not include all
information and footnotes necessary to constitute a complete set of financial
statements under generally accepted accounting principles applicable to annual
periods and accordingly should be read in conjunction with the financial
information contained in the Form 10-K. Management believes these unaudited
consolidated financial statements reflect all adjustments of a normal recurring
nature which are necessary for a fair presentation of the results for the
interim periods presented. The results of operations for the interim periods are
not necessarily indicative of the results that may be expected for the full year
or any other interim period. A summary of the Corporation's significant
accounting policies follows:
STATEMENT OF CASH FLOWS: Cash and demand balances due from banks are considered
"cash and cash equivalents" for financial reporting purposes.
BUSINESS COMBINATIONS: SFAS 141, Business Combinations, requires business
combinations initiated after June 30, 2001 to be accounted for by the purchase
method. Under the purchase method, net assets of the business acquired are
recorded at their estimated fair values as of the date of acquisition with any
excess of the cost of the acquisition over the fair value of the net tangible
and intangible assets acquired recorded as goodwill. Results of operations of
the acquired business are included in the income statement from the date of
acquisition.
Prior to SFAS 141, certain business combinations not accounted for as purchase
acquisitions were accounted for under the pooling-of-interests method, which
required the retroactive combining of the assets, liabilities, stockholders'
equity, and results of operations of the merged entity with the Corporation's
respective accounts at historical amounts. Prior period financial statements
were then 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 on an
aggregate basis at the lower of carrying amount or fair value.
Interest income is recognized on an accrual basis. Loan origination fees,
certain direct costs, and unearned discounts are deferred and amortized into
interest income 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.
Income on direct financing leases is recognized on a basis that achieves a
constant periodic rate of return on the outstanding investment. Income on
leveraged leases is recognized on a basis that achieves a constant periodic rate
of return on the outstanding investment in the lease, net of the related
deferred tax liability, in the years in which the net investment is positive.
Residual values on leased assets are reviewed regularly for other-than-temporary
impairment. When there is other-than-temporary impairment in the carrying value
of the Corporation's interest in the residual value of a leased asset, the
carrying value is reduced to the estimated fair value with the write-down
generally recognized in other noninterest expense in the income statement.
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 (unless the loan or lease is sufficiently collateralized such that full
repayment of both principal and interest is expected and is in the process of
collection), terms are renegotiated below market levels, or when an individual
analysis of a borrower's creditworthiness indicates a credit should be placed on
nonperforming status. 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. Interest income during the period the loan is on
nonperforming status is recorded on a cash basis after recovery of principal is
reasonably assured.
8
Commercial loans and leases and commercial loans secured by real estate are
generally charged off to the extent principal and interest due exceed the net
realizable value of the collateral, with the charge-off occurring when the loss
is reasonably quantifiable but not later than when the loan becomes 180 days
past due. Loans secured by residential real estate are generally charged off to
the extent principal and interest due exceed 90% of the current appraised value
of the collateral and the loan becomes 180 days past due.
Commercial and commercial real estate loans exceeding $500,000 are evaluated for
impairment in accordance with the provisions of SFAS 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
all amounts due will not be collected pursuant to the contractual terms of the
loan 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 subject to evaluation and 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. Installment loans secured by home equity and
classified as residential real estate are also subject to this charge-off
policy. 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 and actual loss
experience, current economic events in specific industries and geographical
areas, including unemployment levels, 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 current economic trends, all of which may be
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. Evaluations are conducted at least quarterly and more
often if deemed necessary. 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 the allowance for loan losses represent
an estimation done pursuant to either SFAS 5, Accounting for Contingencies, or
SFAS 114. The allocated component of the allowance for loan losses reflects
expected losses resulting from analyses developed through specific credit
allocations for individual loans and historical loss experience for each loan
category. The specific credit allocations are based on regular analyses 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 consideration of concentrations and changes in portfolio mix and
volume.
The unallocated portion of the allowance reflects management's estimate of
probable inherent but undetected losses within the portfolio due to
uncertainties in economic conditions, delays in obtaining information, including
unfavorable information about a borrower's financial condition, the difficulty
in identifying triggering events that correlate perfectly to subsequent loss
rates, and risk factors that have not yet manifested themselves in loss
allocation factors. In addition, the unallocated allowance includes a component
that explicitly accounts for the inherent imprecision in loan loss migration
models. The Corporation has grown through acquisition, expanded the geographic
footprint in which it operates, and changed its portfolio mix in recent years.
As a result, historical loss experience data used to establish allocation
estimates may not precisely correspond to the current portfolio. Also, loss data
representing a complete economic cycle is not available for all sectors. The
uncertainty surrounding the strength and timing of economic cycles, including
management's concerns over the effects of the prolonged economic downturn in the
current cycle, also affects the allocation model's estimates of loss. The
historical losses used in the migration analysis may not be representative of
actual losses inherent in the portfolio that have not yet been realized.
OTHER REAL ESTATE OWNED: Other real estate owned (OREO) is comprised principally
of commercial and residential real estate properties obtained in partial or
total satisfaction of nonperforming loans. OREO also includes bank premises
qualifying as held for sale under SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. OREO obtained in satisfaction of a loan is
recorded at the estimated fair value less anticipated selling costs based upon
the property's appraised value at the date of transfer, with any difference
between the fair value of the property and the carrying value of the loan
charged to the allowance for loan losses. Bank premises are transferred at the
lower of carrying value or estimated fair value less anticipated selling costs.
Subsequent changes in value are reported as adjustments to the carrying amount,
not to exceed the initial carrying value of the assets at the time of transfer.
Changes in value subsequent to transfer are recorded in noninterest expense on
the income statement. Gains or losses not previously recognized resulting from
the sale of other real estate owned are recognized in noninterest expense on the
date of sale.
9
SECURITIES: Securities purchased with the intention of realizing short-term
profits are considered trading securities, carried at fair value, and included
in other investments. Realized and unrealized gains and losses are included in
securities gains or loss on the income statement. Interest on trading account
securities is recorded in interest income. As of March 31, 2003, December 31,
2002, and March 31, 2002, trading account securities totaled $24 million, $15
million, and $29 million, respectively.
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. As of March 31, 2003,
December 31, 2002, and March 31, 2002, there were no securities classified as
held to maturity.
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 in other comprehensive income, net of tax.
Realized gains and losses on the sale of and other-than-temporary impairment
charges on available-for-sale securities are recorded in securities gains or
losses on the income statement.
Interest and dividends on securities, including amortization of premiums and
accretion of discounts using the effective-interest method over the period to
maturity, are included in interest income. Realized gains and losses on the sale
of and other-than-temporary impairment charges on securities, except for the
Corporation's internally-managed equity portfolio of bank and thrift common
stock investments (bank stock fund), are determined using the
specific-identification method. On January 1, 2003, the Corporation changed to
the average-cost method to determine realized gains and losses and
other-than-temporary impairment charges on bank stock fund investments,
consistent with the manner in which the Corporation manages the investments in
this fund. Purchases and sales of securities are recognized on a trade-date
basis.
PRINCIPAL INVESTMENTS: Principal investments, which include direct investments
in private and public companies and indirect investments in private equity fund
partnerships, are carried at estimated fair value with changes in fair value
recognized in other noninterest income.
Direct investments include equity and mezzanine investments in the form of
common stock, preferred stock, limited liability company interests, warrants,
and subordinated debt. Direct mezzanine investments in the form of subordinated
debt and preferred stock, which earn interest or dividends, are included in
other investments on the balance sheet, while the remainder of the direct
investments are included in other assets. Indirect investments include ownership
interests in private equity fund partnerships managed by third-party investors
and are included in other assets on the balance sheet.
The fair values of publicly traded investments are determined using quoted
market prices, subject to various discount factors, sales restrictions, and
regulation, when appropriate. Investments that are not publicly traded are
initially valued at cost and subsequent adjustments to fair value are estimated
in good faith by management. Factors used in determining the fair value of
direct investments include consideration of the company's business model,
current and projected financial performance, liquidity, management team, and
overall economic and market conditions. Factors used in determining the fair
value of indirect investments include evaluation of the general partner's
valuation techniques and overall economic and market conditions. The fair value
estimates of the investments are based upon currently available information and
may not necessarily represent amounts that will ultimately be realized, which
depend on future events and circumstances.
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 accounted for 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.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of the cost
of an acquisition over the fair value of the net assets acquired. Other
intangible assets represent purchased assets that also lack physical substance
but can be distinguished from goodwill because of contractual or other legal
rights or because the asset is capable of being sold or exchanged either on its
own or in combination with a related contract, asset, or liability. On January
1, 2002, the Corporation adopted SFAS 142, Goodwill and Other Intangible Assets.
Under the provisions of SFAS 142, goodwill is no longer ratably amortized into
the income statement over an estimated life, but rather is tested at least
annually for impairment. Intangible assets which have finite lives continue to
be amortized over their estimated useful lives and also continue to be subject
to impairment testing. All of the Corporation's other intangible assets have
finite lives and are amortized on a straight-line basis over varying periods not
exceeding 10 years. Note 10 includes a summary of the Corporation's goodwill and
other intangible assets.
10
DEPRECIABLE ASSETS: Properties and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the estimated useful lives of the assets.
Useful lives range from one to 10 years for furniture, fixtures, and equipment;
three to five years for software, hardware, and data handling equipment; and 10
to 40 years for buildings and building improvements. Land improvements are
amortized over a period of 15 years and leasehold improvements are amortized
over the term of the respective lease plus the first optional renewal period, if
applicable. Maintenance and repairs are charged to expense as incurred, while
improvements which extend the useful life are capitalized and depreciated over
the estimated remaining life of the asset.
Long-lived depreciable assets are evaluated periodically for impairment when
events or changes in circumstances indicate the carrying amount may not be
recoverable. Impairment exists when the expected undiscounted future cash flows
of a long-lived asset are less than its carrying value. In that event, the
Corporation recognizes a loss for the difference between the carrying amount and
the estimated fair value of the asset based on a quoted market price, if
applicable, or a discounted cash flow analysis. Impairment losses are recorded
in other noninterest expense on the income statement.
ASSET SECURITIZATIONS: National City uses the securitization of financial assets
as a source of funding. Financial assets, including pools of credit card
receivables and automobile loans, are transferred into trusts or to SPEs in
transactions which are effective under applicable banking rules and regulations
to legally isolate the assets from National City Bank (the Bank), a subsidiary
of the Corporation. Where the transferor is a depository institution such as a
bank subsidiary of the Corporation, legal isolation is accomplished through
compliance with specific rules and regulations of the relevant regulatory
authorities. In addition, National City purchases the guaranteed portion of
Small Business Administration (SBA) loans from third-party lenders and then
securitizes these loans into SBA guaranteed pooled securities through the use of
a fiscal and transfer agent approved by the SBA. The certificates are then sold
directly to institutional investors, achieving legal isolation.
SFAS 140 requires, for certain transactions completed after the initial adoption
date, a "true sale" analysis of the treatment of the transfer under state law as
if the Corporation was a debtor under the bankruptcy code. A "true sale" legal
analysis includes several legally relevant factors, such as the nature and level
of recourse to the transferor and the nature of retained servicing rights. The
analytical conclusion as to a true sale is never absolute and unconditional, but
contains qualifications based on the inherent equitable powers of a bankruptcy
court, as well as the unsettled state of the common law. Once the legal
isolation test has been met under SFAS 140, other factors concerning the nature
and extent of the transferor's control over the transferred assets are taken
into account in order to determine whether derecognition of assets is warranted,
including whether the SPE has complied with rules concerning qualifying
special-purpose entities.
A legal opinion regarding legal isolation for each credit card securitization
has been obtained by the Bank. The opinion rendered in connection with the 2002
credit card securitization included in its conclusion that the FDIC regulation,
Treatment by the Federal Deposit Insurance Corporation as Conservator or
Receiver of Financial Assets Transferred by an Insured Depository Institution in
Connection with a Securitization or Participation (Securitization Rule) would be
applicable to the transfer of such receivables. The Securitization Rule provides
reasonable assurance that neither the FDIC acting as conservator or receiver for
the transferring bank subsidiary, nor any other creditor of the bank, may
reclaim or recover the receivables from the securitization trust or
recharacterize the receivables as property of the transferring bank subsidiary
or of the conservatorship or receivership for the bank. The opinion further
reasoned, even if the Securitization Rule did not apply, then pursuant to
various FDIC pronouncements, the FDIC would uphold the effectiveness of the
security interest granted in the financial assets. A legal opinion was obtained
for the first step in the automobile loan securitization transaction in 2002,
which was structured as a two-step securitization. While noting the transaction
fell within the meaning of a "securitization" under the Securitization Rule, in
accordance with accounting guidance, an analysis was also rendered under state
law as if the transferring Bank was a debtor under the bankruptcy code. The
"true sale" opinion provides reasonable assurance the purchased assets would not
be characterized as the property of the transferring Bank's receivership or
conservatorship estate in the event of insolvency and also states the transferor
would not be required to substantively consolidate the assets and liabilities of
the purchaser SPE with those of the transferor upon such event. The process of
securitizing SBA loans into pools of SBA certificates is prescribed by the SBA
and must be followed to obtain the SBA guarantee. This process has been
developed to meet the requirements for sale treatment under SFAS 140.
In a securitization, the trust issues beneficial interests in the form of senior
and subordinated asset-backed securities backed or collateralized by the assets
sold to the trust. The senior classes of the asset-backed securities typically
receive investment grade credit ratings at the time of issuance. These ratings
are generally achieved through the creation of lower-rated subordinated classes
of asset-backed securities, as well as subordinated interests retained by an
affiliate of the Corporation. In all cases, the Corporation or its affiliate
retains interests in the securitized assets, which may take the form of seller
certificates, subordinated tranches, cash reserve balances, servicing assets,
and interest-only strips representing the cash flows generated by the assets in
excess of the contractual cash flows required to be paid to the investors and
for other obligations such as servicing fees.
An SBA approved fiscal and transfer agent associated with the SBA
securitizations issues certificates once all the necessary documents to support
the transaction have been provided. The Corporation retains beneficial interests
in the securitized assets in the form of interest-only strips. The SBA
guarantees the credit risk with respect to the loans sold.
In accordance with SFAS 140, securitized loans are removed from the balance
sheet and a net gain or loss is recognized in income at the time of initial sale
and each subsequent sale when the combined net sales proceeds and, if
applicable, retained interests differ from the loans' allocated carrying amount.
Net gains or losses resulting from securitizations are recorded in noninterest
income.
11
Retained interests in the subordinated tranches and interest-only strips are
recorded at their fair value and included in the available-for-sale securities
portfolio with subsequent adjustments to fair value recorded through other
comprehensive income within stockholders' equity or in other noninterest expense
in the income statement if the fair value has declined below the carrying amount
and such decline has been determined to be other-than-temporary. The Corporation
uses assumptions and estimates in determining the fair value allocated to the
retained interests at the time of sale and each subsequent sale in accordance
with SFAS 140. These assumptions and estimates include projections concerning
rates charged to customers, the expected life of the receivables, credit loss
experience, loan repayment rates, the cost of funds, and discount rates
commensurate with the risks involved.
On a quarterly basis, management reviews the historical performance of each
retained interest and the assumptions used to project future cash flows. If past
performance and future expectations dictate, assumptions are revised and the
present value of future cash flows is recalculated. Refer to Note 5 for further
analysis of the assumptions used in the determination of fair value.
When the Corporation retains the right to service the loans and receives related
fees that exceed the current market rate to service the receivables, a servicing
asset is recorded and included in other assets on the balance sheet. A servicing
asset is not recognized if the Corporation receives adequate compensation
relative to current market servicing prices to service the receivables sold.
Servicing assets created in a securitization are initially measured at their
allocated carrying amount based upon relative fair values at the date of
securitization and are subsequently carried at the lower of this initial
carrying value, adjusted for amortization, or fair value. Impairment, if any, is
recognized when and in the amount the carrying value exceeds its fair value as
determined by calculating the present value of the expected future net servicing
cash flows using the assumptions described previously. The amortization of
servicing assets occurs in proportion to, and over the period of, the estimated
net servicing income and is recorded in noninterest income on the income
statement.
For securitizations involving credit card receivables, the Corporation's
continuing involvement in the securitized assets includes maintaining an
undivided, pro rata interest in all credit card loan receivables that are in the
trust, referred to as seller's interest. The seller's interest ranks pari-passu
with the investors' interests in the trust. As the amount of the loans in the
securitized pool fluctuates due to customer payments, purchases, cash advances,
and credit losses, the carrying amount of the seller's interest will vary.
However, the Corporation is required to maintain its seller's interest at a
minimum level of 4% of the initial invested amount in each series to ensure
receivables are available for allocation to the investors' interests.
Also with regard to credit card securitizations, the trust is not required to
make principal payments to the investors during the revolving period, which
generally approximates 48 months. Instead, the trust uses principal payments
received on the accounts to purchase new loan receivables. Therefore, the
principal dollar amount of the investor's interest in the loans within the trust
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 in the credit card trust may begin
earlier if the average annualized yield on the loans securitized (generally
equal to the sum of 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.
The retained interests represent National City's maximum loss exposure with
respect to securitization vehicles. The investors in the asset-backed securities
issued by the SPEs have no further recourse against the Corporation if cash
flows generated by the securitized assets are inadequate to service the
obligations of the SPEs.
Transaction costs associated with revolving loan securitizations are deferred at
the time of sale and amortized over the revolving term of the securitization,
while transaction costs associated with fixed-term loan securitizations are
recognized as a component of the gain or loss at the time of sale.
DERIVATIVE INSTRUMENTS: The Corporation enters into derivative transactions
principally to protect against the risk of adverse price or interest rate
movements on the value of certain assets and liabilities and on future cash
flows. The Corporation is also required to recognize certain contracts and
commitments as derivatives when the characteristics of those contracts and
commitments meet the definition of a derivative.
Under the guidelines of SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, all derivative instruments are required to be
carried at fair value on the balance sheet. SFAS 133 provides special hedge
accounting provisions, which permit the change in the fair value of the hedged
item related to the risk being hedged to be recognized in earnings in the same
period and in the same income statement line as the change in the fair value of
the derivative.
Derivative instruments designated in a hedge relationship to mitigate 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 133. Derivative instruments designated in a hedge
relationship to mitigate exposure to variability in expected future cash flows,
or other types of forecasted transactions, are considered cash flow hedges. The
Corporation formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking each hedge transaction.
Fair value hedges are accounted for by recording the fair value of the
derivative instrument and the fair value related to the risk being hedged of the
hedged asset or liability on the balance sheet with corresponding offsets
recorded in the income statement. The adjustment to the hedged asset or
liability is included in the basis of the hedged item, while the fair value of
the derivative is recorded
12
as a freestanding asset or liability. Actual cash receipts or payments and
related amounts accrued during the period on derivatives included in a fair
value hedge relationship are recorded as adjustments to the income or expense
recorded on the hedged asset or liability.
Cash flow hedges are accounted for by recording the fair value of the derivative
instrument on the balance sheet as either a freestanding 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 or periods the hedged
forecasted transaction affects earnings.
Under both the fair value and cash flow hedge methods, derivative gains and
losses not effective in hedging the change in fair value or expected cash flows
of the hedged item are recognized immediately in the income statement. At the
hedge's inception and at least quarterly thereafter, a formal assessment is
performed to determine whether changes in the fair values or cash flows of the
derivative instruments have been highly effective in offsetting changes in the
fair values or cash flows of the hedged items and whether they are expected to
be highly effective in the future. If it is determined a derivative instrument
has not been or will not continue to be highly effective as a hedge, hedge
accounting is discontinued prospectively. SFAS 133 basis adjustments recorded on
hedged assets and liabilities are amortized over the remaining life of the
hedged item beginning no later than when hedge accounting ceases.
MORTGAGE SERVICING ASSETS: The Corporation recognizes as separate assets rights
to service mortgage loans it does not own but services for others for a fee. The
total cost of loans sold is allocated between the loans sold and the servicing
assets retained based on the relative fair values of each. Mortgage servicing
assets, when purchased, are initially recorded at cost. Mortgage servicing
assets are carried at the lower of the initial carrying value, adjusted for
amortization, or estimated fair value. Amortization is determined in proportion
to and over the period of estimated net servicing income. For purposes of
determining impairment, the mortgage servicing assets are stratified by product
type and interest rate. Certain mortgage servicing assets hedged with derivative
instruments as part of SFAS 133 hedge relationships are carried at fair value
and consequently may be adjusted above their initial carrying value.
The fair value of mortgage servicing assets is estimated by calculating the
present value of estimated future net servicing cash flows, taking into
consideration actual and expected mortgage loan prepayment rates, discount
rates, servicing costs, and other economic factors, which are determined based
on current market conditions. The expected and actual rates of mortgage loan
prepayments are the most significant factors driving the value of mortgage
servicing assets. Increases in mortgage loan prepayments reduce estimated future
net servicing cash flows because the life of the underlying loan is reduced. In
determining the fair value of the mortgage servicing assets, mortgage loan
rates, which are used to determine prepayment rates, and discount rates are held
constant over the estimated life of the portfolio. Expected mortgage loan
prepayment rates are derived from a third party model and adjusted to reflect
National City's actual prepayment experience.
STOCK-BASED COMPENSATION: Effective January 1, 2003, the Corporation adopted the
fair value method of recording stock awards under SFAS 123, Accounting for
Stock-Based Compensation. Under the guidance of SFAS 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, the Corporation began
applying the recognition provisions of SFAS 123 prospectively to all awards
granted to employees after January 1, 2003. Compensation expense for option
awards granted in 2003 will be determined based on the estimated fair value of
the award at the date of grant and recognized ratably in the income statement
over the option's vesting period. Stock options granted prior to January 1,
2003, will continue to be accounted for under the recognition and measurement
provisions of Accounting Principles Board (APB) Opinion 25, Accounting for Stock
Issued to Employees. Under APB 25, compensation expense for employee stock
options is generally not recognized if the exercise price of the option equals
or exceeds the fair value of the stock on the date of grant. Therefore, the cost
related to stock-based employee compensation included in the determination of
net income for 2003 is less than that which would have been recognized if the
fair value method had been applied to all unvested stock awards. The remaining
outstanding options accounted for under APB 25 vest through 2005. Compensation
expense for restricted share awards is ratably recognized over the period of
service, usually the restricted period, based upon the fair value of the stock
on the date of grant. The adoption of the recognition provisions of SFAS 123 did
not have a significant impact on the determination of compensation expense for
restricted share awards.
13
The following table illustrates the effect on net income and earnings per share
if the Corporation had applied the fair value recognition provisions of SFAS 123
to all stock option awards. Also included in the pro forma net income and
earnings per share is the after-tax expense, net of minority interest benefit,
related to option awards granted by the Corporation's 85%-owned processing
subsidiary, National Processing, Inc., on its common stock.
- ---------------------------------------------------------------------------------------------------
For the Three
Months Ended March 31
- ---------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Amounts) 2003 2002
- ---------------------------------------------------------------------------------------------------
Net income, as reported $496,548 $446,131
Add: option expense included in reported net income
National City common stock 316 --
National Processing common stock -- --
Less: total option expense determined under fair value
method for all option awards
National City common stock (11,174) (10,155)
National Processing common stock (1,675) (1,263)
- ---------------------------------------------------------------------------------------------------
Pro forma net income $484,015 $434,713
- ---------------------------------------------------------------------------------------------------
Pro forma net income per share:
Basic -- as reported $ .81 $ .73
Basic -- pro forma .79 .72
Diluted -- as reported .81 .73
Diluted -- pro forma .79 .71
===================================================================================================
The fair value of stock options granted were estimated at the date of grant
using the 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 assumptions, which can
materially affect the fair value estimate. The following weighted-average
assumptions were used to determine the fair value of options granted on National
City common stock: a risk-free interest rate of 3.4% and 3.7% for the three
months ended March 31, 2003 and 2002, respectively; an expected life of the
option of five years for both periods; an expected dividend yield of 4.5% and
4.4% for the three months ended March 31, 2003 and 2002, respectively; and
expected volatility of 27.1% and 25.9% for the three months ended March 31, 2003
and 2002, respectively. The weighted-average grant-date fair value of options
granted during the three months ended March 31, 2003 and 2002 was $4.89 and
$5.16, respectively. The weighted-average assumptions used to value the National
Processing option grants are disclosed in National Processing, Inc.'s Form 10-Q
for the quarter ended March 31, 2003.
ADVERTISING COSTS: Advertising costs are generally expensed as incurred.
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.
STOCK REPURCHASES: Acquisitions of the Corporation's common stock are recorded
using the par value method, which requires the cash paid to be allocated to
common stock, capital surplus, and retained earnings.
2. RECENT ACCOUNTING PRONOUNCEMENTS
AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In
April 2003, the FASB issued SFAS 149, which amends and clarifies financial
accounting and reporting for derivative instruments and hedging activities under
SFAS 133, as well as amends certain other existing FASB pronouncements. In
general, SFAS 149 is effective for derivative transactions entered into or
modified and for hedging relationships designated after June 30, 2003. The
adoption of this standard is not expected to have a material impact on results
of operations, financial position, or liquidity.
14
CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. FIN 46 provides guidance on how to identify a variable interest entity
(VIE) and determine when the assets, liabilities, noncontrolling interests, and
results of operations of a VIE are to be included in an entity's consolidated
financial statements. A VIE exists when either the total equity investment at
risk is not sufficient to permit the entity to finance its activities by itself,
or the equity investors lack one of three characteristics associated with owning
a controlling financial interest. Those characteristics include the direct or
indirect ability to make decisions about an entity's activities through voting
rights or similar rights, the obligation to absorb the expected losses of an
entity if they occur, and the right to receive the expected residual returns of
the entity if they occur.
FIN 46 was effective immediately for new entities created or acquired after
February 1, 2003, and will become effective on July 1, 2003, for entities in
which the Corporation had a variable interest prior to February 1, 2003.
The Corporation's retained interests in its credit card and automobile loan
securitizations, which are discussed in Note 5, will not be consolidated
because the transaction structures are exempt from the requirements of FIN 46.
Management is continuing to evaluate various principal investments and other
investments to assess whether consolidation or further disclosure of significant
interests in such entities will be required when the guidance provided under FIN
46 becomes effective for existing VIEs on July 1, 2003. However, these
investments, either individually or in the aggregate, are not material to the
Corporation's consolidated financial statements.
GUARANTEES: In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This interpretation expands the
disclosures to be made by a guarantor about its obligations under certain
guarantees and requires the guarantor to recognize a liability for the
obligation assumed under a guarantee. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying that is
related to an asset, liability, or equity security of the guaranteed party.
Certain guarantee contracts are excluded from both the disclosure and
recognition requirements of this interpretation, including, among others,
guarantees relating to employee compensation, residual value guarantees under
capital lease arrangements, commercial letters of credit, loan commitments,
subordinated interests in an SPE, and guarantees of a company's own future
performance. Other guarantees are subject to the disclosure requirements of FIN
45 but not to the recognition provisions and include, among others, a guarantee
accounted for as a derivative instrument under SFAS 133, a holding company's
guarantee of debt owed to a third party by its subsidiary or vice versa, and a
guarantee which is based on performance not price. The disclosure requirements
of FIN 45 were effective for the Corporation as of December 31, 2002, and
require disclosure of the nature of the guarantee, the maximum potential amount
of future payments the guarantor could be required to make under the guarantee,
and the current amount of the liability, if any, for the guarantor's obligations
under the guarantee. The recognition requirements of FIN 45 are applied
prospectively to guarantees issued or modified after December 31, 2002.
Significant guarantees that have been entered into by the Corporation are
disclosed in Note 19. The implementation of the accounting requirements of FIN
45 did not have a material impact on the Corporation's results of operations,
financial position, or liquidity.
ACCOUNTING FOR STOCK-BASED COMPENSATION: In December 2002, the FASB issued SFAS
148, Accounting for Stock-Based Compensation -- Transition and Disclosure, which
provides guidance to transition from the intrinsic value method of accounting
for stock-based employee compensation under APB 25 to SFAS 123's fair value
method of accounting, if a company so elects.
Effective January 1, 2003, the Corporation adopted the fair value method of
recording stock awards under SFAS 123. Refer to Notes 1 and 20 for further
discussion on the Corporation's adoption of SFAS 148. National City estimates
the income statement impact associated with expensing stock options will be
approximately $18 million pretax and $15 million, or $.02 per diluted share,
after tax, in 2003, assuming options are granted in 2003 at a similar level and
under similar market conditions to 2002. As the cost of anticipated future
option awards is phased in over a four-year period, the annual impact will rise
to approximately $.10 per diluted share, assuming options are granted in future
years at a similar level and under similar market conditions to 2002. The actual
impact per diluted share may vary in the event the fair value or the number of
options granted increases or decreases from the current estimate, or if the
current accounting guidance changes.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities, was issued in
July 2002 and was adopted by the Corporation on January 1, 2003. This statement
requires a cost associated with an exit or disposal activity, such as the sale
or termination of a line of business, the closure of business activities in a
particular location, or a change in management structure, to be recorded as a
liability at fair value when it becomes probable the cost will be incurred and
no future economic benefit will be gained by the company for such cost.
Applicable costs include employee termination benefits, contract termination
costs, and costs to consolidate facilities or relocate employees. SFAS 146
supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity, which in some cases
required certain costs to be recognized before a liability was actually
incurred. The adoption of this standard did not have a material impact on the
Corporation's results of operations, financial position, or liquidity for the
three months ended March 31, 2003.
15
ASSET RETIREMENT OBLIGATIONS: In August 2001, the FASB issued SFAS 143,
Accounting for Asset Retirement Obligations. SFAS 143 requires an entity to
record a liability for an obligation associated with the retirement of an asset
at the time the liability is incurred by capitalizing the cost as part of the
carrying value of the related asset and depreciating it over the remaining
useful life of that asset. The Corporation adopted the standard on January 1,
2003, and its adoption did not have a material impact on the Corporation's
results of operations, financial position, or liquidity for the first three
months of 2003.
3. NON-GAAP FINANCIAL MEASURES
In January 2003, the United States Securities and Exchange Commission (SEC)
issued Regulation G, Conditions for Use of Non-GAAP Financial Measures. A
non-GAAP financial measure is a numerical measure of a company's historical or
future performance, financial position, or cash flow that excludes (includes)
amounts or adjustments that are included (excluded) in the most directly
comparable measure calculated in accordance with generally accepted accounting
principles (GAAP). Regulation G requires companies that present non-GAAP
financial measures to disclose a numerical reconciliation to the most directly
comparable measurement using GAAP. Management does not believe it has used any
non-GAAP financial measure in this Quarterly Report on Form 10-Q.
4. RESTRUCTURING CHARGES
In January 2003, the Corporation implemented various cost-reduction initiatives
focused on improving the long-term profitability of National City. In connection
with the cost-reduction initiatives, severance and related charges totaling $71
million were recorded in the first quarter of 2003. Of this amount, $67 million
was recorded to salaries, benefits, and other personnel expense on the income
statement and was associated with a voluntary retirement program and position
eliminations made across the Corporation's lines of business during the first
quarter of 2003. The remaining $4 million was recorded to third-party services
expense and was incurred for placement services offered to employees whose
positions were eliminated. A liability for these severance and related charges
was accrued during the first quarter of 2003. A rollforward of the liability for
severance and related expenses is presented in the table below. Also included in
the rollforward is the accrued liability for severance expenses incurred in the
normal course of business.
- -------------------------------------------------
Three Months
Ended
(In Thousands) March 31, 2003
- -------------------------------------------------
Beginning balance $ 17,036
Severance and related charges 71,137
Payments and adjustments (15,704)
- -------------------------------------------------
ENDING BALANCE $ 72,469
=================================================
5. SECURITIZATION ACTIVITY
The Corporation periodically sells assets through securitization transactions.
During the first quarter of 2003, the Corporation sold four pools of Small
Business Administration (SBA) loans, which were securitized, totaling $44
million and recognized a pretax loss of $215 thousand, which was recorded in
other noninterest income. Retained interests in the form of interest-only
strips were recognized with an initial carrying value of approximately $4
million. The SBA loans securitized were sold servicing released and no
transaction costs were capitalized in conjunction with the sale.
On January 31, 2002, National City sold $425 million of credit card receivables
to the National City Credit Card Master Trust (trust) and recognized a pretax
gain of $25 million, which was recorded in other noninterest income. Retained
interests in the form of interest-only strips and subordinated tranches were
also recognized with initial carrying values of $5 million and $27 million,
respectively. Transaction costs of $2 million incurred in connection with the
securitization were deferred and are being amortized over the revolving term of
the securitization. The transaction costs deferred consisted primarily of
securities underwriting, filing, and professional services fees.
During 2001 and 2000, the Corporation sold $425 million and $600 million of
credit card receivables to the trust.
The Corporation established an automobile receivables trust into which it sold,
through securitization on March 27, 2002, $1.1 billion of fixed-rate, closed-end
automobile loans. A pretax gain of $25 million on this term securitization was
recorded in other noninterest income. Retained interests in the form of
interest-only strips, subordinated tranches, and dealer rebate receivables were
also recognized with initial carrying values of $41 million, $62 million, and $2
million, respectively. In addition, a servicing asset was created in the amount
of $17 million.
16
A summary of the components of managed loans, which represents both owned and
securitized loans, along with quantitative information about delinquencies and
net credit losses follows. The automobile loans presented represent the managed
portfolio of indirect prime automobile loans. The SBA loans represent
securitized loans originally purchased and then sold by the Corporation.
- -----------------------------------------------------------------------------------------------------------------------------------
As of March 31 Three Months Ended March 31
-------------------------------------------------------------------------------------------
Principal Loans Past Due Average Net Credit
Balance 30 days or more Balances Losses
-------------------------------------------------------------------------------------------
(In Millions) 2003 2002 2003 2002 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Type of loan:
Credit card $ 2,365.8 $ 2,161.6 $ 95.8 $ 82.5 $ 2,382.2 $ 2,211.8 $ 27.7 $ 31.7
Automobile 4,325.6 4,327.4 70.7 57.2 4,368.8 4,387.2 13.2 14.5
SBA 39.6 -- 1.4 -- 25.8 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans managed or
securitized 6,731.0 6,489.0 167.9 139.7 6,776.8 6,599.0 40.9 46.2
Less:
Loans securitized 2,194.5 2,557.1 67.1 49.5 2,240.8 1,345.4 18.0 17.7
Loans held for securitization -- -- -- -- -- 1,148.9 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
LOANS HELD IN PORTFOLIO $ 4,536.5 $ 3,931.9 $ 100.8 $ 90.2 $ 4,536.0 $ 4,104.7 $ 22.9 $ 28.5
- -----------------------------------------------------------------------------------------------------------------------------------
The Corporation's on-balance-sheet credit card receivables are expected to
increase following the revolving period of the securitization, which
approximates 48 months.
Certain cash flows received from the structured entities associated with the
loan sales described above follow:
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31
---------------------------------------------------------
Credit Card Automobile SBA
- -----------------------------------------------------------------------------------------------------------------------
(In Millions) 2003 2002 2003 2002 2003
- -----------------------------------------------------------------------------------------------------------------------
Proceeds from new securitizations $ -- $ 397.4 $ -- $ 1,041.0 $ 40.3
Proceeds from collections reinvested in previous
securitizations 758.4 701.7 -- -- --
Servicing fees received 7.2 7.3 2.0 -- --
Other cash flows received on retained interest 24.3 22.9 5.4 -- .1
Proceeds from sales of previously charged-off accounts .4 .5 -- -- --
Purchases of delinquent or foreclosed assets -- -- -- -- --
Repayments of servicing advances -- -- -- -- --
=======================================================================================================================
A summary of the fair values of the interest-only strips and servicing assets
retained, key economic assumptions used to arrive at the fair values, and the
sensitivity of the March 31, 2003 fair values to immediate 10% and 20% adverse
changes in those assumptions follows. The sensitivities are hypothetical.
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 interests 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.
17
- --------------------------------------------------------------------------------------------------------------------------------
Weighted- Variable Monthly Expected
average Annual Principal Annual Annual
Fair Life Coupon Rate Repayment Credit Discount
(Dollars in Millions) Value (in months) to Investors Rate Losses Rate Yield
- --------------------------------------------------------------------------------------------------------------------------------
CREDIT CARD LOANS
SERIES 2000-1 - INTEREST-ONLY STRIP
AS OF MARCH 31, 2003 $ 4.3 3.3 1.51% 17.44% 4.99% 15.00% 10.84%
Decline in fair value of 10% adverse
change $ .2 $ .3 $ .8 -- $ 2.5
Decline in fair value of 20% adverse
change .4 .6 1.6 -- 4.3
SERIES 2001-1 - INTEREST-ONLY STRIP
AS OF MARCH 31, 2003 $ 3.0 3.3 1.53% 17.44% 4.99% 15.00% 10.84%
Decline in fair value of 10% adverse
change $ .2 $ .2 $ .6 -- $ 1.8
Decline in fair value of 20% adverse
change .3 .4 1.1 -- 3.0
SERIES 2002-1 - INTEREST-ONLY STRIP
AS OF MARCH 31, 2003 $ 3.0 3.3 1.52% 17.44% 4.99% 15.00% 10.84%
Decline in fair value of 10% adverse
change $ .2 $ .2 $ .6 -- $ 1.8
Decline in fair value of 20% adverse
change .3 .4 1.1 -- 3.0
================================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Weighted- Monthly Expected
average Prepayment Cumulative Annual Weighted-
Fair Life Speed Credit Discount average
(Dollars in Millions) Value (in months) (% ABS)(a) Losses(c) Rate Coupon
- ----------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE LOANS
SERIES 2002-A
Interest-only strip
AS OF MARCH 31, 2003 $22.8 17.4 1.40% 2.16% 12.00% 8.71%
Decline in fair value of 10% adverse
change $ 1.4 $ 2.2 $ .5 $ 8.2
Decline in fair value of 20% adverse
change 2.7 4.2 .9 16.1
Servicing asset
AS OF MARCH 31, 2003(b) $ 8.7 13.0 1.40% 2.16% 12.00% 8.71%
Decline in fair value of 10% adverse
change $ .4 -- $ .1 --
Decline in fair value of 20% adverse
change .9 -- .2 $ .1
=========================================================================================================================
(a) Absolute prepayment speed
(b) Carrying value of servicing asset at March 31, 2003 was $8.6 million
(c) The expected static pool loss assumption performed consistent with the
expected cumulative credit loss assumptions
- -------------------------------------------------------------------------------------------------------------------------
Weighted-
average Constant Annual Weighted-
Fair Life Prepayment Discount average
(Dollars in Millions) Value (in months)(a) Rate(a) Rate(a) Spread(a)
- -------------------------------------------------------------------------------------------------------------------------
SBA LOANS
Interest-only strips
As of the date of the securitizations $ 3.8 55.4 16.15% 10.00% 2.75%
As of March 31, 2003 3.7 54.7 16.15 10.00 2.75
Decline in fair value of 10% adverse change -- -- $ .1
Decline in fair value of 20% adverse change $ .1 $ .1 .2
=========================================================================================================================
(a) Represents weighted-average assumptions and aggregate amounts for all
securitized pools
18
6. ASSET-BACKED COMMERCIAL PAPER CONDUIT
During 2002, the Corporation served as the administrative agent and investment
advisor to a commercial paper conduit (North Coast Funding, LLC) that purchased
high-grade assets from the Corporation and certain corporate customers and then
issued high-grade commercial paper to third-party investors collateralized by
such assets. The conduit was established in 2000, and at that time, was
considered an unconsolidated qualified special-purpose entity under the
guidelines of SFAS 140.
Effective September 29, 2002, the asset sale agreement between North Coast
Funding, LLC and National City SPC, Inc. was amended to grant the conduit the
right to sell assets at its sole discretion. All parties to the conduit and the
rating agencies were informed of the intent to amend the agreement and the
independent third-party owner of the conduit approved the amendment. The nature
of the amendment caused the conduit to lose its status as a qualifying
special-purpose entity. As a result, under applicable accounting guidance, the
assets and liabilities and results of operations of the conduit were
consolidated in the financial statements of the Corporation. During the fourth
quarter of 2002, the remaining commercial paper borrowings held by third-party
investors matured and the conduit was legally dissolved.
7. LOANS AND ALLOWANCE FOR LOAN LOSSES
Total loans outstanding were recorded net of unearned income as of March 31,
2003, December 31, 2002, and March 31, 2002 of $332 million, $390 million, and
$517 million, respectively.
The loan portfolio includes lease financing receivables consisting of direct
financing and leveraged leases on equipment, which are included in commercial
loans on the consolidated balance sheet, and retail automobile lease financings,
which are included in other consumer loans on the consolidated balance sheet.
The direct financing and leveraged leased equipment consists primarily of
manufacturing and mining equipment, commercial trucks and trailers, and
airplanes. The Corporation ceased originating retail automobile leases in
December 2000 and is letting the portfolio run off over time. A summary of lease
financings by type at March 31 follows:
- -------------------------------------------------------------------------------
(In Thousands) 2003 2002
- -------------------------------------------------------------------------------
COMMERCIAL
Direct financings $1,298,518 $1,549,540
Leveraged leases 302,676 325,428
- -------------------------------------------------------------------------------
TOTAL COMMERCIAL LEASE FINANCINGS 1,601,194 1,874,968
CONSUMER
Retail automobile lease financings 440,044 1,049,946
- -------------------------------------------------------------------------------
TOTAL NET INVESTMENT IN LEASE FINANCINGS $2,041,238 $2,924,914
===============================================================================
The components of the net investment in lease financings at March 31 follow:
- -----------------------------------------------------------------------------------------------
(In Thousands) 2003 2002
- -----------------------------------------------------------------------------------------------
COMMERCIAL
Lease payments receivable $1,443,536 $1,736,732
Estimated residual value of leased assets 509,556 587,284
- -----------------------------------------------------------------------------------------------
Gross investment in commercial lease financings 1,953,092 2,324,016
Unearned income (351,898) (449,048)
- -----------------------------------------------------------------------------------------------
TOTAL NET INVESTMENT IN COMMERCIAL LEASE FINANCINGS $1,601,194 $1,874,968
- -----------------------------------------------------------------------------------------------
CONSUMER
Lease payments receivable $ 123,562 $ 363,322
Estimated residual value of leased assets 348,523 786,586
- -----------------------------------------------------------------------------------------------
Gross investment in consumer lease financings 472,085 1,149,908
Unearned income (32,041) (99,962)
- -----------------------------------------------------------------------------------------------
TOTAL NET INVESTMENT IN CONSUMER LEASE FINANCINGS $ 440,044 $1,049,946
===============================================================================================
19
A rollforward of the residual value component of lease financings follows:
- -------------------------------------------------------------------------
(In Thousands) 2003 2002
- -------------------------------------------------------------------------
COMMERCIAL
Beginning balance $561,438 $ 595,867
Additions 1,303 8,694
Maturities and terminations (15,791) (17,277)
Write-downs (37,394) --
- -------------------------------------------------------------------------
ENDING BALANCE $509,556 $ 587,284
- -------------------------------------------------------------------------
CONSUMER
Beginning balance $446,872 $ 862,428
Additions -- --
Maturities and terminations (73,094) (62,672)
Write-downs (25,255) (13,170)
- -------------------------------------------------------------------------
ENDING BALANCE $348,523 $ 786,586
=========================================================================
The commercial lease residual value write-downs were associated with various
commercial aircraft leases. The write-downs consisted of $16 million
attributable to decreases in the residual values of airplanes which were charged
to other noninterest expense, $5 million attributable to credit losses which
were charged to the allowance for loan losses, and $16 million attributable to
the write-off of unearned income and other related accounts.
The allowance for loan losses represents an estimation of probable credit losses
inherent in the loan portfolio. Activity in the allowance for loan losses
follows:
- ----------------------------------------------------------------------------------------
Three Months Ended
March 31
- ----------------------------------------------------------------------------------------
(In Thousands) 2003 2002
- ----------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF PERIOD $1,098,588 $ 997,331
Provision 200,233 188,640
Allowance related to loans sold or securitized -- (4,477)
Charge-offs:
Commercial 103,603 105,956
Real estate - commercial 2,801 2,325
Real estate - residential 41,212 23,792
Home equity lines of credit 5,597 4,741
Credit cards and other unsecured lines of credit 21,810 22,618
Other consumer 35,256 54,691
- ----------------------------------------------------------------------------------------
Total charge-offs 210,279 214,123
Recoveries:
Commercial 11,081 7,578
Real estate - commercial 511 691
Real estate - residential 10,517 847
Home equity lines of credit 1,512 993
Credit cards and other unsecured lines of credit 2,157 2,586
Other consumer 13,929 19,977
- ----------------------------------------------------------------------------------------
Total recoveries 39,707 32,672
Net charge-offs 170,572 181,451
- ----------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $1,128,249 $1,000,043
========================================================================================
Nonperforming loans totaled $696 million, $702 million, and $650 million as of
March 31, 2003, December 31, 2002, and March 31, 2002, respectively. For loans
classified as nonperforming at March 31, 2003, the contractual interest due and
actual interest recognized on those loans during the first quarter was $16
million and $1 million, respectively. Included in nonperforming loans were
impaired loans, as defined under SFAS 114, aggregating $383 million, $391
million, and $331 million at March 31, 2003, December 31, 2002, and March 31,
2002, respectively. Average impaired loans for the three months ended March 31,
2003 and 2002 totaled $387 million and $250 million, respectively. 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 as of March 31, 2003, December 31, 2002, and March 31, 2002 was
$73 million, $76 million, and $86 million, respectively. At March 31, 2003,
December 31, 2002, and March 31, 2002, impaired loans with an associated
allowance totaled $237 million, $206 million, and $265 million, respectively,
while impaired loans with no associated
20
allowance totaled $146 million, $185 million, and $66 million for these same
period-ends. There was no interest recognized during the first three months of
2003 and 2002, respectively, on impaired loans while they were considered
impaired.
8. SECURITIES
Securities available for sale follow:
- -------------------------------------------------------------------------------
AMORTIZED FAIR
(In Thousands) COST VALUE
- -------------------------------------------------------------------------------
MARCH 31, 2003
U.S. Treasury and Federal agency debentures $1,074,007 $1,129,613
Mortgage-backed securities 4,247,906 4,428,893
Asset-backed and corporate debt securities 1,437,178 1,438,508
States and political subdivisions 650,475 702,509
Other 759,991 764,621
- -------------------------------------------------------------------------------
TOTAL SECURITIES $8,169,557 $8,464,144
- -------------------------------------------------------------------------------
December 31, 2002
U.S. Treasury and Federal agency debentures $1,084,077 $1,143,923
Mortgage-backed securities 4,552,641 4,779,566
Asset-backed and corporate debt securities 1,815,549 1,817,958
States and political subdivisions 650,747 702,669
Other 765,065 767,152
- -------------------------------------------------------------------------------
TOTAL SECURITIES $8,868,079 $9,211,268
- -------------------------------------------------------------------------------
March 31, 2002
U.S. Treasury and Federal agency debentures $ 977,766 $ 998,890
Mortgage-backed securities 5,994,604 6,038,966
Asset-backed and corporate debt securities 414,140 415,653
States and political subdivisions 685,069 714,709
Other 837,327 867,801
- -------------------------------------------------------------------------------
TOTAL SECURITIES $8,908,906 $9,036,019
- -------------------------------------------------------------------------------
The other category includes Federal Reserve and Federal Home Loan Bank stock,
certain retained interests in securitizations, and the Corporation's internally
managed equity portfolio of bank and thrift common stock investments (bank stock
fund). The bank stock fund had a cost basis and fair value of $262 million and
$251 million, respectively, at March 31, 2003, compared to a cost basis and fair
value of $75 million and $71 million, respectively, at December 31, 2002, and
a cost basis and fair value of $272 million and $296 million, respectively, at
March 31, 2002.
At March 31, 2003, the carrying value of securities pledged to secure public and
trust deposits, U.S. Treasury notes, security repurchase agreements, and
derivative instruments totaled $7 billion.
At March 31, 2003, there were no securities of a single issuer, other than U.S.
Treasury and Federal agency debentures and other U.S. government-sponsored
agency securities, which exceeded 10% of stockholders' equity.
For the three months ended March 31, 2003 and 2002, gross securities gains of
$400 thousand and $54 million, respectively, were recognized. Gross securities
losses recognized for the three months ended March 31, 2003 were $200 thousand.
There were no securities losses recognized during the first quarter of 2002.
21
9. PRINCIPAL INVESTMENTS
The Corporation's principal investment portfolio is managed within the Wholesale
Banking line of business. The principal investment portfolio primarily consists
of investments in the consumer and retail, manufacturing, automotive, building
products, and commercial services industries with no single industry
constituting greater than 20% of the total portfolio. A rollforward of principal
investments follows:
- ----------------------------------------------------------------------------------------
Three Months Ended March 31
(In Thousands) 2003 2002
- ----------------------------------------------------------------------------------------
DIRECT INVESTMENTS:
Carrying value at beginning of period $ 317,089 $ 286,333
Investments -- new fundings 15,722 10,725
Returns of capital and write-offs (4,520) (3,648)
Fair value adjustments 316 (2,936)
- ----------------------------------------------------------------------------------------
Carrying value at end of period $ 328,607 $ 290,474
- ----------------------------------------------------------------------------------------
INDIRECT INVESTMENTS:
Carrying value at beginning of period $ 254,899 $ 209,051
Investments -- new fundings 13,611 11,648
Returns of capital and write-offs (3,921) (1,074)
Fair value adjustments 49 (9)
- ----------------------------------------------------------------------------------------
Carrying value at end of period $ 264,638 $ 219,616
- ----------------------------------------------------------------------------------------
TOTAL PRINCIPAL INVESTMENTS:
Carrying value at beginning of period $ 571,988 $ 495,384
Investments -- new fundings 29,333 22,373
Returns of capital and write-offs (8,441) (4,722)
Fair value adjustments 365 (2,945)
- ----------------------------------------------------------------------------------------
CARRYING VALUE AT END OF PERIOD $ 593,245 $ 510,090
========================================================================================
- ----------------------------------------------------------------------------------------
Three Months Ended March 31
(In Thousands) 2003 2002
- ----------------------------------------------------------------------------------------
PRINCIPAL INVESTMENT REVENUE(a) $ 8,693 $ 5,650
- ----------------------------------------------------------------------------------------
NET PRINCIPAL INVESTMENT GAINS (LOSSES)(b) $ 6,464 $ (1,907)
========================================================================================
(a) Consists primarily of interest, dividends, and fee income
(b) Consists of fair value adjustments and realized gains and losses on the
return of capital, and principal investment write-offs
Accounting policies for principal investments are included in Note 1.
Commitments to fund principal investments are discussed in Note 19.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Refer to Note 1 for the accounting policies related to goodwill and other
intangible assets. At March 31, 2003, December 31, 2002, and March 31, 2002, the
Corporation had goodwill assets of $1.1 billion. A summary of goodwill by line
of business follows:
- --------------------------------------------------------------------------------------------------
JANUARY 1 GOODWILL IMPAIRMENT MARCH 31
(In Thousands) 2003 ACQUIRED LOSSES 2003
- --------------------------------------------------------------------------------------------------
Consumer and Small Business
Financial Services $ 512,731 -- -- $ 512,731
Wholesale Banking 86,729 -- -- 86,729
National Consumer Finance 261,387 -- -- 261,387
Asset Management 126,207 -- -- 126,207
National Processing 91,227 -- -- 91,227
Parent and other -- -- -- --
- --------------------------------------------------------------------------------------------------
TOTAL $1,078,281 -- -- $1,078,281
==================================================================================================
The Corporation has finite-lived intangible assets capitalized on its balance
sheet in the form of core deposit, credit card, and merchant portfolios and
other intangibles. Merchant portfolio intangibles relate to merchant card
customer portfolios acquired by National Processing. These intangible assets
continue to be amortized over their estimated useful lives in accordance with
SFAS 142, which range from one to 10 years. There were no adjustments to the
useful lives of these intangible assets as a result of the adoption of SFAS 142.
22
A summary of core deposit, credit card, and merchant portfolios and other
intangible assets follows:
- -----------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2003 2002 2002
- -----------------------------------------------------------------------------------------
CORE DEPOSIT INTANGIBLES
Gross carrying amount $ 93,328 $ 93,328 $ 93,328
Less: accumulated amortization 68,417 65,169 55,424
- -----------------------------------------------------------------------------------------
NET CARRYING AMOUNT 24,911 28,159 37,904
- -----------------------------------------------------------------------------------------
CREDIT CARD INTANGIBLES
Gross carrying amount 17,323 17,323 14,612
Less: accumulated amortization 13,349 12,990 11,983
- -----------------------------------------------------------------------------------------
NET CARRYING AMOUNT 3,974 4,333 2,629
- -----------------------------------------------------------------------------------------
MERCHANT PORTFOLIOS AND OTHER INTANGIBLES
Gross carrying amount 63,577 63,577 59,677
Less: accumulated amortization 23,269 21,496 16,291
- -----------------------------------------------------------------------------------------
NET CARRYING AMOUNT 40,308 42,081 43,386
- -----------------------------------------------------------------------------------------
TOTAL FINITE-LIVED INTANGIBLES
Gross carrying amount 174,228 174,228 167,617
Less: accumulated amortization 105,035 99,655 83,698
- -----------------------------------------------------------------------------------------
NET CARRYING AMOUNT $ 69,193 $ 74,573 $ 83,919
=========================================================================================
Amortization expense on finite-lived intangible assets totaled $5 million and $5
million for the three months ended March 31, 2003 and 2002, respectively.
Amortization expense on finite-lived intangible assets is expected to total $21
million, $20 million, $8 million, $5 million, and $5 million in 2003, 2004,
2005, 2006, and 2007, respectively.
11. MORTGAGE SERVICING ASSETS
The unpaid principal balance of residential mortgage loans serviced for third
parties was $112.4 billion at March 31, 2003, compared to $101.9 billion at
December 31, 2002, and $85.2 billion at March 31, 2002.
The net carrying value of mortgage servicing assets follows:
- ---------------------------------------------------------------------------------------------
March 31
(In Thousands) 2003 2002
- ---------------------------------------------------------------------------------------------
Initial carrying value adjusted for
amortization $ 1,932,613 $ 1,631,632
SFAS 133 hedge basis adjustments (822,917) (8,844)
Impairment valuation allowance (296,384) (258,928)
- ---------------------------------------------------------------------------------------------
NET CARRYING VALUE $ 813,312 $ 1,363,860
=============================================================================================
Changes in the carrying value of mortgage servicing assets follow:
- ---------------------------------------------------------------------------------
Three Months Ended March 31
(In Thousands) 2003 2002
- ---------------------------------------------------------------------------------
Balance at beginning of year $ 615,193 $ 1,135,704
Additions 267,307 294,904
Amortization (147,921) (69,053)
SFAS 133 hedge basis adjustments (6,127) (6,027)
Impairment recovery 87,166 13,009
Sales (2,306) (4,677)
- ---------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 813,312 $ 1,363,860
=================================================================================
Net decrease in impairment valuation allowance $ 87,166 $ 13,009
=================================================================================
The fair value of mortgage servicing assets is estimated by calculating the
present value of estimated future net servicing cash flows, taking into
consideration actual and expected mortgage loan prepayment rates, discount
rates, servicing costs, and other economic factors, which are determined based
on current market conditions. The expected and actual rates of mortgage loan
prepayments are the most significant factors driving the value of mortgage
servicing assets. Increases in mortgage loan prepayments reduce estimated future
net servicing cash flows because the life of the underlying loan is reduced. In
determining the fair value of the mortgage servicing assets, mortgage loan
rates, which are used to determine prepayment rates, and discount rates are held
constant over the estimated life of the portfolio. Expected mortgage loan
prepayment rates are derived from a third-party model and adjusted to reflect
National City's actual prepayment experience.
23
The key economic assumptions used to estimate the value of the mortgage
servicing asset portfolio at March 31, 2003, December 31, 2002, and March 31,
2002 are presented in the table that follows. A sensitivity analysis of the
current fair value of mortgage servicing assets to immediate 10% and 20% adverse
changes in those assumptions as of March 31, 2003 is also presented. These
sensitivities are hypothetical. 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
mortgage servicing assets is calculated independently without changing any other
assumption. In reality, changes in one factor may result in changes in another
(for example, changes in prepayment rate estimates could result in changes in
the discount rates), which might magnify or counteract the sensitivities.
- ----------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(Dollars in Thousands) 2003 2002 2002
- ----------------------------------------------------------------------------------------------------------------
Fair value $ 813,312 $ 615,193 $ 1,363,860
Expected weighted-average life (in years) 2.7 2.2 4.4
Constant prepayment rate (CPR) 40.94% 63.07% 13.39%
Discount rate 9.55 9.53 11.45
Prepayment rate
Decline in fair value from 10% adverse change $ 47,395
Decline in fair value from 20% adverse change 80,957
Discount rate
Decline in fair value from 10% adverse change 17,575
Decline in fair value from 20% adverse change 34,129
================================================================================================================
The key economic assumptions used in determining the fair value of mortgage
servicing assets capitalized in the first quarter of 2003 were as follows:
- --------------------------------------------------------
Weighted-average CPR 34.04%
Weighted-average life (in years) 3.8
Weighted-average discount rate 9.50%
========================================================
Since March 31, 2002, actual and expected mortgage loan prepayments increased
due to a decline in market interest rates. The increase in the prepayment rate
has in turn lowered the amount of serving asset capitalized at the time of loan
sale and reduced the fair value of the servicing assets, as reflected through
increased amortization expense and an increase in SFAS 133 hedge basis
adjustments and impairment valuation allowance. During the first quarter of
2003, the rates of actual and expected mortgage loan prepayments were lower than
anticipated at December 31, 2002, resulting in a recovery of temporary
impairment on certain mortgage servicing assets.
Risk associated with declines in the estimated fair value of mortgage servicing
assets due to increases in mortgage loan prepayments is managed using derivative
instruments that are expected to increase in value when interest rates decline.
Because derivative instruments that reflect the exact opposite risk profile of
the mortgage servicing assets are effectively not available in the capital
markets, management uses a variety of derivative instruments whose fair values,
when combined together, are expected to offset changes in the value of the
mortgage servicing assets. Because the risk profile of the derivatives is not
exactly the same as the mortgage servicing assets, changes in the value of the
derivative instruments may not exactly offset the change in value of the
mortgage servicing assets. The Corporation manages the risk to an immediate
reduction in the fair value of its mortgage servicing assets within guidelines
set forth by the Asset/Liability Management Committee. Notes 1 and 21 provide
further discussion on how derivative instruments are accounted for, the nature
of the derivative instruments used, the risks associated with the use of
derivative instruments, and ineffective hedge and other derivative gains and
losses generated by derivative instruments. During the first quarter of 2003,
net gains totaling $82 million were recognized on derivative instruments used to
hedge the value of mortgage servicing assets and included in mortgage banking
revenue on the income statement. A discussion of mortgage banking revenue is
included in the Financial Review on page 47.
24
12. BORROWED FUNDS
Detail of borrowed funds follows:
- ------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2003 2002 2002
- ------------------------------------------------------------------------------
U.S. Treasury notes $ 351,871 $ 8,881,947 $ 577,811
Senior bank notes 555,000 1,560,000 --
Commercial paper and other 829,061 1,051,962 531,549
- ------------------------------------------------------------------------------
TOTAL BORROWED FUNDS $ 1,735,932 $11,493,909 $ 1,109,360
==============================================================================
U.S. Treasury notes represent secured borrowings from the U.S. Treasury. These
borrowings are collateralized by qualifying securities and commercial and
residential real estate loans. The funds are placed at the discretion of the
U.S. Treasury. At March 31, 2003, $352 million of notes were callable on demand
by the U.S. Treasury, compared to $7.9 billion and $578 million at December 31,
2002 and March 31, 2002, respectively. At December 31, 2002, $1.0 billion of the
notes were term notes with a stated maturity of less than one month.
The senior bank notes are issued by National City's bank subsidiaries and have
maturities of six months or less.
Commercial paper is issued by the Corporation's subsidiary, National City Credit
Corporation, and has maturities of six months or less.
13. LONG-TERM DEBT
The composition of long-term debt follows:
- -------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2003 2002 2002
- -------------------------------------------------------------------------------------
3.20% senior notes due 2008 $ 295,416 $ -- $ --
8.50% subordinated notes due 2002 -- -- 99,996
6.625% subordinated notes due 2004 249,881 249,849 249,752
7.75% subordinated notes due 2004 199,658 199,594 199,402
8.50% subordinated notes due 2004 149,895 149,863 149,769
7.20% subordinated notes due 2005 260,066 260,849 256,093
5.75% subordinated notes due 2009 332,044 333,928 298,059
6.875% subordinated notes due 2019 799,984 808,353 693,216
Other 2,640 2,640 13,520
- -------------------------------------------------------------------------------------
TOTAL HOLDING COMPANY 2,289,584 2,005,076 1,959,807
6.50% subordinated notes due 2003 200,540 202,158 207,014
7.25% subordinated notes due 2010 269,798 272,007 242,005
6.30% subordinated notes due 2011 229,308 231,006 203,551
7.25% subordinated notes due 2011 198,313 198,263 198,116
6.25% subordinated notes due 2011 339,997 342,357 300,857
6.20% subordinated notes due 2011 546,824 550,307 479,476
Senior bank notes 15,715,745 14,998,141 12,169,963
Federal Home Loan Bank advances 4,002,063 3,750,980 3,749,665
- -------------------------------------------------------------------------------------
TOTAL BANK SUBSIDIARIES 21,502,588 20,545,219 17,550,647
- -------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $23,792,172 $22,550,295 $19,510,454
=====================================================================================
The amounts above represent the par value of the debt adjusted for any
unamortized discount or other basis adjustments related to hedging the debt with
derivative instruments. The Corporation uses derivative instruments, primarily
interest rate swaps, to manage interest rate risk by hedging the fair value of
certain fixed-rate debt by converting the debt to variable rate and by hedging
the cash flow variability associated with certain variable-rate debt by
converting the debt to fixed rate. Further discussion on derivative instruments
is included in Notes 1 and 21.
The subordinated notes of the holding company and bank subsidiaries qualify for
Tier 2 capital under the regulatory capital requirements of the federal banking
agencies. Further discussion on regulatory capital requirements is included in
Note 15.
At March 31, 2003, the par values of senior and subordinated debt, senior bank
notes, and long-term advances from the Federal Home Loan Bank (FHLB) totaled
$3.8 billion, $15.6 billion and $4.0 billion, respectively.
25
All senior and subordinated notes of the holding company and bank subsidiaries
were issued at fixed rates, pay interest semi-annually and may not be redeemed
prior to maturity. During March 2003, the holding company issued senior notes
with a par value of $300 million. At March 31, 2003, $2.6 billion of fixed-rate
subordinated debt was effectively converted to variable-rate debt based on the
three-month London Interbank Offering Rate (LIBOR) through the use of interest
rate swaps.
Senior bank notes are issued by National City's bank subsidiaries. At March 31,
2003, senior bank notes totaling $1.5 billion were contractually based on a
fixed rate of interest and $14.1 billion were contractually based on a variable
rate of interest. The weighted-average contractual interest rates for fixed and
variable-rate senior bank notes at March 31 were 2.89% and 1.50%, respectively.
Through the use of interest rate swaps, as of March 31, the entire balance of
fixed-rate senior bank notes had been effectively converted to variable-rate
notes based on either the one- or three-month LIBOR rate, the Federal Funds rate
or the Prime rate and $3.7 billion of the variable-rate senior bank notes had
been effectively converted to fixed-rate notes with a weighted-average fixed
rate of 3.93%. Additionally, $5.4 billion of variable rate senior bank notes
were capped at a weighted-average rate of 4.65% through the use of interest rate
caps.
FHLB advances at March 31, 2003, contractually consisted of $192 million of
fixed-rate obligations and $3.8 billion of variable-rate obligations. The
weighted-average contractual interest rates for fixed- and variable-rate
advances at March 31 were 5.64% and 1.29%, respectively. Through the use of
interest rate swaps, as of March 31, fixed-rate advances with a par value of
$100 million had been effectively converted to a variable rate based on
one-month LIBOR and variable-rate advances with a par value of $1.4 billion had
been effectively converted to fixed-rate advances with a weighted-average fixed
rate of 4.03%. Additionally, $555 million of variable rate FHLB advances were
capped at a weighted-average rate of 4.15% through the use of interest rate
caps. FHLB advances are collateralized by qualifying residential real estate
loans.
A credit agreement dated April 12, 2001, as amended, with a group of
unaffiliated banks allows the Corporation to borrow up to $375 million until
April 12, 2005 with a provision to extend the expiration date under certain
circumstances. The Corporation pays a variable annual facility fee based on the
Corporation's long-term debt rating. The fee is currently 10 basis points on the
amount of the credit facility. There were no borrowings outstanding under this
agreement at March 31, 2003, December 31, 2002, or March 31, 2002.
14. CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY DEBENTURES OF THE CORPORATION
The composition of capital securities follows:
- ---------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2003 2002 2002
- ---------------------------------------------------------------------------------------
8.12% capital securities of First of
America Capital Trust I due January 31, 2027 $150,000 $150,000 $150,000
9.85% capital securities of Fort Wayne
Capital Trust I due April 15, 2027 30,000 30,000 30,000
- ---------------------------------------------------------------------------------------
TOTAL CAPITAL SECURITIES $180,000 $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 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.
26
15. REGULATORY RESTRICTIONS AND CAPITAL RATIOS
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements of 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
financial position and operations.
Regulatory and other capital measures follow:
- -------------------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
2003 2002 2002
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) AMOUNT RATIO Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------
Total equity/assets $ 8,587,163 7.31% $ 8,308,012 7.03% $ 7,672,211 7.67%
Total common equity/assets 8,587,163 7.31 8,308,012 7.03 7,671,513 7.67
Tangible common equity/
tangible assets 7,439,689 6.39 7,155,158 6.11 6,509,313 6.58
Tier 1 capital 7,536,440 7.82 7,263,196 7.60 6,546,222 7.66
Total risk-based capital 11,219,925 11.65 10,996,661 11.51 10,323,939 12.09
Leverage 7,536,440 6.54 7,263,196 6.52 6,546,222 6.49
=========================================================================================================================
The tangible common equity ratio excludes goodwill and other intangible assets
from both the numerator and denominator.
Tier 1 capital consists of total equity plus qualifying capital securities and
minority interests, less unrealized gains and losses accumulated in other
comprehensive income, certain intangible assets, and adjustments related to the
valuation of mortgage servicing assets and certain equity investments in
nonfinancial companies (principal investments).
Total risk-based capital is comprised of Tier 1 capital plus qualifying
subordinated debt, the allowance for loan losses and a portion of unrealized
gains on certain equity securities.
Both the Tier 1 and the total risk-based capital ratios are computed by dividing
the respective capital amounts by risk-weighted assets, as defined.
The leverage ratio reflects Tier 1 capital divided by average total assets for
the period. Average assets used in the calculation excludes certain intangible
and mortgage servicing assets.
National City's Tier 1, total risk-based capital, and leverage ratios for the
current period are above the required minimum levels of 4.00%, 8.00%, and 4.00%,
respectively. The capital levels at all of National City's subsidiary banks are
maintained at or above the well-capitalized minimums of 6.00%, 10.00%, and 5.00%
for the Tier 1 capital, total risk-based capital, and leverage ratios,
respectively. As of the most recent notification from the Federal Deposit
Insurance Corporation, which was March 30, 2003, the due date of the last
required quarterly regulatory financial filings, each of the Corporation's
subsidiary banks were considered well-capitalized under the regulatory framework
for prompt corrective action. There have been no conditions or events since
these filings were made that management believes have changed any subsidiary
bank's capital category. As of December 31, 2002 and March 31, 2002, each of the
subsidiary banks were also categorized as well-capitalized.
The Corporation's subsidiary banks are required to maintain noninterest bearing
reserve balances with the Federal Reserve Bank. The required reserve balance was
$114 million at March 31, 2003.
Under current Federal Reserve regulations, the banking subsidiaries are limited
in the amount they may loan to the holding 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 holding company, are also required to be
collateralized.
Dividends paid by subsidiary banks to the holding company are also subject to
certain legal and regulatory limitations. At March 31, 2003, the subsidiary
banks may pay dividends of $1.5 billion, plus an additional amount equal to
their net profits for 2003, as defined by statute, up to the date of any such
dividend declaration, without prior regulatory approval.
27
16. STOCKHOLDERS' EQUITY
A summary of outstanding shares of preferred and common stock follows:
- -----------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
2003 2002 2002
- -----------------------------------------------------------------------------------------------------
Preferred Stock, no par value,
authorized 5,000,000 shares -- -- 13,969
Common Stock, $4 par value,
authorized 1,400,000,000 shares 610,971,942 611,491,359 608,395,463
====================================================================================================
On August 30, 2002, the Corporation redeemed all preferred shares outstanding,
stated value $50 per share, at a redemption price of $50.50137 per share,
representing a total cost of $37,119. Prior to redemption, holders of preferred
shares had the right at their option, to convert each share of preferred into
3.0291 shares of National City common stock at any time through August 20, 2002.
The holders of the preferred shares were entitled to receive cumulative
preferred dividends payable quarterly at the annual rate of 6%.
A summary of activity in accumulated other comprehensive income (loss) follows:
- --------------------------------------------------------------------------------------------------
Three Months Ended March 31
(In Thousands) 2003 2002
- --------------------------------------------------------------------------------------------------
Accumulated unrealized gains on securities
available for sale at January 1, net of tax $ 223,073 $ 105,656
Net unrealized (losses) gains for the period, net of tax (benefit)
expense of ($16,952) in 2003 and $6,458 in 2002 (31,482) 11,993
Reclassification adjustment for gains included in net income,
net of tax expense of $60 in 2003 and $18,736 in 2002 (111) (34,796)
- --------------------------------------------------------------------------------------------------
Effect on other comprehensive income for the period (31,593) (22,803)
- --------------------------------------------------------------------------------------------------
Accumulated unrealized gains on securities available for sale
at March 31, net of tax $ 191,480 $ 82,853
==================================================================================================
Accumulated unrealized losses on derivatives used in cash $(155,893) $ (33,379)
flow hedging relationships at January 1, net of tax
Net unrealized losses for the period, net of tax benefit (4,717) (8,218)
of $2,540 in 2003 and $4,425 in 2002
Reclassification adjustment for losses included in net income,
net of tax benefit of $13,543 in 2003 and $15,542 in 2002 25,151 28,863
- --------------------------------------------------------------------------------------------------
Effect on other comprehensive income for the period 20,434 20,645
- --------------------------------------------------------------------------------------------------
Accumulated unrealized losses on derivatives used in cash
flow hedging relationships at March 31, net of tax $(135,459) $ (12,734)
==================================================================================================
Accumulated other comprehensive income at
January 1, net of tax $ 67,180 $ 72,277
Other comprehensive loss, net of tax (11,159) (2,158)
- --------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME AT MARCH 31,
NET OF TAX $ 56,021 $ 70,119
==================================================================================================
The Corporation had two share repurchase authorizations outstanding at March 31,
2003. In February 2003, the Corporation's Board of Directors authorized a
share repurchase program for the repurchase of up to 25 million shares of
National City common stock, subject to an aggregate purchase limit of $800
million. In October 1999, the Corporation's Board of Directors authorized the
repurchase of up to 30 million shares of National City common stock, subject to
an aggregate purchase limit of $1.0 billion. Shares repurchased under both
programs are held for reissue in connection with the Corporation's stock
compensation plans and for general corporate purposes. During the first three
months of 2003, the Corporation repurchased 1.4 million shares of its common
stock. There were no share repurchases of National City common stock during the
first three months of 2002. As of March 31, 2003, 37.9 million shares remain
authorized for repurchase under both authorizations.
28
17. NET INCOME PER COMMON SHARE
Basic and diluted net income per common share calculations follow:
- ----------------------------------------------------------------------------------------
Three Months Ended March 31
(Dollars in Thousands,
Except Per Share Amounts) 2003 2002
- ----------------------------------------------------------------------------------------
BASIC
Net income $496,548 $446,131
Less preferred dividends -- 10
- --------------------------------------------------------------------------------------
Net income applicable to common stock $496,548 $446,121
- --------------------------------------------------------------------------------------
Average common shares outstanding 611,522 607,815
- --------------------------------------------------------------------------------------
Net income per common share -- basic $ .81 $ .73
======================================================================================
DILUTED
Net income $496,548 $446,131
- --------------------------------------------------------------------------------------
Average common shares outstanding 611,522 607,815
Stock award adjustment 4,057 6,184
Preferred stock adjustment -- 43
- --------------------------------------------------------------------------------------
Average common shares outstanding -- diluted 615,579 614,042
- --------------------------------------------------------------------------------------
Net income per common share -- diluted $ .81 $ .73
======================================================================================
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 outstanding convertible preferred stock and stock-based
compensation awards were converted or exercised into common shares. Net income
is not adjusted for preferred dividend requirements since the preferred shares
are assumed to be converted from the beginning of the period.
18. INCOME TAX EXPENSE
The composition of income tax expense follows:
- ----------------------------------------------------------------------------------------
Three Months Ended March 31
(In Thousands) 2003 2002
- ----------------------------------------------------------------------------------------
Applicable to income exclusive of
securities transactions $254,045 $213,514
Applicable to securities transactions 60 18,736
- --------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $254,105 $232,250
======================================================================================
The effective tax rate was 33.9% and 34.2% for the three months ended March 31,
2003 and 2002, respectively.
19. COMMITMENTS, CONTINGENT LIABILITIES, GUARANTEES, AND RELATED PARTY
TRANSACTIONS
COMMITMENTS: A summary of the contractual amount of significant commitments
follows:
- ---------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2003 2002 2002
- ---------------------------------------------------------------------------------------------------------------
Commitments to extend credit:
Revolving home equity and credit card lines $22,703,751 $22,138,518 $18,187,743
Other loans 41,886,629 35,018,220 29,950,874
Standby letters of credit 3,873,809 3,769,894 3,535,745
Commercial letters of credit 114,590 126,775 95,100
Net commitments to sell mortgage loans and
mortgage-backed securities 19,863,588 21,966,179 10,797,040
Commitments to fund principal investments 240,260 241,952 317,929
Commitments to fund civic and community investments 171,976 205,705 157,147
===============================================================================================================
Commitments to extend credit are agreements to lend. Since many of the
commitments to extend credit may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash-flow requirements.
Certain lending commitments for conforming residential mortgage loans to be sold
into the secondary market are considered derivative instruments under the
guidelines of SFAS 133. The changes in the fair value of these commitments due
to interest rate risk are recorded on the balance sheet as either derivative
assets or derivative liabilities and are included in other loans in the table
above. Further discussion on derivative instruments is included in Notes 1 and
21.
29
Standby and commercial letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. Standby letters of
credit generally are contingent upon the failure of the customer to perform
according to the terms of the underlying contract with the third party, while
commercial letters of credit are issued specifically to facilitate commerce and
typically result in the commitment being drawn on when the underlying
transaction is consummated between the customer and the third party.
The credit risk associated with loan commitments and standby and commercial
letters of credit is essentially the same as that involved in extending loans to
customers and is subject to normal credit policies. Collateral may be obtained
based on management's credit assessment of the customer.
The Corporation enters into forward contracts for the future delivery or
purchase of fixed-rate conforming residential mortgage loans and mortgage-backed
securities at a specified interest rate to reduce the interest rate risk
associated with loans held for sale, commitments to fund loans, and mortgage
servicing assets. These contracts are also considered derivative instruments
under SFAS 133 and changes in the fair value of these contracts due to interest
rate risk are recorded on the balance sheet as either derivative assets or
derivative liabilities. Further discussion on derivative instruments is included
in Notes 1 and 21.
The Corporation has principal investment commitments to provide equity and
mezzanine capital financing to private and public companies through either
direct investments in specific companies or through investment funds and
partnerships. The timing of future cash requirements to fund such commitments is
generally dependent on the investment cycle. This cycle, the period over which
privately-held companies are funded by private equity investors and ultimately
sold, merged, or taken public through an initial offering, can vary based on
overall market conditions as well as the nature and type of industry in which
the companies operate.
The Corporation invests in low-income housing, small-business commercial real
estate, and historic tax credit projects to promote the revitalization of
low-to-moderate-income neighborhoods throughout the local communities of its
banking subsidiaries. As a limited partner in these unconsolidated projects, the
Corporation is allocated tax credits and deductions associated with the
underlying projects. The amount of commitments to fund civic and community
investments represent funds the Corporation has committed to invest in existing
and future projects.
Under an agreement with the formerly unconsolidated asset-backed commercial
paper conduit, National City had commitments to provide liquidity to the conduit
in the event funding could not be readily accessed in the commercial paper
market. The Corporation also provided standby letters of credit to the conduit
to provide partial credit protection to commercial paper holders. As a result of
the consolidation and subsequent dissolution of the conduit, National City no
longer has liquidity and standby letter of credit commitments to third parties
related to the conduit. At March 31, 2002, the Corporation had conduit-related
liquidity and letter of credit commitments of $3.6 billion and $19 million,
respectively. Further discussion of the asset-backed commercial paper conduit is
included in Note 6.
CONTINGENT LIABILITIES AND GUARANTEES: The Corporation enters into residential
mortgage loan sale agreements with investors in the normal course of business.
These agreements usually require the Corporation to make certain representations
concerning credit information, loan documentation, collateral, and insurability.
On occasion, investors have requested the Corporation to indemnify them against
losses on certain loans or to repurchase loans which the investors believe do
not comply with applicable representations. Upon completion of its own
investigation, the Corporation generally repurchases or provides indemnification
on certain loans. Indemnification requests are generally received within two
years subsequent to sale. Management maintains a liability for estimated losses
on loans expected to be repurchased or on which indemnification is expected to
be provided and regularly evaluates the adequacy of this recourse liability
based on trends in repurchase and indemnification requests, actual loss
experience, known and inherent risks in the loans, and current economic
conditions. Total loans sold, including loans sold with servicing released, were
$27.5 billion and $17.6 billion for the first quarters of 2003 and 2002,
respectively. Total loans repurchased or indemnified during the first quarters
of 2003 and 2002 were $200 million and $63 million, respectively. In addition,
total loans sold of $2.8 billion remained uninsured as of March 31, 2003. The
volume and balance of uninsured government loans may be impacted by processing
or notification delays. Management believes the majority of the uninsured loans
at March 31, 2003 will become insured during the normal course of business. To
the extent insurance is not obtained, the loans may be subject to repurchase.
Uninsured government loans which were ultimately repurchased have been included
in the repurchase totals above. Losses charged against the liability for
estimated losses, including uninsured government loans, were $7 million and $9
million for the first three months of 2003 and 2002, respectively. At March 31,
2003, the liability for estimated losses on repurchase and indemnification was
$128 million, which was included in accrued expenses and other liabilities.
The Corporation from time to time also enters into financial guarantee contracts
whereby a premium is received from another financial institution counterparty to
guarantee a portion of credit risk on interest rate swap contracts entered into
between the financial institution counterparty and its customer. The Corporation
becomes liable to pay the financial institution only if the financial
institution is unable to collect amounts owed to them by their customer. The
premium is recorded as a liability when received and is ratably amortized over
the life of the contract to noninterest income. As of March 31, 2003, the
maximum exposure to loss under these contracts totaled $3 million. The
Corporation has not entered into any significant risk participations since
January 1, 2003.
30
The guarantee liability for the Corporation's standby letters of credit was $3
million at March 31, 2003, which was recorded in other liabilities on the
consolidated balance sheet. The current liability reflects the fair value of the
guarantee associated with standby letters of credit originated since January 1,
2003, the implementation date for the recognition provisions of FIN 45. See
above for further discussion on standby letters of credit and their associated
outstanding commitments.
The Corporation, through its subsidiaries, National Processing, Inc. and
National City Bank of Kentucky, provides merchant card processing services.
Under the rules of VISA(R) and MasterCard(R), when a merchant processor acquires
card transactions, it has certain contingent liabilities for the transactions
processed. This contingent liability arises in the event of a billing dispute
between the merchant and a cardholder that is ultimately resolved in the
cardholder's favor. In such a case, the transaction is "charged back" to the
merchant and the disputed amount is credited or otherwise refunded to the
cardholder. If the Corporation is unable to collect this amount from the
merchant's account, and if the merchant refuses or is unable to reimburse the
Corporation for the chargeback due to liquidation or other reasons, the
Corporation will bear the loss for the amount of the refund paid to the
cardholder.
A cardholder, through its issuing bank, generally has until the later of up to
four months after the date a transaction is processed or the delivery of the
product or service to present a chargeback to the Corporation as the merchant
processor. Management believes the maximum potential exposure for chargebacks
would not exceed the total amount of merchant transactions processed through
VISA(R) and MasterCard(R) for the last four months, plus any outstanding
delayed-delivery transactions and unresolved chargebacks in the process of
resolution. For the period from December 2002 through March 2003, this amount
totaled approximately $51 billion. Additionally, at March 31, 2003, the
Corporation had $4 million of unresolved chargebacks that were in process of
resolution.
For the three months ended March 31, 2003 and 2002, the Corporation processed
$40 million and $49 million, respectively, in chargebacks presented by issuing
banks. Actual losses recorded for the three months ended March 31, 2003 and 2002
were $900 thousand and $1 million, respectively. The Corporation accrues for
probable losses based on historical experience and at March 31, 2003, had $1
million recorded in accrued expenses and other liabilities for expected losses.
In most cases, a contingent liability for chargebacks is unlikely to arise as
most products or services are delivered when purchased, and credits are issued
on returned items. However, where the product or service is not provided until
some time after the purchase (delayed-delivery), the potential for this
contingent liability increases. For the three months ended March 31, 2003, the
Corporation processed approximately $3.7 billion of merchant transactions
related to delayed-delivery purchases.
The Corporation currently processes card transactions for four of the largest
airlines in the United States. In May 2002, the Corporation announced its
decision to discontinue processing debit and credit card transactions for the
airline industry. The Corporation will honor its existing contractual
obligations to the airlines it currently serves but does not intend to renew
such contracts when their current terms expire. The contracts currently in
effect have various expiration dates extending through November 2005. U.S.
Airways Group, Inc. and United Air Lines, Inc. are both merchant-processing
customers of the Corporation. United Airlines, Inc. is currently operating under
Chapter 11 protection. In March 2003, U.S. Airways Group, Inc. emerged from
bankruptcy court protection and is operating as a reorganized company. In the
event of liquidation of one or more of the Corporation's airline customers, the
Corporation could become financially responsible for refunding tickets purchased
through VISA(R)and MasterCard(R)under the chargeback rules of those
associations.
At March 31, 2003, the dollar value of tickets purchased, but as yet unflown,
was approximately $1.3 billion. Based upon available information, this is
management's best estimate of maximum potential chargebacks related to its
airline customers. As of March 31, 2003, the Corporation held $139 million in
merchant deposits and withheld settlement funds for certain airline merchants.
The merchant deposits collateralize only individual airline merchants. Of the
total merchant deposits, $133 million was related to two airline merchants.
During the second quarter of 2003, the Corporation's contractual obligation to
process card transactions for these two airline customers will cease and the
merchants will transition to other card processors. As part of the transition,
those airlines' $133 million of deposits will be released as the Corporation's
contingent liability for future flights is reduced. These two airline merchants
represent approximately 38% of the total contingent liability for unflown
tickets.
Based on current conditions in the airline industry and other information
currently available to the Corporation, management believes the risk of a
material loss under the chargeback rules has increased since December 31, 2002
but is not probable at this time.
National City and 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. It is
management's opinion that the Corporation's financial position, results of
operations, and cash flows would not be materially affected by the outcome of
any pending or threatened legal proceedings, commitments, or claims.
RELATED PARTY TRANSACTIONS: The Corporation has no material related party
transactions which would require disclosure. The Corporation may extend credit
to certain officers and directors of the Corporation and its banking
subsidiaries in the ordinary course of business, and under substantially the
same terms as comparable third-party lending arrangements, and in compliance
with applicable banking regulations.
31
20. STOCK OPTIONS AND AWARDS
National City maintains various incentive and nonqualified stock option plans
and also maintains various restricted stock plans. These plans provide for the
granting of stock options, stock appreciation rights, and restricted shares to
eligible employees and directors. All of the Corporation's stock option and
restricted stock plans were approved by stockholders with the exception of the
150th anniversary commemorative grant in 1995.
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 92 million
options to purchase shares of common stock at the fair 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 10 years from the date of grant. In addition, stock options may be granted
that include the right to receive additional options if certain criteria are
met. The exercise price of an additional option is equal to the fair 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 a total of 5.6 million options to purchase common
stock at the fair 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 March 31, 2003, 662,600 of these options remained
outstanding and all were exercisable.
On January 1, 2003, the Corporation prospectively adopted the fair value method
of accounting for stock awards under SFAS 123. Further discussion of the impact
of the change is included in Notes 1 and 2. During the first three months of
2003, compensation expense recognized related to National City's stock option
plans totaled $500 thousand. There was no expense recognized in the first three
months of 2002.
RESTRICTED STOCK PLANS: National City's restricted stock plans provide for the
issuance of up to 8 million 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. Compensation expense for restricted
share awards is ratably recognized over the period of service, usually the
restricted period, based on the market price of the stock on the date of grant.
The weighted-average grant-date fair value of restricted share awards granted
during the first quarter of 2003 and 2002 was $27.79 and $27.87, respectively.
Compensation expense recognized for restricted share plans during the first
three months of 2003 and 2002 was $3 million and $2 million, respectively.
OPTION AND RESTRICTED STOCK AWARD ACTIVITY: Stock option and unvested restricted
stock award activity follows:
- -----------------------------------------------------------------------
Weighted-
Average
Shares Outstanding Exercise
--------------------------- Price Per
Awards Options Share
- -----------------------------------------------------------------------
January 1, 2002 1,823,310 48,798,550 $ 25.79
- -----------------------------------------------------------------------
Cancelled (26,212) (193,379) 29.46
Exercised (207,060) (1,168,637) 17.06
Granted 223,529 48,694 29.62
- -----------------------------------------------------------------------
March 31, 2002 1,813,567 47,485,228 $ 28.94
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
January 1, 2003 2,539,171 52,963,738 $ 26.89
- -----------------------------------------------------------------------
Cancelled (36,405) (247,224) 30.22
Exercised (218,692) (917,344) 17.49
Granted 271,021 208,470 28.09
- -----------------------------------------------------------------------
MARCH 31, 2003 2,555,095 52,007,640 $ 27.04
=======================================================================
As of March 31, 2003 and 2002, 22,444,143 and 32,283,571 shares, respectively,
were available for grant under the Corporation's stock option and restricted
stock plans.
Cancelled activity includes both forfeited and expired awards and options.
32
Information about stock options outstanding at March 31, 2003 follows:
- ----------------------------------------------------------------------------------------------
Weighted-
Average
Weighted- Remaining Weighted-
Average Contractual Average
Range of Exercise Life Exercise
Exercise Prices Outstanding Price (in years) Exercisable Price
- ----------------------------------------------------------------------------------------------
$9.17-$11.99 139,852 $ 9.94 1.2 139,852 $ 9.94
12.00-16.99 2,973,536 14.37 1.7 2,973,536 14.37
17.00-21.99 7,976,678 17.80 6.2 7,941,003 17.78
22.00-26.99 1,398,877 24.86 3.3 1,379,377 24.84
27.00-31.99 30,983,864 28.87 7.3 16,930,145 29.11
32.00-37.81 8,534,833 34.11 5.1 8,457,833 34.13
- ----------------------------------------------------------------------------------------------
TOTAL 52,007,640 $ 27.04 6.3 37,821,746 $ 26.47
==============================================================================================
At March 31, 2003 and 2002, options for 37,821,746 and 32,686,054 shares of
common stock, respectively, were exercisable.
21. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation uses derivative instruments primarily to protect against the
risk of adverse price or interest rate movements on the value of certain assets
and liabilities and on future cash flows. It also executes derivative
instruments with its commercial banking customers to facilitate their risk
management strategies. Derivative instruments represent contracts between
parties that usually require little or no initial net investment and result in
one party delivering cash or another type of asset to the other party based on a
notional amount and an underlying as specified in the contract. A notional
amount represents the number of units of a specific item, such as currency units
or shares. An underlying represents a variable, such as an interest rate,
security price, or price index. The amount of cash or other asset delivered from
one party to the other is determined based on the interaction of the notional
amount of the contract with the underlying. Derivatives are also implicit in
certain contracts and commitments.
Market risk is the risk of loss arising from an adverse change in interest
rates, exchange rates, or equity prices. The Corporation's primary market risk
is interest rate risk. Management uses derivative instruments to protect against
the risk of interest rate movements on the value of certain assets and
liabilities and on future cash flows. These instruments include interest rate
swaps, interest rate futures, interest rate options, forward agreements, and
interest rate caps and floors with indices that relate to the pricing of
specific assets and liabilities. The nature and volume of the derivative
instruments used to manage interest rate risk depend on the level and type of
assets and liabilities on the balance sheet and the risk management strategies
for the current and anticipated rate environments.
SFAS 133 requires all derivative instruments to be carried at fair value on the
balance sheet. SFAS 133 provides special hedge accounting provisions which
permit the change in the fair value of the hedged item related to the risk being
hedged to be recognized in earnings in the same period and in the same income
statement line as the change in fair value of the derivative. Note 1 provides
further detail on how derivative instruments are accounted for in the financial
statements. The Corporation usually designates derivative instruments used to
manage interest rate risk into SFAS 133 hedge relationships with the specific
assets, liabilities, or cash flows being hedged. Some derivative instruments
used for interest rate risk management are not designated in an SFAS 133 hedge
relationship. Such will be the case if the derivative instrument is being used
to offset risk related to an asset or liability that is accounted for at fair
value in the financial statements, if the derivative instrument has been moved
out of an SFAS 133 relationship because the hedge was deemed not effective, or
if operational or cost constraints make it prohibitive to apply hedge
accounting.
As with any financial instrument, derivative instruments have inherent risks,
primarily market and credit risk. Market risk associated with changes in
interest rates is managed by establishing and monitoring limits as to the degree
of risk that may be undertaken as part of the Corporation's overall market risk
monitoring process carried out by the Asset/Liability Management Committee. See
further discussion of this process in the Market Risk section of the Financial
Review.
Credit risk occurs when a counterparty to a derivative contract with an
unrealized gain fails to perform according to the terms of the agreement. Credit
risk is managed by limiting the aggregate amount of net unrealized gains in
agreements outstanding, monitoring the size and the maturity structure of the
derivative portfolio, applying uniform credit standards to all activities with
credit risk, and collateralizing gains. The Corporation has established
bilateral collateral agreements with its major derivative dealer counterparties
that provide for exchanges of marketable securities or cash to collateralize
either party's net gains. At March 31, 2003, these collateral agreements covered
99.9% of the notional amount of the total derivative portfolio, excluding
futures, forward commitments to sell or purchase mortgage loans or
mortgage-backed securities, and customer derivative contracts. The Corporation
held cash, U.S. government, and U.S. government-sponsored agency securities with
a fair value of $379 million to collateralize net gains with counterparties and
no pledged or delivered securities to collateralize net losses with
counterparties at March 31, 2003. The Corporation typically does not have
collateral agreements covering open forward commitments to sell or purchase
mortgage loans or
33
mortgage-backed securities due to the fact these contracts usually mature within
90 days. Open futures contracts are also not covered by collateral agreements
because the contracts are cash settled with counterparties daily. The credit
risk associated with derivative instruments executed with the Corporation's
commercial banking customers is essentially the same as that involved in
extending loans and is subject to normal credit policies. Collateral may be
obtained based on management's assessment of the customer.
Derivative contracts are valued using observable market prices, if available, or
cash flow projection models acquired from third parties. Pricing models used for
valuing derivative instruments are regularly validated by testing through
comparison with other third parties. The valuations presented in the following
tables are based on yield curves, forward yield curves, and implied volatilities
that were observable in the cash and derivatives markets on March 31, 2003,
December 31, 2002, and March 31, 2002.
FAIR VALUE HEDGES: The Corporation primarily uses interest rate swaps, interest
rate futures, interest rate caps and floors, interest rate options, interest
rate forwards, and forward purchase commitments to hedge the fair values of
mortgage servicing assets, certain fixed-rate residential and commercial loans,
and U.S. Treasury securities for changes in interest rates.
The Corporation also uses receive-fixed interest rate swaps to hedge the fair
values of certain fixed-rate funding products against changes in interest rates.
The funding products hedged include purchased deposits, long-term FHLB advances,
corporate and subordinated long-term debt, and senior bank notes.
During the first three months of 2003 and 2002, the Corporation recognized total
net ineffective fair value hedge gains of $50 million and $24 million,
respectively. Of the total gains recognized, net ineffective hedge gains related
to mortgage loans held for sale and servicing assets were $44 million and $20
million in the first quarters of 2003 and 2002, respectively. Ineffective hedge
gains (losses) for these hedged assets are included in mortgage banking revenue
on the income statement. Net ineffective hedge gains related to hedging
commercial loans, U.S. Treasury securities, and fixed-rate funding products are
included in other noninterest income on the income statement and totaled $7
million and $4 million in the first quarters of 2003 and 2002, respectively.
There were no components of derivative instruments which were excluded from the
assessment of hedge effectiveness during the first three months of 2003 and
2002.
CASH FLOW HEDGES: The Corporation hedges cash flow variability related to
variable-rate funding products, specifically FHLB advances and senior bank
notes, through the use of pay-fixed interest rate swaps and interest rate caps.
The Corporation also holds pay-fixed interest rate swaps and caps to hedge
forecasted cash flows associated with debt instruments expected to be issued
subsequent to 2003.
During the first three months of 2003 and 2002, the Corporation recognized net
ineffective cash flow hedge losses of $137 thousand and $166 thousand,
respectively. These gains (losses) are included in other noninterest income on
the income statement. There were no components of derivative instruments which
were excluded from the assessment of hedge effectiveness during the first three
months of 2003 and 2002.
Gains and losses on derivative instruments reclassified from accumulated other
comprehensive income to current-period earnings are included in the line item in
which the hedged cash flows are recorded. At March 31, 2003, December 31, 2002
and March 31, 2002, accumulated other comprehensive income included a deferred
after-tax net loss of $135 million, $156 million and $13 million, respectively,
related to derivatives used to hedge funding cash flows. See Note 16 for further
detail of the amounts included in accumulated other comprehensive income. The
net after-tax derivative loss included in accumulated other comprehensive income
as of March 31, 2003, is projected to be reclassified into interest expense in
conjunction with the recognition of interest payments on funding products
through November 2005, with $99 million of net loss expected to be reclassified
within the next year. During the first three months of 2003 and 2002, pretax
losses of $39 million and $46 million, respectively, were reclassified into
interest expense as adjustments to interest payments on variable-rate funding
products. Also during the first three months of 2002, pretax gains of $2 million
were reclassified into other noninterest income as part of the gain on the
automobile loan securitization. There were no gains or losses reclassified into
earnings during the first three months of 2003 and 2002 arising from the
determination that the original forecasted transaction would not occur.
The tables on the following pages provide further information regarding
derivative instruments designated in fair value and cash flow hedges at March
31, 2003, December 31, 2002, and March 31, 2002.
OTHER DERIVATIVE ACTIVITIES: The Corporation's derivative portfolio also
includes derivative instruments not included in SFAS 133 hedge relationships.
Those derivatives include purchased derivatives, primarily swaps, futures, and
forwards, used for interest rate and other risk management purposes, as well as
mortgage banking loan commitments defined as derivatives under SFAS 133, and
derivatives executed with customers, primarily interest rate swaps and options,
to facilitate their interest rate risk management strategies. The Corporation
generally does not enter into derivative transactions for purely speculative
purposes. Gains and losses on mortgage banking related derivative instruments
are included in mortgage-banking-revenue on the income statement, while gains
and losses on other non-SFAS 133 derivative instruments are included in other
noninterest income. A summary of non-SFAS 133 derivative instruments by type of
activity follows:
34
- ---------------------------------------------------------------------------------------------------------------------
For the Three Months Ended
--------------------------
As of March 31 March 31
--------------------------------------------------
Net Derivative Net Gains
Asset (Liability) (Losses)
--------------------------------------------------
(In Millions) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
NON-SFAS 133 DERIVATIVE
INSTRUMENTS
Mortgage-banking-related:
Mortgage servicing asset risk management $ 44.9 $ 13.9 $ 58.9 $ (1.8)
Mortgage loan commitments and associated risk
management 109.3 (32.8) 118.5 (44.2)
- ---------------------------------------------------------------------------------------------------------------------
Total 154.2 (18.9) 177.4 (46.0)
- ---------------------------------------------------------------------------------------------------------------------
Customer risk management 18.0 27.8 3.4 2.1
Other (20.6) 33.1 (2.7) 4.7
- ---------------------------------------------------------------------------------------------------------------------
Total (2.6) 60.9 .7 6.8
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NON-SFAS 133 DERIVATIVES $ 151.6 $ 42.0 $ 178.1 $ (39.2)
=====================================================================================================================
35
Summary information regarding the interest rate derivatives portfolio used for
interest-rate risk management purposes and designated as accounting hedges under
SFAS 133 at March 31, 2003, December 31, 2002, and March 31, 2002 follows:
- --------------------------------------------------------------------------------------
MARCH 31, 2003
----------------------------------------------------
NET INEFFECTIVE
NOTIONAL DERIVATIVE HEDGE GAINS
(In Millions) AMOUNT ASSET LIABILITY (LOSSES)(a)
- --------------------------------------------------------------------------------------
FAIR VALUE HEDGES
Loans
Receive-fixed interest
rate swaps $ 60 $ 1.3 $ --
Receive-fixed interest rate
swaptions sold 55 -- .4
Pay-fixed interest rate
swaps 3,469 .7 263.6
Callable pay-fixed
interest rate swaps 44 -- 5.2
Extendable pay-fixed
interest rate swaps -- -- --
Pay-fixed interest rate
swaptions sold 55 -- 4.6
Interest rate caps sold 815 -- 2.3
Interest rate floors sold 260 -- 8.2
Interest rate futures
purchased 3,404 -- --
Interest rate futures sold 4,066 -- --
- --------------------------------------------------------------------------------------
Total 12,228 2.0 284.3 $ 6.4
- --------------------------------------------------------------------------------------
Mortgage loans held for sale
Forward commitments to sell
mortgage loans and
mortgage backed securities 19,489 -- 159.3
Receive-fixed interest
rate swaps 2,875 193.5 1.1
Receive fixed interest rate
swaptions sold 1,000 -- 26.8
Pay-fixed interest rate
swaptions purchased 430 20.8 --
Pay-fixed interest rate
swaptions sold 250 -- --
Interest rate caps
purchased 5,600 17.8 --
Interest rate futures
purchased 150 -- --
Interest rate futures sold -- -- --
Treasury futures options
sold 400 -- 5.5
- --------------------------------------------------------------------------------------
Total 30,194 232.1 192.7 26.3
- --------------------------------------------------------------------------------------
Available for sale securities
Pay-fixed interest rate
swaps 250 -- 3.0 --
Mortgage servicing assets
Forward commitments to
purchase mortgage loans
and mortgage backed
securities 3,075 14.0 --
Receive-fixed interest
rate swaps 3,412 295.7 --
Receive-fixed interest rate
swaptions purchased -- -- --
Receive-fixed interest rate
swaptions sold 250 -- 5.6
Pay-fixed interest rate
swaptions purchased 3,500 62.6 --
Pay-fixed interest rate
swaptions sold 2,818 -- 140.7
Principal-only swaps 546 32.4 7.4
Interest rate caps
purchased 21,604 44.7 --
Interest rate floors
purchased 75 .1 --
Interest rate futures
purchased 975 -- --
- --------------------------------------------------------------------------------------
Total 36,255 449.5 153.7 17.2
- --------------------------------------------------------------------------------------
Funding
Receive-fixed interest
rate swaps 4,540 426.0 5.1
Callable receive-fixed
interest rate swaps 490 18.6 --
- --------------------------------------------------------------------------------------
Total 5,030 444.6 5.1 .1
- --------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED IN FAIR
VALUE HEDGES 83,957 1,128.2 638.8 50.0
- --------------------------------------------------------------------------------------
Funding
Pay-fixed interest rate
swaps 6,850 -- 148.5
Interest rate caps
purchased 8,500 12.4 --
- --------------------------------------------------------------------------------------
Total 15,350 12.4 148.5 (.1)
- --------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED IN CASH
FLOW HEDGES 15,350 12.4 148.5 (.1)
- --------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED FOR
INTEREST RATE RISK MANAGEMENT
AND DESIGNATED IN SFAS 133
RELATIONSHIPS $ 99,307 $1,140.6 $787.3 $ 49.9
- --------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
December 31, 2002
----------------------------------------------------
Net Ineffective
Notional Derivative Hedge Gains
(In Millions) Amount Asset Liability (Losses)(a)
- ---------------------------------------------------------------------------------------
FAIR VALUE HEDGES
Loans
Receive-fixed interest
rate swaps $60 $ 1.4 $ --
Receive-fixed interest rate
swaptions sold 55 -- .4
Pay-fixed interest rate
swaps 3,539 -- 285.1
Callable pay-fixed
interest rate swaps 44 -- 5.6
Extendable pay-fixed
interest rate swaps 1 -- --
Pay-fixed interest rate
swaptions sold 55 -- 4.7
Interest rate caps sold 765 -- 1.3
Interest rate floors sold 260 -- 8.3
Interest rate futures
purchased 3,301 -- --
Interest rate futures sold 4,094 -- --
- --------------------------------------------------------------------------------------
Total 12,174 1.4 305.4 $ 10.5
- --------------------------------------------------------------------------------------
Mortgage loans held for sale
Forward commitments to sell
mortgage loans and
mortgage backed securities 22,909 -- 375.2
Receive-fixed interest
rate swaps 2,490 218.3 --
Receive fixed interest rate
swaptions sold
Pay-fixed interest rate
swaptions purchased -- -- --
Pay-fixed interest rate
swaptions sold 500 -- 7.0
Interest rate caps
purchased 4,850 15.6 --
Interest rate futures
purchased
Interest rate futures sold 75 -- --
Treasury futures options
sold
- --------------------------------------------------------------------------------------
Total 30,824 233.9 382.2 30.8
- --------------------------------------------------------------------------------------
Available for sale securities
Pay-fixed interest rate
swaps 250 -- 4.7 2.6
Mortgage servicing assets
Forward commitments to
purchase mortgage loans
and mortgage backed
securities 4,025 46.5 --
Receive-fixed interest
rate swaps 2,920 376.1 --
Receive-fixed interest rate
swaptions purchased 670 34.1 --
Receive-fixed interest rate
swaptions sold 2,008 -- 56.1
Pay-fixed interest rate
swaptions purchased 3,370 55.7 --
Pay-fixed interest rate
swaptions sold 3,908 -- 184.3
Principal-only swaps 726 46.7 .2
Interest rate caps
purchased 24,340 61.6 --
Interest rate floors
purchased 75 .4 --
Interest rate futures
purchased 1,308 -- --
- --------------------------------------------------------------------------------------
Total 43,350 621.1 240.6 300.6
- --------------------------------------------------------------------------------------
Funding
Receive-fixed interest
rate swaps 4,395 453.8 --
Callable receive-fixed
interest rate swaps 545 22.9 --
- --------------------------------------------------------------------------------------
Total 4,940 476.7 -- 1.4
- --------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED IN FAIR
VALUE HEDGES 91,538 1,333.1 932.9 345.9
- --------------------------------------------------------------------------------------
Funding
Pay-fixed interest rate
swaps 7,150 -- 181.2
Interest rate caps
purchased 8,500 14.9 --
- --------------------------------------------------------------------------------------
Total 15,650 14.9 181.2 (.1)
- --------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED IN CASH
FLOW HEDGES 15,650 14.9 181.2 (.1)
- --------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED FOR
INTEREST RATE RISK MANAGEMENT
AND DESIGNATED IN SFAS 133
RELATIONSHIPS $107,188 $1,348.0 $ 1,114.1 $ 345.8
======================================================================================
(a) Represents net ineffective hedge gain (loss) on hedging strategy for
the three and twelve-month periods ended March 31, 2003 and December 31, 2002,
respectively
36
- ---------------------------------------------------------------------------------------------------------
March 31, 2002
------------------------------------------------------------
Derivative
----------------------- Net
Ineffective
Notional Hedge Gains
(In Millions) Amount Asset Liability (Losses)(a)
- ---------------------------------------------------------------------------------------------------------
FAIR VALUE HEDGES
Loans
Receive-fixed interest rate swaps $ 60 $ -- $ .5
Receive-fixed interest rate
swaptions sold 55 -- 1.7
Pay-fixed interest rate swaps 3,506 7.0 104.0
Callable pay-fixed interest rate
swaps 50 -- 3.1
Pay-fixed interest rate swaptions
sold 155 -- 3.6
Interest rate caps purchased 3 -- .1
Interest rate caps sold 790 -- 7.5
Interest rate floors sold 60 -- 2.4
Interest rate futures purchased 3,899 -- --
Interest rate futures sold 4,349 -- --
- ---------------------------------------------------------------------------------------------------------
Total 12,927 7.0 122.9 $ 3.7
- ---------------------------------------------------------------------------------------------------------
Mortgage loans held for sale
Forward commitments to sell
mortgage loans and
mortgage backed securities 12,403 97.8 --
Receive-fixed interest rate swaps 2,260 -- 48.1
Pay-fixed interest rate swaptions
purchased -- -- --
Pay-fixed interest rate swaptions
sold 250 -- .9
Interest rate caps purchased 3,500 57.6 --
- ---------------------------------------------------------------------------------------------------------
Total 18,413 155.4 49.0 (5.4)
- ---------------------------------------------------------------------------------------------------------
Available for sale securities
Pay-fixed interest rate swaps 500 -- 5.3 .4
Mortgage servicing assets
Forward commitments to purchase
mortgage loans and
mortage backed securities 3,180 3.2 2.9
Receive-fixed interest rate swaps 3,278 67.7 18.2
Pay-fixed interest rate swaps 1,000 6.4 --
Principal-only swaps 540 3.8 19.5
Interest rate caps purchased 13,390 84.7 --
Interest rate floors purchased 125 .1 --
Interest rate futures purchased 350 -- --
Treasury futures options purchased 350 .9 --
Forward volatility agreements 500 .5 --
- ---------------------------------------------------------------------------------------------------------
Total 22,713 167.3 40.6 25.3
- ---------------------------------------------------------------------------------------------------------
Funding
Receive-fixed interest rate swaps 3,445 58.5 26.2
Callable receive-fixed interest
rate swaps 860 10.0 7.0
- ---------------------------------------------------------------------------------------------------------
Total 4,305 68.5 33.2 .1
- ---------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED IN FAIR VALUE
HEDGES 58,858 398.2 251.0 24.1
- ---------------------------------------------------------------------------------------------------------
Funding
Pay-fixed interest rate swaps 8,400 31.0 44.1
Interest rate caps purchased 5,000 3.7 .9
- ---------------------------------------------------------------------------------------------------------
Total 13,400 34.7 45.0 (.2)
- ---------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED IN CASH FLOW
HEDGES 13,400 34.7 45.0 (.2)
- ---------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED FOR INTEREST
RATE RISK MANAGEMENT AND DESIG-
NATED IN SFAS 133 RELATIONSHIPS $72,258 $ 432.9 $ 296.0 $ 23.9
=========================================================================================================
(a) Represents net ineffective hedge gain (loss) on hedging strategy for
three month period ended March 31, 2002
37
22. LINE OF BUSINESS RESULTS
National City operates five major lines of business: Consumer and Small Business
Financial Services, Wholesale Banking, National Consumer Finance, Asset
Management, and National Processing.
Consumer and Small Business Financial Services (CSBFS) provides banking services
to consumers and small businesses within National City's six-state footprint. In
addition to deposit gathering and direct lending services provided through the
retail bank branch network, call centers, and the Internet, the business line's
activities also include small business services, dealer finance, education
finance, retail brokerage, and lending-related insurance services. Consumer
lending products offered through CSBFS include home equity, automobile, marine,
and recreational vehicle installment loans, government or privately guaranteed
student loans, and credit cards and other unsecured personal and business lines
of credit. Major revenue sources include net interest income on loan and deposit
accounts, deposit account service fees, debit and credit card interchange and
service fees, and ATM surcharge and net interchange fees. CSBFS's expenses are
mainly personnel and branch network support costs.
Wholesale Banking provides credit-related and treasury management products, as
well as capital markets and international services, to large- and medium-sized
corporations. Major products and services include: lines of credit, term loans,
leases, investment real estate lending, asset-based lending, structured finance,
syndicated lending, equity and mezzanine capital, treasury management services,
and international payment and clearing services. The majority of revenue is
driven by loans to middle-market companies with annual revenue in the $5 million
to $500 million range across a diverse group of industries, generally within
National City's six-state footprint.
National Consumer Finance (NCF) originates conforming and nonconforming
residential mortgage and home equity loans within National City's six-state
footprint and nationally through retail branch offices, correspondent
relationships, and a network of brokers, real estate agents, and builders. NCF's
activities also include selling and servicing mortgage loans for third-party
investors. Conforming mortgage loans, which generally represent loans
collateralized by one-to-four-family residential real estate, having loan-
to-value collateral ratios of 80% or less, and made to borrowers in good credit
standing, are originated through National City Mortgage Co. ( NCMC), a business
unit within NCF, and are generally or typically sold to primary market
aggregators (Fannie Mae, Freddie Mac, Ginnie Mae, or the Federal Home Loan
Banks) and jumbo loan investors. During the first quarter of 2003 and 2002,
approximately 56% of NCMC mortgage loans were originated through wholesale and
correspondent channels, while 44% were originated through retail mortgage
branches operated by NCMC nationally, or through CSBFS bank branches within
National City's six-state footprint. First Franklin Financial Corporation, a
business unit within NCF, originates nonconforming mortgage loans, which do not
meet the above conforming definition due to credit characteristics, the
underlying documentation, the loan-to-value ratio, or other factors. First
Franklin originates loans primarily through brokers, which are either sold
servicing-released to third parties or are retained in portfolio. NCF's National
Home Equity business unit originates prime-quality home equity loans outside
National City's six-state footprint. Significant revenue streams for NCF include
net interest income on loans and fee income related to the origination, sale,
and servicing of loans. Expenses include personnel costs, branch office costs,
and loan collection expenses.
The Asset Management business includes both institutional asset and personal
wealth management. The institutional asset management business provides
investment management, custody, retirement planning services, bond
administration and other corporate trust services to institutional clients. The
clients served include publicly traded corporations, charitable endowments and
foundations, as well as unions, residing primarily in National City's six-state
footprint and generally complementing its corporate banking relationships.
Personal wealth management services are provided by three business units --
Private Client Group, NatCity Investments, Inc., and Sterling. Products and
services include private banking services and tailored credit solutions,
customized investment management services, brokerage, estate and tax planning,
as well as trust management and administration for affluent individuals and
families. Sterling offers financial management services and alternative
investments for high net worth clients.
National Processing consists of National Processing, Inc., National City's
85%-owned payment processing subsidiary. National Processing authorizes,
processes, and performs financial settlement and reporting of card transactions,
including credit and debit transactions and also provides financial settlement
and reporting solutions to large and mid-size corporate customers in the travel
and health care industries. National Processing is the second largest acquirer
of credit card transactions in the United States.
The business units are identified by the product or services offered and the
channel through which the product or service is delivered. 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 as part of investment funding activities. Asset
securitizations are also considered funding activities and the effects of such
securitizations are included within the parent and other category. The assets
sold through securitization continue to be reflected as owned by the business
unit that manages those assets. Asset sales and other transactions between
business units are primarily conducted at fair value, resulting in gains or
losses that are eliminated for reporting consolidated results of operations.
Parent and other is primarily comprised of the results of investment funding
activities, including asset securitization activities, intersegment revenue and
expense eliminations, and unallocated corporate income and expense. The
intersegment revenue and expense amounts presented
38
in the tables relate to either services provided or asset sales between the
operating segments. The amounts do not include reimbursements related to expense
allocations and the effects of centrally managing interest rate risk. The
accounting policies of the individual business units are the same as those of
the Corporation. Prior period amounts have been restated as necessary to conform
with the current period's presentation.
Operating results of the business units are discussed in the Line of Business
Results section of the Financial Review. Selected financial information by line
of business is included in the table below.
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER AND
SMALL BUSINESS NATIONAL
FINANCIAL WHOLESALE CONSUMER ASSET NATIONAL PARENT AND CONSOLIDATED
(In Thousands) SERVICES BANKING FINANCE MANAGEMENT PROCESSING OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31, 2003
Net interest income (expense)(a) $ 484,329 $ 253,006 $ 457,271 $ 25,125 $ 683 $ (119,686) $1,100,728
Provision (benefit) for loan losses 70,465 115,716 30,486 1,584 -- (18,018) 200,233
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) after
provision 413,864 137,290 426,785 23,541 683 (101,668) 900,495
Noninterest income 166,639 85,762 400,432 82,782 106,123 24,723 866,461
Noninterest expense 353,723 135,730 245,432 76,438 92,564 104,979 1,008,866
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 226,780 87,322 581,785 29,885 14,242 (181,924) 758,090
Income tax expense (benefit)(a) 85,723 32,440 220,775 11,297 5,695 (94,388) 261,542
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 141,057 $ 54,882 $ 361,010 $ 18,588 $ 8,547 $ (87,536) $ 496,548
====================================================================================================================================
Intersegment revenue (expense) $ (965) $ 6,335 $ 1,616 $ 2,015 $ 1,411 $ (10,412) $ --
Average assets (in millions) 25,819 31,185 45,317 2,916 533 10,663 116,433
====================================================================================================================================
Quarter ended March 31, 2002
Net interest income (expense)(a) $ 489,147 $ 246,527 $ 277,486 $ 25,063 $ 1,190 $ (34,063) $1,005,350
Provision (benefit) for loan losses 79,375 94,004 22,822 1,509 -- (9,070) 188,640
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) after
provision 409,772 152,523 254,664 23,554 1,190 (24,993) 816,710
Noninterest income 144,515 71,665 202,390 93,990 109,778 122,055 744,393
Noninterest expense 331,753 124,516 206,677 75,126 91,504 45,313 874,889
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes 222,534 99,672 250,377 42,418 19,464 51,749 686,214
Income tax expense (a) 84,118 37,706 93,773 16,034 7,416 1,036 240,083
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 138,416 $ 61,966 $ 156,604 $ 26,384 $ 12,048 $ 50,713 $ 446,131
====================================================================================================================================
Intersegment revenue (expense) $ (456) $ 3,107 $ 957 $ 3,300 $ 2,001 $ (8,909) $ --
Average assets (in millions) 24,796 31,410 31,684 3,013 442 10,763 102,108
====================================================================================================================================
(a) Includes tax-equivalent adjustment for tax-exempt interest income
39
23. FINANCIAL HOLDING COMPANY
Condensed financial statements of the holding company, which include
transactions with subsidiaries, follow:
BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2003 2002 2002
- ---------------------------------------------------------------------------------------------------
ASSETS
Cash and demand balances due from banks $ 1,500 $ 1,498 $ 1,500
Loans to and receivables from subsidiaries 87,219 699,323 619,686
Securities 428,045 227,223 368,077
Other investments 147,040 556,123 470,426
Investments in:
Subsidiary banks 9,877,907 9,390,979 8,841,063
Nonbank subsidiaries 554,173 545,499 447,929
Goodwill, net of accumulated amortization 58,566 58,566 58,566
Derivative assets 143,819 154,905 12,900
Other assets 637,659 644,245 583,692
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $11,935,928 $12,278,361 $11,403,839
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt $ 2,289,585 $ 2,005,076 $ 1,959,807
Borrowed funds from subsidiaries 403,568 1,205,568 1,037,568
Derivative liabilities 13,586 7,184 6,887
Accrued expenses and other liabilities 642,026 752,521 727,366
- --------------------------------------------------------------------------------------------------
Total liabilities 3,348,765 3,970,349 3,731,628
Stockholders' equity 8,587,163 8,308,012 7,672,211
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,935,928 $12,278,361 $11,403,839
==================================================================================================
The holding company guarantees commercial paper issued by its subsidiary
National City Credit Corporation and capital securities issued by two subsidiary
trusts. As of March 31, 2003, outstanding commercial paper borrowings totaled
$871 million and outstanding capital securities totaled $180 million -- refer to
Notes 12 and 14. The holding company also guarantees National City Bank of
Kentucky's financial obligations under this subsidiary bank's membership with
VISA(R) up to $600 million and Mastercard(R) up to $400 million. Refer to Note
19 for further discussion of contingent liabilities and guarantees related to
the Corporation's merchant card processing business.
STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------
Three Months Ended March 31
(In Thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------
INCOME
Dividends from:
Subsidiary banks $ -- $ --
Nonbank subsidiaries -- --
Interest on loans to subsidiaries 291 3,005
Interest and dividends on securities 2,118 4,121
Securities gains, net -- 48,427
Other income 393 3,724
- ---------------------------------------------------------------------------------------------------
TOTAL INCOME 2,802 59,277
===================================================================================================
EXPENSE
Interest on debt and other borrowings 24,781 31,572
Other expense 1,096 16,486
- ---------------------------------------------------------------------------------------------------
TOTAL EXPENSE 25,877 48,058
===================================================================================================
Income (loss) before tax (benefit) expense and equity in
undistributed net income of subsidiaries (23,075) 11,219
Income tax (benefit) expense (19,408) 3,392
- ---------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed net income of
subsidiaries (3,667) 7,827
Equity in undistributed net income of subsidiaries 500,215 438,304
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 496,548 $ 446,131
===================================================================================================
40
- ----------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS Three Months Ended March 31
(In Thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 496,548 $ 446,131
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries (500,215) (438,304)
Depreciation and amortization of properties and equipment 222 568
Decrease in receivables from subsidiaries 14,770 9,340
Securities gains, net -- (48,427)
Other gains, net (15) (776)
Amortization of premiums and discounts on securities and debt (497) (205)
Decrease in accrued expenses and other liabilities (108,460) (61,505)
Other, net (3,168) (7,738)
- ----------------------------------------------------------------------------------------------------
Net cash used in operating activities (100,815) (100,916)
- ----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities (242,695) (20,569)
Proceeds from sales and maturities of securities 35,000 189,990
Net change in other investments 409,083 (175,195)
Principal collected on loans to subsidiaries 647,334 97,500
Loans to subsidiaries (50,000) (27,822)
Investments in subsidiaries (507) (30,000)
Net decrease in properties and equipment 10,840 --
- ----------------------------------------------------------------------------------------------------
Net cash provided by investing activities 809,055 33,904
- ----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in borrowed funds (802,000) 220,000
Issuance of debt 300,000 --
Dividends paid (186,574) (179,233)
Issuances of common stock 17,965 26,248
Repurchases of common stock (37,629) --
- ----------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (708,238) 67,015
- ----------------------------------------------------------------------------------------------------
Increase in cash and demand balances due from banks 2 3
Cash and demand balances due from banks, January 1 1,498 1,497
- ----------------------------------------------------------------------------------------------------
CASH AND DEMAND BALANCES DUE FROM BANKS, MARCH 31 $ 1,500 $ 1,500
====================================================================================================
SUPPLEMENTAL INFORMATION
Interest paid $ 24,740 $ 29,330
====================================================================================================
Retained earnings of the holding company included $6.1 billion, $6.1 billion,
and $6.0 billion of equity in undistributed net income of subsidiaries at March
31, 2003, December 31, 2002, and March 31, 2002, respectively.
FINANCIAL REVIEW
The financial review section discusses the financial condition and results of
operations of National City Corporation (the Corporation or National City) for
the three months ended March 31, 2003 and serves to update the 2002 Annual
Report on Form 10-K (Form 10-K). The financial review should be read in
conjunction with the financial information contained in the Form 10-K and in the
accompanying consolidated financial statements and notes presented on pages 4
through 41 of this Form 10-Q.
This document, including information incorporated by reference into this
document, contains or may contain certain forward-looking statements (as defined
in the Private Securities Litigation Reform Act of 1995) with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of the Corporation, 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
ability to effectively carry out business plans, changes in regulatory or
legislative requirements, 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.
41
APPLICATION OF CRITICAL ACCOUNTING POLICIES
National City's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States and follow
general practices within the industries in which it operates. Application of
these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions, and judgments. Certain policies inherently have a
greater reliance on the use of estimates, assumptions, and judgments and as such
have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available. When third-party information is not available, valuation
adjustments are estimated in good faith by management primarily through the use
of internal cash flow modeling techniques.
The most significant accounting policies followed by the Corporation are
presented in Note 1 to the consolidated financial statements. These policies,
along with the disclosures presented in the other financial statement notes and
in this financial review, provide information on how significant assets and
liabilities are valued in the financial statements and how those values are
determined. Based on the valuation techniques used and the sensitivity of
financial statement amounts to the methods, assumptions, and estimates
underlying those amounts, management has identified the determination of the
allowance for loan losses, the valuation of retained interests, including
mortgage and other servicing assets, the valuation of derivative instruments,
and the valuation of leased asset residuals to be the accounting areas that
require the most subjective or complex judgments, and as such could be most
subject to revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan and lease portfolio. Determining the amount
of the allowance for loan losses is considered a critical accounting estimate
because it requires significant judgment and the use of estimates related to the
amount 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 current economic trends and conditions, all of which may be
susceptible to significant change. The loan and lease portfolio also represents
the largest asset type on the consolidated balance sheet. Note 1 to the
consolidated financial statements describes the methodology used to determine
the allowance for loan losses and a discussion of the factors driving changes in
the amount of the allowance for loan losses is included in the Credit Risk
Management section of this financial review.
Retained interests, including mortgage and other servicing assets, are
established and accounted for based on discounted cash flow modeling techniques
which require management to make estimates regarding the amount and timing of
expected future cash flows, including assumptions about loan repayment rates,
credit loss experience, and costs to service, as well as discount rates that
consider the risk involved. Because the values of these assets are sensitive to
changes in assumptions, the valuation of retained interests is considered a
critical accounting estimate. Notes 1, 5, and 11 to the consolidated financial
statements include further discussion on the accounting for these assets as well
as provide sensitivity analyses showing how the value of these assets is
estimated to change in response to adverse changes in the key assumptions used
to determine their value.
The valuation of derivative instruments is considered critical because the
majority of the derivative instruments held by the Corporation are valued using
discounted cash flow modeling techniques, which require the use of estimates
regarding the amount and timing of future cash flows. Derivative instruments are
carried at fair value on the consolidated balance sheet with changes in value
recorded in the income statement. Notes 1 and 21 to the consolidated financial
statements provide further discussion on the accounting for and the
Corporation's use of derivative instruments.
Lease financing arrangements include a residual value component, which
represents the estimated value of the leased asset upon the expiration of the
lease. The Corporation leases various types of equipment under commercial lease
financing arrangements and also has a portfolio of automobile lease financings,
although this portfolio has been declining since the decision was made in
December 2000 to cease originating automobile leases. The valuation of residual
assets is considered critical due to the sensitivity in forecasting the impact
of product and technology changes, consumer behavior, competitor initiatives,
shifts in supply and demand, and economic conditions, among other factors, on
the fair value of residual assets. Notes 1 and 7 to the consolidated financial
statements provide further discussion of the Corporation's lease financing
arrangements.
Any material effect on the financial statements related to these critical
accounting areas is also discussed in this financial review.
42
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
Note 2 to the consolidated financial statements discusses new accounting
policies adopted by the Corporation during 2003 and the expected impact of
accounting policies recently issued or proposed but not yet required to be
adopted. To the extent the adoption of new accounting standards materially
affects the Corporation's financial condition, results of operations, or
liquidity, the impacts are discussed in the applicable section(s) of this
financial review and notes to the consolidated financial statements.
EARNINGS SUMMARY
National City reported net income of $497 million, or $.81 per diluted share for
the first quarter of 2003, up from first quarter 2002 net income of $446
million, or $.73 per diluted share. Returns on average common equity and average
assets for the first quarter of 2003 were 23.4% and 1.73%, respectively,
compared to returns of 24.0% and 1.77%, respectively, for the same period in
2002.
Record levels of mortgage banking activity resulting from the historically low
interest rate environment, partially offset by higher credit costs, drove net
interest income and fee income and led to strong financial results in the first
quarter of 2003.
FINANCIAL CONDITION
This section should also be reviewed in connection with the average balance
sheets presented on pages 58-59 of this financial review.
AVERAGE EARNING ASSETS: A summary of average earning assets follows:
- ---------------------------------------------------------------------------------
Three Months Ended
- ---------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2003 2002 2002
- ---------------------------------------------------------------------------------
Portfolio loans $ 73,183 $ 71,291 $67,929
Loans held for sale or
securitization 22,524 19,676 15,015
Securities (at amortized cost) 8,295 9,484 8,834
Other 783 864 800
- ---------------------------------------------------------------------------------
TOTAL EARNING ASSETS $104,785 $ 101,315 $92,578
=================================================================================
Average earning assets increased to $104.8 billion during the first quarter of
2003, up from $101.3 billion and $92.6 billion for the fourth and first quarters
of 2002, respectively. The increase in average earnings assets was principally
due to the continued strength in residential real estate and home equity loan
originations, which have benefited from the low interest rate environment.
Portfolio loan growth during the first quarter of 2003 increased 3% and 8% when
compared to the fourth and first quarters of 2002, respectively. The increase in
portfolio loans was driven by the retention of residential real estate loan
production from the National City Mortgage Co. (NCMC) and First Franklin
Corporation subsidiaries, and from home equity loan production generated from
the Corporation's National Home Equity division. First Franklin mortgage loan
originations remained strong during the first quarter of 2003 and totaled $3.5
billion, down slightly from the $3.6 billion originated during the 2002 fourth
quarter, and up from the $2.0 billion originated in the 2002 first quarter. A
portion of First Franklin's mortgage loan production is retained in portfolio
with the remainder sold to third
43
parties. During the first quarter of 2003, $1.8 billion of First Franklin's
production was retained for the residential real estate portfolio, compared to
$1.6 billion and $1.4 billion for the fourth and first quarters of 2002,
respectively. The First Franklin residential real estate portfolio grew to $10.4
billion at March 31, 2003, compared to $9.4 billion and $6.8 billion at December
31, 2002 and March 31, 2002, respectively. Additionally, the residential real
estate portfolio increased as the result of retaining certain adjustable-rate
mortgage loans in portfolio. These loans were originated by NCMC and the total
amount of mortgage loans retained in portfolio during the first quarter of 2003
was $672 million. The residential real estate portfolio was also affected by the
December 31, 2002 reclassification of $3.2 billion of installment loans secured
by home equity from the other consumer portfolio. This loan reclassification was
made to make the balance sheet presentation of loans secured by real estate more
consistent with bank regulatory definitions. Home equity loan production
remained strong and continued to benefit from the low interest rate environment
and management's focus on the national home equity market.
Average commercial loans declined on a linked-quarter and year-over-year basis,
offsetting the portfolio growth from the mortgage and home equity lending
activities. Commercial loan demand continued to be reflective of the weak
economic environment. The linked-quarter and year-over-year increase in average
commercial real estate, and to some extent the decrease in average commercial
loans, is the result of a 2002 fourth quarter $1.1 billion reclassification of
loans from the commercial loan portfolio. This loan reclassification was made to
make the presentation of loans secured by commercial real estate more consistent
with bank regulatory guidelines. The following table summarizes the period-end
commercial and commercial real estate portfolios by major industry and exposure
to individual borrowers as of March 31, 2003.
- ---------------------------------------------------------------------------------------------------------------
Average Largest Loan
Outstanding % to Loan Balance to a Single
(Dollars in Millions) Balance Total Per Obligor Obligor
- ---------------------------------------------------------------------------------------------------------------
Real estate $10,236 29% $ .8 $ 57
Consumer cyclical 5,084 15 .8 118
Consumer noncyclical 3,870 11 .4 48
Industrial 3,697 11 .9 96
Basic materials 2,976 9 1.4 43
Financial 2,434 7 1.7 73
Services 2,098 6 .6 750(a)
Energy and utilities 742 2 1.2 51
Technology 407 1 3.1 22
Miscellaneous 1,492 4 .2 18
- ---------------------------------------------------------------------------------------------------------------
33,036 95
Commercial leasing -- all industries 1,601 5
- ---------------------------------------------------------------------------------------------------------------
TOTAL $34,637 100%
===============================================================================================================
(a) This loan is secured by government-insured student loans.
The average balance of loans held for sale grew 14% and 50% during the first
quarter of 2003 when compared to the fourth and first quarters of 2002,
respectively. The increase in loans held for sale was due to strong mortgage
loan origination volumes at NCMC and First Franklin as a result of the
historically low interest rate environment. Refer to the Noninterest Income
section of this financial review for further discussion on NCMC and First
Franklin mortgage loan originations. The higher level of loans held for sale
served as the primary driver of the increase in net interest income and, as a
result of a steeper yield curve, also had a positive impact on the net interest
margin.
Average securities balances in the first quarter of 2003 decreased compared to
the fourth and first quarters of 2002 and were primarily a result of principal
paydowns, particularly in the mortgage-backed security portfolio.
44
AVERAGE INTEREST BEARING LIABILITIES AND FUNDING: A summary of average interest
bearing liabilities and funding follows:
- -------------------------------------------------------------------------------------------------
Three Months Ended
- -------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2003 2002 2002
- -------------------------------------------------------------------------------------------------
Noninterest bearing deposits $ 15,689 $ 15,710 $ 12,366
Interest bearing core deposits 40,398 39,684 37,124
- -------------------------------------------------------------------------------------------------
Total core deposits 56,087 55,394 49,490
Purchased deposits 9,972 10,679 11,321
Short-term borrowings 14,942 13,812 12,882
Long-term debt and capital securities 22,826 21,175 18,615
- -------------------------------------------------------------------------------------------------
Total purchased funding 47,740 45,666 42,818
Stockholders' equity 8,600 8,386 7,529
- -------------------------------------------------------------------------------------------------
TOTAL FUNDING $ 112,427 $ 109,446 $ 99,837
=================================================================================================
TOTAL INTEREST BEARING LIABILITIES $ 88,138 $ 85,350 $ 79,942
=================================================================================================
The percentage of each funding source to total funding follows:
- ----------------------------------------------------------------------------------------------
Three Months Ended
- ----------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
2003 2002 2002
- ----------------------------------------------------------------------------------------------
Noninterest bearing deposits 14.0% 14.3% 12.4%
Interest bearing core deposits 35.9 36.3 37.2
- ----------------------------------------------------------------------------------------------
Total core deposits 49.9 50.6 49.6
Purchased deposits 8.9 9.8 11.3
Short-term borrowings 13.3 12.6 12.9
Long-term debt and capital securities 20.3 19.3 18.7
- ----------------------------------------------------------------------------------------------
Total purchased funding 42.5 41.7 42.9
Stockholders' equity 7.6 7.7 7.5
- ----------------------------------------------------------------------------------------------
TOTAL 100.0% 100.0% 100.0%
==============================================================================================
Average interest bearing liabilities totaled $88.1 billion for the first quarter
of 2003, up from $85.4 billion and $79.9 billion for the fourth and first
quarters of 2002, respectively. Average noninterest bearing deposits, which
include mortgage banking escrow deposit balances, remained unchanged at $15.7
billion during the 2003 first quarter when compared to the 2002 fourth quarter,
but increased when compared to the 2002 first quarter average balance of $12.4
billion. In general, average funding balances increased during the first quarter
of 2003 and over the past year to support the growth in portfolio loans and
loans held for sale. The Corporation considers noninterest bearing deposits, NOW
and money market accounts, savings accounts, and consumer time deposits to be
core deposits. Purchased deposits consist primarily of brokered certificates of
deposit, certificates of deposit of $100,000 or more, and foreign deposits. Core
deposits continued to grow during the first quarter of 2003, continuing a trend
that began in late 2000, reflecting new account acquisition and retention,
expanded product offerings, and improved customer service. Core deposit growth
also was driven by a higher level of mortgage banking escrow balances associated
with an increase in refinancing activity and, to a lesser extent, a general
shift in customer preference away from the equity markets and into insured bank
deposits. Long-term debt continued to increase in the first quarter of 2003
principally through the issuance of senior bank notes by the bank subsidiaries
and the March 2003 issuance of $300 million of senior notes by the holding
company. Refer to Note 13 of the consolidated financial statements for
discussion on the Corporation's long-term debt.
CAPITAL: The Corporation has consistently maintained regulatory capital ratios
at or above the "well-capitalized" standards. For further detail on capital and
capital ratios, see Notes 15 and 16 to the consolidated financial statements.
Total stockholders' equity was $8.6 billion at March 31, 2003, up from $8.3
billion and $7.7 billion at December 31, 2002 and March 31, 2002, respectively.
Equity as a percentage of assets was 7.31% at March 31, 2003, compared to 7.03%
at December 31, 2002 and 7.67% a year ago. Book value per common share rose to
$14.05 at March 31, 2003, up from $13.59 and $12.61 at December 31, 2002 and
March 31, 2002, respectively.
45
As of March 31, 2003, the Corporation has two share repurchase authorizations
outstanding. In February 2003, the Board of Directors authorized a new share
repurchase program for the repurchase of up to 25 million shares of National
City common stock, subject to an aggregate purchase limit of $800 million. The
Board of Directors approved the other share repurchase authorization in October
1999 for the repurchase of up to 30 million shares of National City common
stock, subject to an aggregate purchase limit of $1.0 billion. Shares
repurchased under both authorizations will be held for reissue in connection
with stock compensation plans and for general corporate purposes. During the
first quarter of 2003 and the fourth quarter of 2002, the Corporation
repurchased 1.4 million shares and 1.3 million shares, respectively. There were
no share repurchases during the first quarter of 2002. As of March 31, 2003,
37.9 million shares remain authorized for repurchase under both authorizations.
Subject to ongoing capital, investment, and acquisition considerations,
management intends to continue share repurchases in 2003 on an opportunistic
basis.
National City declared and paid dividends per common share of $.305 during the
first quarter of 2003, up one cent from the quarterly dividend per share
declared and paid in the 2002 first quarter of $.295. The dividend payout is
continually reviewed by management and the Board of Directors. The dividend
payout ratio, representing dividends per share divided by earnings per share,
was 37.7% and 40.4% for the first quarters of 2003 and 2002, respectively. It is
management's intention to migrate to a lower payout ratio over time.
At March 31, 2003, the Corporation's market capitalization was $17.0 billion.
National City's common stock is traded on the New York Stock Exchange under the
symbol "NCC." Stock price information for National City's common stock is
presented in the following table.
- --------------------------------------------------------------------------------------
2003 2002
------- ---------------------------------------------------
FIRST Fourth Third Second First
NYSE: NCC QUARTER Quarter Quarter Quarter Quarter
- ---------------------------- ---------------------------------------------------
High $29.45 $29.82 $33.49 $33.75 $31.16
Low 26.53 24.60 25.58 29.60 26.31
Close 27.85 27.32 28.53 33.25 30.76
======================================================================================
RESULTS OF OPERATIONS
NET INTEREST INCOME
The primary source of the Corporation's revenue is net interest income. Net
interest income is discussed and presented in this financial review on a
tax-equivalent basis as the interest on certain loans and securities held by the
Corporation is not taxable for Federal income tax purposes. In order to compare
the tax-exempt yields on these assets to taxable yields, the interest earned on
these assets is adjusted to a pretax-equivalent amount based upon the marginal
Federal income tax rate of 35%. The tax-equivalent adjustments to net interest
income were $7 million, $7 million, and $8 million for the first quarter of
2003, the fourth quarter of 2002, and the first quarter of 2002, respectively.
Tax-equivalent net interest income for the first quarter of 2003 was $1.1
billion, compared to $1.1 billion last quarter, and $1.0 billion in the first
quarter in 2002. The net interest margin decreased to 4.21% in the first quarter
of 2003, down from net interest margins of 4.26% and 4.36% for the fourth and
first quarters of 2002, respectively.
The growth in net interest income during the first quarter of 2003, as compared
to the first quarter of 2002, was the result of earning asset growth, driven
mostly by strong mortgage loan originations, a more favorable earning asset mix,
a higher level of core deposits, and lower funding costs. The lower margin was
due to reduced asset yields and narrower spreads on deposits, reflecting the
ongoing effect of lower market interest rates.
NONINTEREST INCOME
Details of noninterest income follow:
- ---------------------------------------------------------------------------------------------
Three Months Ended
- ---------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2003 2002 2002
- ---------------------------------------------------------------------------------------------
Mortgage banking revenue $394 $206 $195
Deposit service charges 135 137 119
Payment processing revenue 105 116 109
Trust and investment management fees 69 70 78
Card-related fees 41 46 32
Brokerage revenue 24 26 27
Other service fees 28 25 22
Other 70 65 109
- ---------------------------------------------------------------------------------------------
TOTAL FEES AND OTHER INCOME 866 691 691
Securities gains (losses), net -- (17) 54
- ---------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME $866 $674 $745
=============================================================================================
Fees and other income for the first quarter of 2003 were $866 million, up from
$691 million recorded in both the fourth and first quarters of 2002. In general,
the increase in fees and other income was driven mainly by the continued growth
in mortgage banking revenue, and to a lesser extent, increases in deposit
service charges and other banking service fees, offset partially by declines in
processing revenue and asset management fees. A discussion of significant
changes in fees and other income follows.
46
Details of mortgage banking revenue follow:
- ------------------------------------------------------------------------------------------------
Three Months Ended
- ------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2003 2002 2002
- ------------------------------------------------------------------------------------------------
Servicing revenue:
Net servicing fees $ 120 $ 89 $ 88
Amortization of mortgage servicing assets (148) (138) (69)
Mortgage servicing asset impairment
recovery 87 10 13
Mortgage servicing asset ineffective
hedge and other derivative gains, net 76 58 24
- ------------------------------------------------------------------------------------------------
Net servicing revenue 135 19 56
National City Mortgage Co. (NCMC)
origination and sales revenue 190 118 125
- ------------------------------------------------------------------------------------------------
Total NCMC mortgage banking revenue 325 137 181
First Franklin origination and sales revenue 69 69 14
- ------------------------------------------------------------------------------------------------
TOTAL MORTGAGE BANKING REVENUE $ 394 $ 206 $195
================================================================================================
Information on residential mortgage loan origination and sales follows:
- -------------------------------------------------------------------------------------------------------
Three Months Ended
- -------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2003 2002 2002
- -------------------------------------------------------------------------------------------------------
Originations
NCMC $ 24,300 $ 29,330 $ 14,389
First Franklin 1,732 1,963 626
- -------------------------------------------------------------------------------------------------------
TOTAL RESIDENTIAL MORTGAGE LOANS
ORIGINATED FOR SALE $ 26,032 $ 31,293 $ 15,015
=======================================================================================================
Sales
NCMC $ 25,611 $ 20,253 $ 16,989
First Franklin 1,851 1,810 635
- -------------------------------------------------------------------------------------------------------
TOTAL RESIDENTIAL MORTGAGE LOAN SALES $ 27,462 $ 22,063 $ 17,624
=======================================================================================================
The continued growth in mortgage banking revenue during the first quarter of
2003 reflected a strong mortgage origination market driven by the historically
low interest rate environment and the results of successful hedging strategies
to protect the value of mortgage servicing assets. Mortgage loans originated for
sale to third parties by NCMC were $24.3 billion during the first quarter of
2003, down from $29.3 billion originated during the fourth quarter of 2002, and
up from $14.4 billion originated during the 2002 first quarter. Mortgage loans
originated for sale by First Franklin were $1.7 billion during the 2003 first
quarter, compared to $2.0 billion originated for the 2002 fourth quarter and up
from $626 million originated in the year-ago quarter. Virtually all NCMC's
mortgage loan production is sold into the secondary market. Approximately
one-half of the First Franklin loan production is also sold to third parties,
with the remainder held in portfolio. Sales of NCMC mortgage loans totaled $25.6
billion during the first quarter of 2003, up from $20.3 billion and $17.0
billion sold in the 2002 fourth and first quarters, respectively. Sales of First
Franklin mortgage loans were $1.9 billion during the first quarter of 2003,
virtually unchanged from $1.8 billion sold during the fourth quarter of 2002 and
up from $635 million sold during the first quarter of 2002.
The Corporation typically retains the right to service the mortgage loans sold
by NCMC and recognizes a mortgage servicing asset upon sale of the loans. Notes
1 and 11 of the consolidated financial statements provide further discussion on
the accounting for mortgage servicing assets. As a result of the continued high
volume of mortgage loan origination and sale activity, the unpaid principal
balance of loans serviced for third parties grew to $112.4 billion at March 31,
2003, up from $101.9 billion at December 31, 2002, and $85.2 billion at March
31, 2002. Net servicing fees increased as the result of growth in loans serviced
for third parties and, in the first quarter of 2003, an adjustment of
approximately $30 million to accrue servicing fees earned but not collected.
Despite growth in the portfolio of loans serviced for third parties, the
carrying value of mortgage servicing assets declined at March 31, 2003 to $813
million, when compared to the carrying value at March 31, 2002 of $1.4 billion.
Conversely, on a linked-quarter basis, the carrying value of mortgage servicing
assets increased from $615 million at December 31, 2002. The year-over-year
decrease in mortgage servicing assets reflected higher actual and expected loan
prepayments due to a decline in market interest rates. During the first quarter
of 2003, a recovery of temporary impairment on certain mortgage servicing assets
was recognized, driven by lower actual and expected mortgage loan prepayment
rates from what was anticipated at year-end. The value of mortgage servicing
assets is sensitive to changes in interest rates. In a low rate environment, as
was experienced during the first quarter of 2003 and in fiscal year 2002,
mortgage loan refinancings generally increase, causing actual and expected loan
prepayments to increase, which
47
drives down the estimated value of existing mortgage servicing assets. The
Corporation manages the risk associated with declines in the estimated value of
mortgage servicing assets by using derivative instruments. Consistent with the
fourth and first quarters of 2002, mortgage banking revenue in the first quarter
of 2003 benefited from successful hedging strategies designed to protect the
value of mortgage servicing assets. Further detail on mortgage servicing assets,
including a sensitivity analysis of the effect changes in assumptions have on
the estimated value of servicing assets, is included in Note 11 to the
consolidated financial statements.
Deposit service charges increased during the first quarter of 2003 when compared
to the same 2002 period but decreased slightly on a linked-quarter basis. The
year-over-year increase is a result of growth in core deposits, increased cash
management account activity, a higher level of customer debit card usage, and
fewer waived fees. During the first quarter and over the past two years, core
deposit balances have increased as a result of new account acquisition, expanded
product offerings, and improved customer service.
Payment processing revenue generated by National Processing, National City's
85%-owned subsidiary, declined during the first quarter of 2003 when compared to
the fourth and first quarters of 2002. The linked-quarter decrease in payment
processing revenue was mainly attributed to lower first quarter transaction
volume following the fourth quarter holiday season characterized by comparably
higher transaction volumes. The year-over-year decrease was mainly attributed to
lower levels of consumer spending and a reduction in transactions processed for
the airline and travel industries. In 2002, National Processing decided to
discontinue serving the airline industry and will continue to process debit and
credit card transactions for airline customers until its existing contractual
obligations expire. The contracts have various expiration dates through 2005.
Trust and investment management fees declined during the first quarter of 2003
on a linked-quarter and year-over-year basis primarily as a result of the lower
value of assets under administration upon which fees are calculated. At March
31, 2003, assets under administration totaled $103.3 billion, compared to $134.2
billion at December 31, 2002 and $148.6 billion at March 31, 2002. The
linked-quarter and year-over-year reduction in assets under administration was
the result of net cash outflows, and to a lesser extent, a decline in equity
market values.
Card-related fees decreased on a linked-quarter basis mainly due to seasonal
declines in credit card transaction volume. The year-over-year increase is
mainly a result of certain excess cash flows, principally interchange fees,
associated with securitized credit card balances which were recorded in interest
income during the first quarter of 2002, versus card-related fees during the
2003 first quarter.
Brokerage revenue declined during the first quarter of 2003 when compared to the
fourth and first quarters of 2002. The continued weak equity markets and
economic environment reduced investment banking and retail brokerage equity
trading activities and related revenue during the first quarter. Declines in
revenue from these activities were partially offset by continued growth in
revenue generated from the sale of fixed annuity products through the retail
branch network.
The linked-quarter and year-over-year growth in other service fees resulted from
increases in fees generated primarily from banking services, such as safe
deposit box rentals and check cashing, and syndicated lending activities.
Other fee income increased slightly on a linked-quarter basis and decreased when
compared to the same quarter a year ago. Items affecting comparability include
principal investment gains of $6 million during the first quarter of 2003,
compared to principal investment losses of $2 million during both the fourth and
first quarters of 2002. Further detail on the Corporation's principal
investments, including the accounting policy, can be found in Notes 1 and 9 to
the consolidated financial statements. Additionally, the year-over-year decrease
in other noninterest income was mainly attributed to securitization gains of $50
million during the first quarter of 2002. There were no securitization gains
recorded in the first quarter of 2003. Refer to Note 5 for further discussion on
securitization transactions.
Net securities gains for the first quarter of 2003 were $170 thousand, compared
to a loss of $17 million during the fourth quarter of 2002 and a gain of $54
million in the first quarter of 2002. The majority of these gains (losses) were
generated from the Corporation's internally managed portfolio of bank and thrift
common stocks (bank stock fund). Bank stock fund losses were $16 million in the
fourth quarter of 2002 and gains were $49 million in the first quarter of 2002.
There were no bank stock fund gains (losses) in the first quarter of 2003. Net
unrealized losses in the bank stock fund are included in other comprehensive
income, net of tax, within stockholders' equity and were $11 million at March
31, 2003.
In the second quarter of 2003, VISA(R) and Mastercard(R) reached a tentative
agreement to settle merchant litigation regarding debit card interchange
reimbursement fees. Conditions of the settlement have yet to be finalized,
however, management does not believe the impact of renegotiated debit card
interchange rates will have a material impact on the Corporation's results of
operations, financial position, or liquidity.
48
NONINTEREST EXPENSE
Details of noninterest expense follow:
- -----------------------------------------------------------------------------------------------------
Three Months Ended
- -----------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2003 2002 2002
- -----------------------------------------------------------------------------------------------------
Salaries, benefits, and other personnel $ 561 $ 527 $444
Equipment 65 65 62
Net occupancy 58 59 55
Third-party services 65 70 54
Card processing 52 54 54
Marketing and public relations 17 19 26
Postage and supplies 33 34 32
Goodwill and other intangible asset amortization 5 6 5
Telecommunications 21 22 21
Travel and entertainment 13 18 14
State and local taxes 16 15 17
Other real estate owned 3 8 5
Other 100 114 86
- -----------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE $ 1,009 $ 1,011 $875
=====================================================================================================
Noninterest expense was $1.0 billion in the first quarter of 2003, compared to
$1.0 billion the fourth quarter of 2002 and $875 million for the 2002 first
quarter. A discussion of significant changes in noninterest expense follows.
Details of salaries, benefits, and other personnel expense follow:
- -----------------------------------------------------------------------------------------------------
Three Months Ended
- -----------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(Dollars in Millions) 2003 2002 2002
- -----------------------------------------------------------------------------------------------------
Salaries and incentive compensation $ 403 $ 435 $ 370
Stock-based compensation 4 4 2
Medical and other benefits 44 36 39
Contract labor 20 26 16
Defined contribution plan - 401(k) 23 15 20
Defined benefit pension plan (4) (12) (15)
Severance and other 71 23 12
- -----------------------------------------------------------------------------------------------------
TOTAL SALARIES, BENEFITS,
AND OTHER PERSONNEL $ 561 $ 527 $ 444
=====================================================================================================
FULL-TIME-EQUIVALENT EMPLOYEES 32,633 32,731 32,076
=====================================================================================================
During the first quarter of 2003, the Corporation recorded severance charges of
$71 million in connection with cost-cutting initiatives designed to improve
long-term profitability. Of this charge, $67 million, recorded as salaries,
benefits, and personnel expense, was associated with a voluntary retirement
program and position eliminations made across the Corporation's lines of
business. The remaining $4 million charge was recorded to third-party services
expense and related to placement services offered to employees whose positions
were eliminated. Incentive compensation increased on a year-over-year basis due
to higher mortgage loan originations at NCMC and First Franklin. Conversely,
incentive compensation decreased during the first quarter of 2003, reflecting a
17% decline in mortgage loan originations from the fourth quarter. The employee
benefit-related expenses rose on a linked-quarter and year-over-year basis as a
result of increased contributions to participant 401(k) plans, higher medical
benefit costs, and a decline in the value of pension plan assets, which drove
the reduction in the defined pension benefit. As discussed in Note 1 to the
consolidated financial statements, the Corporation began expensing stock options
in accordance with SFAS 123 on January 1, 2003. The adoption had little impact
to first quarter 2003 earnings, as the majority of new stock option grants
generally occur during the third quarter of each fiscal year. Staffing levels on
a full-time equivalent basis at March 31, 2003 remained virtually unchanged on a
linked-quarter comparison but increased from March 31, 2002. The year-over-year
increase was a result of staff additions to support the mortgage banking
business, partly offset by personnel reductions elsewhere.
Third-party services expense increased during the first quarter of 2003 when
compared to the same 2002 period primarily due to the position elimination
placement service expense of $4 million discussed above, an increase in payment
processing referral fees and, to a lesser extent, increases in professional
service fees and activities outsourced related to higher mortgage banking
volumes. The linked-quarter decrease in third-party services expense is mainly
attributable to a reduction of professional service fees, offset by the position
elimination placement service expense.
49
Marketing and public relations expense decreased during the first quarter of
2003 when compared to the fourth quarter of 2002 but increased when compared to
the same 2002 period. The respective changes in marketing and public relations
expense were mainly due to discretionary costs associated with the ongoing brand
awareness campaign, which included targeted television and print advertising
across National City's footprint.
Other real estate owned expense, which represents costs associated with
obtaining, maintaining, and selling foreclosed properties or vacated bank
premises, decreased on a linked-quarter and year-over-year basis primarily due
to a reduction in property foreclosure and disposition expenses and a reduction
in the write-downs associated with determining the estimated fair value of the
properties or bank premises held for sale.
Other noninterest expense increased during the first quarter of 2003 when
compared to the same 2002 period and decreased on a linked-quarter basis. Items
affecting comparability between periods included a $13 million charge in the
first quarter of 2003 associated with the revaluation of community and civic
partnership investments, compared to similar charges of $36 million and $2
million recorded in the fourth and first quarters of 2002, respectively;
commercial lease valuation charges of $17 million related to aircraft leases
recorded in the 2003 first quarter; and automobile lease residual value charges
of $25 million and $13 million recorded during the first quarters of 2003 and
2002, respectively. The Corporation ceased the origination of automobile leases
in December 2000 and the automobile lease portfolio continues to run off over
time.
The efficiency ratio, which expresses noninterest expense as a percentage of
tax-equivalent net interest income and total fees and other income, was 51.3%
for the first quarter of 2003, down from 57.1% and 51.6% for the fourth and
first quarters of 2002, respectively.
INCOME TAXES
The Corporation's effective tax rate for the first quarter of 2003 was 33.9%,
compared to 34.2% for the first quarter of 2002.
LINE OF BUSINESS RESULTS
National City is functionally managed along five major business lines. A
description of each business line, including its products, customers and markets
served, and selected financial information for the first quarters of 2003 and
2002 is included in Note 22 to the consolidated financial statements. A
discussion of line of business results for the first quarter of 2003
follows.
Net income (loss) by line of business follows:
- --------------------------------------------------------------------------------------------------------
Three Months Ended
- --------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2003 2002 2002
- --------------------------------------------------------------------------------------------------------
Consumer and Small Business Financial Services $141 $161 $138
Wholesale Banking 55 45 62
National Consumer Finance 361 210 157
Asset Management 19 20 26
National Processing 9 14 12
Parent and other (88) (69) 51
- --------------------------------------------------------------------------------------------------------
CONSOLIDATED NET INCOME $497 $381 $446
========================================================================================================
Results for Consumer and Small Business Financial Services improved in the first
quarter of 2003 from the year-ago quarter due to an increase in noninterest
income and a decline in the provision for loan losses. Noninterest income
benefited from strong loan and deposit growth, which boosted service fees earned
on credit card and home equity loans, deposit accounts, and debit and ATM
transactions. Loan growth was driven by higher home equity loan production,
fueled by the low interest rate environment, an increase in credit card loans
associated with new product offerings, and growth in small business loans,
partially offset by the continued run off of the automobile lease portfolio.
Deposits grew over the prior year as a result of new product offerings, such as
free checking accounts and a new money market management account, better sales
efforts aided by enhanced incentive compensation programs, and ongoing emphasis
on customer service and account retention. Over the past several years, the
business line has improved customer service through investments in training and
back-office technology. Partially offsetting the increase in noninterest income
and decline in the loan loss provision was a decrease in net interest income and
an increase in noninterest expense. Although net interest income has benefited
over the past year from loan and deposit growth, the sustained low interest rate
environment has reduced the net interest margin resulting in lower net interest
income. Noninterest expense increased due to higher sales-driven personnel
expenses and automobile lease residual value write-downs. Pretax automobile
lease residual value write-downs totaled $25 million and $13 million for the
three months ended March 31, 2003 and 2002, respectively. Compared to the fourth
quarter of 2002, first quarter 2003 net income declined due primarily to the
first quarter automobile lease residual value write-down. There were no similar
charges in the
50
fourth quarter.
First quarter 2003 net income for Wholesale Banking declined from the first
quarter of 2002 due to increases in the loan loss provision and noninterest
expense partially offset by increases in net interest income and noninterest
income. Credit costs have risen over the past year due to a weaker economy,
which has caused financial stress among corporate customers and resulted in
increased levels of delinquencies and losses. Despite the overall rise in
delinquent loans, there have been no particular industry or geographic
concentration trends. The increase in noninterest expense resulted from a pretax
charge of $17 million recorded in the first quarter of 2003 to write-down the
values of certain commercial leased assets. Net interest income benefited from
improved spreads offset partly by a decline in the loan portfolio due to soft
commercial loan demand stemming from the weaker economy. Noninterest income
increased due to increases in deposit service charges, letter of credit fees,
and loan syndication fees. First quarter 2003 noninterest income also included
gains on principal investments of $6 million, compared to losses of $2 million
in the year-ago period. Wholesale Banking's results improved from the fourth
quarter of 2002 due to a decline in the loan loss provision and an increase in
noninterest income due to an increase in principal investment gains.
Net income for National Consumer Finance for the first quarter of 2003 rose
significantly from the first quarter of last year as the business line continued
to benefit from a low interest rate environment, which aided loan origination
activity, coupled with a steep yield curve, which boosted the net interest
margin on the mortgage warehouse and facilitated mortgage servicing hedging
strategies. During the first quarter of 2003, servicing fee income also
increased due to an adjustment of approximately $30 million to accrue servicing
fees earned but not collected. Residential mortgage production and sales volume
for the first quarter of 2003 increased 69% and 56%, respectively, over the
year- ago quarter. Mortgage loans held for sale averaged approximately $22.5
billion in the 2003 first quarter, versus $13.9 billion in the first quarter of
last year. Residential mortgage production included nonconforming loans
generated by First Franklin. Over the past year, approximately $5.9 billion of
First Franklin's loan production has been retained in portfolio. As of March 31,
2003, the portfolio of First Franklin loans totaled $10.4 billion, compared to
$6.8 billion a year ago. Growth in this portfolio has also contributed to the
increase in net interest income and the provision for loan losses. Strong growth
in home equity loans generated by the National Home Equity group also
contributed to the year-over-year growth in net income. Net income for the
current quarter was also up significantly over the preceding quarter due
primarily to higher mortgage loans held for sale and increases in both sales and
servicing revenue.
Net income for Asset Management in the first quarter of 2003 declined from the
fourth and first quarters of 2002 due principally to a decrease in noninterest
income stemming from lower trust and investment management fee income. Trust and
investment management fees were unfavorably affected by a lower level of assets
under administration, resulting from equity market values and net cash outflows.
Assets under administration were $103.3 billion at March 31, 2003, down from
$134.2 billion at December 31, 2002 and $148.6 billion at March 31, 2002.
National Processing's results for the first quarter of 2003 reflected growth in
transaction volume from existing customers and the addition of new regional
merchants that was more than offset by price compression in the national
merchant base, weak consumer spending, and a decline in transactions processed
for the airline industry, resulting from the strategic decision in 2002 to
discontinue serving this customer base as existing contractual obligations
expire. The contracts have various expiration dates through 2005. The revenue
generated from these contracts represented approximately 8% of National
Processing's 2002 annual revenue.
The parent and other category includes the results of investment funding
activities, unallocated corporate income and expense, and intersegment revenue
and expense eliminations. A net loss was incurred in the first quarter of 2003
primarily due to the recognition of $71 million of severance and related charges
in conjunction with cost-reduction initiatives and an increase in net interest
expense. Net interest expense increased mainly as the result of maintaining an
asset sensitive interest rate risk position in the current low interest rate
environment, and from internal crediting rates on new deposits being higher than
the immediately available investment opportunities for those funds. Also
affecting the year-over-year comparison of results was a decline in fee income
driven by bank stock fund gains of $48 million and asset securitization gains of
$50 million recognized in the first quarter of 2002. There were no bank stock
fund or asset securitization gains during the 2003 first quarter.
51
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE
SHEET ARRANGEMENTS
The following table presents, as of March 31, 2003, the Corporation's
significant fixed and determinable contractual obligations by payment date. The
payment amounts represent those amounts contractually due to the recipient and
do not include any unamortized premiums or discounts, hedge basis adjustments,
or other similar carrying value adjustments. The operating lease amounts
represent obligations as of December 31, 2002. The operating lease obligation as
of March 31, 2003 does not materially differ from the amounts disclosed in the
table below. Further discussion of the nature of each obligation is included in
the referenced note to the consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE IN
--------------------------------------------------
ONE TO THREE TO OVER
NOTE ONE YEAR THREE FIVE FIVE
(In Millions) REFERENCE OR LESS YEARS YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Deposits without a stated maturity $48,798 $ -- $ -- $ -- $48,798
Consumer and brokered certificates
of deposits 7,881 6,225 1,973 1,020 17,099
Federal funds borrowed and security
repurchase agreements 12,745 -- -- -- 12,745
Borrowed funds 12 1,736 -- -- -- 1,736
Long-term debt 13 12,871 4,295 3,222 3,008 23,396
Capital securities 14 -- -- -- 180 180
Operating leases 133 199 113 258 703
============================================================================================================================
The Corporation also enters into derivative contracts under which the
Corporation is required to either receive cash from or pay cash to
counterparties depending on changes in interest rates. Derivative contracts are
carried at fair value on the consolidated balance sheet with the fair value
representing the net present value of expected future cash receipts or payments
based on market interest rates as of the balance sheet date. The fair value of
the contracts change daily as market interest rates change. Certain contracts,
such as interest rate futures, are cash settled daily, while others, such as
interest rate swaps, require monthly cash settlement. Because the derivative
liabilities recorded on the balance sheet at March 31, 2003 do not represent the
amounts that may ultimately be paid under these contracts, these liabilities are
not included in the table of contractual obligations presented above. Further
discussion of derivative instruments is included in Notes 1 and 21 to the
consolidated financial statements.
A schedule of significant commitments at March 31, 2003 follows:
- ------------------------------------------------------------------------------------------------
(In Millions)
- ------------------------------------------------------------------------------------------------
Commitments to extend credit:
Revolving home equity and credit card lines $22,704
Other loans 41,887
Standby letters of credit 3,874
Commercial letters of credit 115
Net commitments to sell mortgage loans and mortgage-backed securities 19,864
Commitments to fund principal investments 240
Commitments to fund civic and community investments 172
================================================================================================
Further discussion of these commitments is included in Note 19 to the
consolidated financial statements.
The Corporation may also have liabilities under certain contractual agreements
contingent upon the occurrence of certain events. A discussion of significant
contractual arrangements under which National City may be held contingently
liable, including guarantee arrangements, is included in Note 19 to the
consolidated financial statements.
The Corporation's significant off-balance sheet arrangements include the use of
special-purpose entities, generally securitization trusts, to diversify its
funding sources. During 2002, 2001 and 2000, National City either sold credit
card receivables and/or automobile loans to securitization trusts, which are
considered qualified special-purpose entities and, accordingly, are not included
in the consolidated balance sheet. The Corporation continues to service the
loans sold to the trusts, for which it receives a servicing fee, and also has
certain retained interests in the assets of the trusts. Further discussion on
the accounting for securitizations is included in Note 1 to the consolidated
financial statements and detail regarding securitization transactions and
retained interests is included in Note 5.
52
RISK MANAGEMENT
The Board of Directors is the foundation for effective corporate governance and
risk management. The Board demands accountability of management, keeps
stockholders' and other constituencies' interests in focus, advocates the
upholding of the Corporation's code of ethics, and fosters a strong internal
control environment. Through its Investment and Audit Committees, the Board
actively reviews critical risk positions, including market, credit, liquidity,
and operational risk. The Corporation's goal in managing risk is to reduce
earnings volatility, control exposure to unnecessary risk, and ensure
appropriate returns for risk assumed. Senior management actively manages risk at
the line of business level, supplemented with corporate-level oversight through
the Asset Liability Committee, internal audit and quality control functions, and
other risk management groups. Building on these strengths, the Corporation
created a Chief Risk Officer function in late 2002 to reinforce the focus on
risk management. This risk management structure is designed to surface risk
issues through a systematic process, enabling timely and appropriate action to
avoid and mitigate risk. The new risk management organization builds on existing
practices by establishing risk limits and more robust measurement systems,
continuing to focus on risk-reduction strategies, and further refining
capital-allocation practices.
CREDIT RISK MANAGEMENT
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, collateral protection, and standard lending
policies and underwriting criteria. Note 1 to the consolidated financial
statements describes the accounting policies related to nonperforming loans and
charge-offs and describes the methodologies used to develop the allowance for
loan losses, including both the allocated and unallocated components. The
policies governing nonperforming loans and charge-offs are consistent with
regulatory standards.
The following tables provide information and statistics on the overall quality
of the loan portfolio.
NET CHARGE-OFFS: Net charge-offs by portfolio type follow:
- -----------------------------------------------------------------------------------------
Three Months Ended
- -----------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2003 2002 2002
- -----------------------------------------------------------------------------------------
Commercial $ 93 $ 61 $ 99
Real estate -- commercial 2 4 1
Real estate -- residential 31 21 23
Home equity lines of credit 3 4 4
Credit card and other
unsecured lines of credit 20 21 19
Other consumer 21 29 35
- -----------------------------------------------------------------------------------------
TOTAL NET CHARGE-OFFS $170 $140 $181
=========================================================================================
Net charge-offs as a percentage of average loans by portfolio type follow:
- -----------------------------------------------------------------------------------------
Three Months Ended
- -----------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
2003 2002 2002
- -----------------------------------------------------------------------------------------
Commercial 1.53% .97% 1.53%
Real estate -- commercial .10 .16 .09
Real estate -- residential .59 .49 .62
Home equity lines of credit .20 .27 .25
Credit card and other
unsecured lines of credit 3.92 4.04 4.56
Other consumer 1.09 1.02 1.24
=========================================================================================
TOTAL NET CHARGE-OFFS
TO AVERAGE PORTFOLIO LOANS (ANNUALIZED) .95% .78% 1.08%
=========================================================================================
Net charge-offs in the first quarter of 2003 were $170 million, or .95% of
average loans, up from $140 million, or .78% of average loans, last quarter but
down from $181 million, or 1.08% of average loans, in the first quarter of 2002.
The linked-quarter increase in commercial loan net charge-offs was mainly driven
by higher commercial loan losses associated with highly leveraged borrowers, as
these loans are especially vulnerable in periods of prolonged economic weakness,
and credit-related losses on certain aircraft leases.
53
The linked-quarter and year-over-year increase in residential real estate net
charge-offs was primarily due to growth and seasonality in the First Franklin
mortgage loan portfolio and losses associated with the runoff of the former
Altegra mortgage loans. The Corporation closed the Altegra origination units in
2000, and in connection with the decision to exit this business, management
assumed a more aggressive stance on the liquidation of this portfolio, which has
contributed to increased levels of nonperforming assets and charge-offs.
Additionally, in the first quarter of 2003, in order to better manage collection
efforts, the Corporation extended the period of time before it charges off
delinquent credit card balances from 120 days to 150 days. This policy change
reduced credit card net charge-offs by approximately $2 million during the first
quarter of 2003.
NONPERFORMING ASSETS AND DELINQUENT LOANS: Details of nonperforming assets
follow:
- -----------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(Dollars in Millions) 2003 2002 2002
- -----------------------------------------------------------------------------------------------------
Commercial $385 $414 $ 368
Real estate -- commercial 78 60 53
Real estate -- residential 233 228 229
- -----------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING LOANS 696 702 650
Other real estate owned (OREO) 116 115 66
Mortgage loans held for sale 5 -- --
Other 5 -- --
- -----------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS $822 $817 $ 716
=====================================================================================================
NONPERFORMING ASSETS AS A PERCENTAGE OF:
PERIOD-END PORTFOLIO LOANS AND OTHER
NONPERFORMING ASSETS 1.10% 1.13% 1.05%
PERIOD-END TOTAL ASSETS .70 .69 .72
=====================================================================================================
Detail of loans 90 days past due accruing interest follows:
- -----------------------------------------------------------------------------------------------------
March 31 December 31 March 31
(In Millions) 2003 2002 2002
- -----------------------------------------------------------------------------------------------------
Commercial $ 47 $ 43 $ 68
Real estate - commercial 18 26 31
Real estate - residential 447 449 406
Home equity lines of credit 14 16 17
Credit card and other unsecured lines of credit 16 8 8
Other consumer 12 19 21
Mortgage loans held for sale 33 14 21
Other 24 -- --
- -----------------------------------------------------------------------------------------------------
TOTAL LOANS 90 DAYS PAST DUE ACCRUING INTEREST $ 611 $ 575 $ 572
=====================================================================================================
The overall increase in nonperforming assets and loans 90 days past due accruing
interest can be attributed to the same portfolios and factors that drove the
increase in net charge-offs. Credit card and other unsecured lines of credit 90
days past due increased as a result of the change in charge-off policy described
above, as past due credit card loans remained in portfolio longer prior to being
charged-off. During the first quarter of 2003, $80 million of commercial loans
were sold to third parties of which $55 million were classified as nonperforming
loans at December 31, 2002. Losses associated with these loan sales were
included in charge-offs.
ALLOWANCE FOR LOAN LOSSES: National City maintains an allowance for loan losses
sufficient to absorb estimated probable current 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, current economic
events in specific industries and geographical areas, including unemployment
levels, and other pertinent factors, including regulatory guidance and general
economic conditions.
The overall allowance for loan losses as a percentage of portfolio loans was
maintained at 1.51% in the first quarter of 2003. The provision for loan losses
was $200 million for the first quarter of 2003, up from the $158 million and
$189 million recorded in the fourth and first quarters of 2002, respectively.
The increase in the loan loss provision reflected higher net charge-offs and
increases in nonperforming and delinquent assets, as well as management's
ongoing concern about economic conditions.
54
An allocation of the ending allowance for loan losses by portfolio type follows:
- -----------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2003 2002 2002
- -----------------------------------------------------------------------------------------------------
Commercial $ 468 $ 450 $ 374
Real estate-- commercial 56 58 58
Real estate-- residential 141 126 126
Home equity lines of credit and other
consumer loans 76 124 139
Credit card and other unsecured lines of credit 76 101 86
Unallocated 311 240 217
- -----------------------------------------------------------------------------------------------------
TOTAL ALLOWANCE FOR LOAN LOSSES $1,128 $1,099 $1,000
=====================================================================================================
By loan type, additional allowance was allocated to the commercial portfolio
during the first quarter due to continued deterioration in credit quality in
nationally-syndicated loans, which are typically characterized by more highly
leveraged borrowers. Additional loan loss was also allocated to the residential
real estate portfolio due to the higher level of nonperforming and delinquent
loans in this portfolio stemming from portfolio growth and seasoning, as well as
the weaker economy. The allowance allocated to the other consumer loan
categories declined in the first quarter of 2003 due to the refinement of loss
allocation factors to reflect a more detailed product mix and, to a lesser
extent, the reclassification of allowance to the residential real estate
portfolio related to the year-end reclassification of certain home equity
installment loans. The unallocated allowance, which is maintained to absorb
estimated probable inherent but undetected losses in the loan portfolio,
increased in the first quarter of 2003 based upon management's judgment after
taking into consideration continued uncertainty surrounding the weak economic
environment.
LIQUIDITY RISK MANAGEMENT
The objective of liquidity management is to ensure the cash flow requirements of
depositors and borrowers, as well as the operating cash needs of the
Corporation, are met, taking into account all on- and off-balance sheet funding
demands. Liquidity management also includes ensuring cash flow needs are met at
a reasonable cost. Liquidity risk arises from the possibility the Corporation
may not be able to satisfy current or future financial commitments, or may
become unduly reliant on alternative funding sources. The Corporation maintains
a liquidity risk management policy to address and manage this risk. The policy
identifies the primary sources of liquidity, establishes procedures for
monitoring and measuring liquidity, and establishes minimum liquidity
requirements which comply with regulatory guidance. The policy also includes a
contingency funding plan to address liquidity needs in the event of an
institution-specific or a systemic financial market crisis. The liquidity
position is continually monitored and reported on monthly to the Asset/Liability
Management Committee.
Funds are available from a number of sources, including the securities
portfolio, the core deposit base, the capital markets, the Federal Home Loan
Bank, the U.S. Treasury, and through the sale and securitization of various
types of assets. Funding sources did not change significantly during the first
quarter of 2003. Core deposits, the most significant source of funding,
comprised approximately 50% of funding at March 31, 2003, December 31, 2002, and
March 31, 2002. Asset securitization vehicles have been used as a source of
funding over the past several years. During the first quarter of 2003, the
Corporation securitized $44 million of Small Business Administration loans.
During the first three months of 2002, the Corporation securitized $1.1 billion
of automobile loans and $425 million of credit card receivables. In 2001 and
2000, credit card receivables totaling $425 million and $600 million were sold
through securitization, respectively. Further discussion of securitization
activities is included in Note 5 to the consolidated financial statements.
At the holding company level, the Corporation uses cash to pay dividends to
stockholders, repurchase common stock, make selected investments and
acquisitions, and service debt. The main sources of funding for the holding
company include dividends and returns of investment from its subsidiaries, a
line of credit with its bank subsidiaries, the commercial paper market, a
revolving credit agreement with a group of unaffiliated banks, and access to the
capital markets.
The primary source of funding for the holding company has been dividends and
returns of investment from its subsidiaries. During the first three months of
2003, there were no dividends declared by the bank subsidiaries or returns of
investment provided to the holding company from the bank subsidiaries. As
discussed in Note 15 to the consolidated financial statements, subsidiary banks
are subject to regulation and, among other things, may be limited in their
ability to pay dividends or transfer funds to the holding company. Accordingly,
consolidated cash flows as presented in the consolidated statements of cash
flows on page 6 may not represent cash immediately available to the holding
company.
Funds raised in the commercial paper market through the Corporation's
subsidiary, National City Credit Corporation, support the short-term cash needs
of the holding company and nonbank subsidiaries. At March 31, 2003, December 31,
2002, and March 31, 2002, $218 million, $1.0 billion, and $502 million,
respectively, of commercial paper proceeds were advanced to the holding company.
55
In 2001, the holding company established a $500 million credit line with its
banking subsidiaries to provide additional liquidity support. There were no
borrowings under this agreement at March 31, 2003, December 31, 2002, and March
31, 2002.
The holding company has a $375 million revolving credit agreement with a group
of unaffiliated banks, which serves as a back-up liquidity facility. No
borrowings have occurred under this facility. See Note 13 to the consolidated
financial statements.
National City also has a shelf registration in place with the United States
Securities and Exchange Commission (SEC). During the first quarter of 2003, the
holding company issued $300 million of senior notes under this shelf
registration. In April 2003, the Corporation filed a shelf registration with the
SEC to allow for the sale, over time, of up to $1.5 billion in debt securities,
preferred and common stock, and depositary shares.
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, currency exchange
rates, or equity prices. Interest rate risk is National City's primary market
risk and results from timing differences in the repricing of assets and
liabilities, 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 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.
The Corporation is also exposed to equity price risk through its internally
managed portfolio of bank and thrift common stock investments. As of March 31,
2003, this portfolio had a cost basis and fair value of $262 million and $251
million, respectively. Price risk is mitigated through active portfolio
management and by limiting the amount invested in any one company. The
Corporation does not have any material foreign currency exchange rate risk
exposure.
ASSET/LIABILITY MANAGEMENT: One of the primary goals of asset/liability
management is to maximize net interest income and the net value of future cash
flows within authorized 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. Both measures are highly assumption-dependent and
change regularly as the balance sheet and business mix evolve; however, taken
together they represent a reasonably comprehensive view of the magnitude of
interest rate risk, 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. Both models assume a parallel shift in the yield curve. The
key assumptions employed by these measures are analyzed regularly and reviewed
by ALCO.
Earnings Simulation Modeling: 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 affected by changes in spread relationships
between certain rate indices, such as the prime rate and the London Interbank
Offering Rate (LIBOR).
The earnings simulation model projects changes in net income caused by the
effect of changes in interest rates on net interest income. The model requires
management to make 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 prepared for the April 2003 ALCO
meeting projects net income would increase by approximately 1.9% of stable-rate
net income if rates were to rise gradually by 200 basis points over the next
twelve months. The model also projects a decrease in net income of 7.1% if rates
were to fall gradually by 200 basis points over the same period. The projected
decrease in net income is above the ALCO guideline of minus 4.0%, however,
management believes a sustained 200 basis point decline in market interest rates
from their current low level is unlikely.
The earnings simulation model excludes the earnings dynamics related to how fee
income and noninterest expense may be affected by changes in interest rates.
Mortgage banking revenue in particular, which is generated from originating,
selling, and servicing residential mortgage loans, is highly sensitive to
changes in interest rates due to the direct effect changes in interest rates
have on loan demand and the value of mortgage servicing assets. In general, low
or declining interest rates typically lead to increased origination and sales
income but potentially lower servicing-related income due to the impact of
higher loan prepayments on the value of mortgage servicing assets. Conversely,
high or rising interest rates typically reduce mortgage loan demand and hence
origination and
56
sales income. In addition, net interest income earned on loans held for sale
increases when the yield curve steepens and decreases when the yield curve
flattens. Risk related to mortgage banking activities is also monitored by ALCO.
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 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 model. As with earnings
simulation modeling, assumptions about the timing and variability of balance
sheet cash flows are critical in NPV analysis. Particularly important are
assumptions driving mortgage prepayments and changes in the noncontractual
deposit portfolios. These assumptions are applied consistently in both models.
The NPV model prepared for the April 2003 ALCO meeting projects an increase in
NPV of approximately 3.6% if interest rates immediately increased 150 basis
points. If rates immediately decreased by 150 basis points, the model projects
an approximate decrease in NPV of 1.6%. Policy guidelines limit the amount of
the estimated decline in NPV to 7.0%.
At the end of 2002, the interest-rate-risk position, as presented and discussed
in the 2002 Form 10-K, was asset sensitive, meaning net income should increase
as rates rise and decrease as rates fall. During the first quarter of 2003, the
Corporation maintained an asset sensitive interest-rate-risk position due to
management's expectation that rates will rise.
Interest Rate Risk Management: Financial instruments used to manage interest
rate risk include investment securities and interest rate derivatives, which
include interest rate swaps, interest rate caps and floors, interest rate
forwards, 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. Further discussion of the use of and the accounting for derivative
instruments is included in Notes 1 and 21 to the consolidated financial
statements.
CONTROLS AND PROCEDURES
The management of National City Corporation is responsible for establishing and
maintaining effective disclosure controls and procedures, as defined under Rules
13a-14 and 15d-14 of the Securities Exchange Act of 1934. As of March 31, 2003,
an evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Corporation's disclosure
controls and procedures. Based on that evaluation, management concluded the
Corporation's disclosure controls and procedures as of March 31, 2003 were
effective in ensuring information required to be disclosed in this Quarterly
Report on Form 10-Q was recorded, processed, summarized, and reported within the
time period required by the United States Securities and Exchange Commission's
rules and forms. There have been no significant changes in the Corporation's
internal controls or in other factors that could significantly affect internal
controls subsequent to March 31, 2003.
57
CONSOLIDATED AVERAGE BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
Three Months Ended
March 31
- -------------------------------------------------------------------------------------------------
(In Millions) 2003 2002
- -------------------------------------------------------------------------------------------------
ASSETS
Earning Assets:
Portfolio loans:
Commercial $ 24,596 $ 26,133
Real estate -- commercial 9,420 7,682
Real estate -- residential 21,025 14,932
Consumer 7,957 11,336
Credit card 2,033 1,780
Home equity 8,152 6,066
- -------------------------------------------------------------------------------------------------
Total portfolio loans 73,183 67,929
Loans held for sale or securitization:
Commercial 14 4
Mortgage 22,510 13,862
Automobile -- 1,007
Credit card -- 142
- -------------------------------------------------------------------------------------------------
Total loans held for sale or securitization 22,524 15,015
Securities available for sale, at cost 8,295 8,834
Federal funds sold and security resale agreements 118 95
Other investments 665 705
- -------------------------------------------------------------------------------------------------
Total earning assets 104,785 92,578
Allowance for loan losses (1,101) (1,021)
Fair value appreciation of securities available for sale 324 188
Cash and demand balances due from banks 3,376 2,937
Properties and equipment 1,038 1,085
Other real estate owned 115 65
Mortgage servicing assets 762 1,225
Goodwill 1,078 1,078
Other intangible assets 72 86
Derivative assets 935 380
Accrued income and other assets 5,049 3,507
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 116,433 $ 102,108
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 15,689 $ 12,366
NOW and money market 23,489 19,411
Savings 2,458 2,594
Consumer time 14,451 15,119
Brokered retail CDs 2,871 3,609
Other 499 920
Foreign 6,602 6,792
- -------------------------------------------------------------------------------------------------
Total deposits 66,059 60,811
- -------------------------------------------------------------------------------------------------
Federal funds borrowed and security repurchase agreements 12,306 9,402
Borrowed funds 2,636 3,480
Long-term debt and capital securities 22,826 18,615
Derivative liabilities 574 313
Accrued expenses and other liabilities 3,432 1,958
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 107,833 94,579
Stockholders' Equity:
Preferred -- 1
Common 8,600 7,528
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,600 7,529
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 116,433 $ 102,108
=================================================================================================
58
DAILY AVERAGE BALANCES/NET INTEREST INCOME/RATES
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) Daily Average Balance
- -------------------------------------------------------------------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------
FIRST Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Earning Assets:
Loans(a):
Commercial $ 24,610 $ 25,345 $ 24,881 $25,127 $ 26,137
Real estate -- commercial 9,420 8,383 8,037 7,909 7,682
Real estate -- residential 43,535 36,372 27,728 25,504 28,794
Home equity lines of credit 8,152 7,857 7,316 6,679 6,066
Credit card and other unsecured lines of credit 2,033 1,958 1,910 1,810 1,922
Other consumer 7,957 11,052 10,924 11,244 12,343
- -------------------------------------------------------------------------------------------------------------------------------
Total loans 95,707 90,967 80,796 78,273 82,944
Securities available for sale, at cost:
Taxable 7,650 8,825 7,668 7,981 8,145
Tax-exempt 645 659 668 679 689
- -------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 8,295 9,484 8,336 8,660 8,834
Federal funds sold, security resale
agreements and other investments 783 864 882 864 800
- -------------------------------------------------------------------------------------------------------------------------------
Total earning assets/total interest income/rates 104,785 101,315 90,014 87,797 92,578
Allowance for loan losses (1,101) (1,079) (1,031) (1,000) (1,021)
Fair value appreciation of securities
available for sale 324 318 299 208 188
Nonearning assets 12,425 12,135 11,825 10,916 10,363
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 116,433 $ 112,689 $ 101,107 $97,921 $ 102,108
===============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW and money market accounts $ 23,489 $ 22,385 $ 21,006 $20,119 $ 19,411
Savings accounts 2,458 2,488 2,543 2,622 2,594
Consumer time deposits 14,451 14,811 15,122 15,209 15,119
Other deposits 3,370 3,415 3,065 3,462 4,529
Foreign deposits 6,602 7,264 5,781 5,372 6,792
Federal funds borrowed 9,171 7,297 4,482 4,092 5,961
Security repurchase agreements 3,135 3,346 3,316 3,206 3,441
Borrowed funds 2,636 3,169 1,784 1,201 3,480
Long-term debt and capital securities 22,826 21,175 18,985 19,432 18,615
- -------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/
total interest expense/rates 88,138 85,350 76,084 74,715 79,942
Noninterest bearing deposits 15,689 15,710 13,864 12,760 12,366
Accrued expenses and other liabilities 4,006 3,243 2,941 2,560 2,271
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 107,833 104,303 92,889 90,035 94,579
TOTAL STOCKHOLDERS' EQUITY 8,600 8,386 8,218 7,886 7,529
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 116,433 $ 112,689 $ 101,107 $97,921 $ 102,108
===============================================================================================================================
NET INTEREST INCOME
INTEREST SPREAD
Contribution of noninterest bearing sources of funds
NET INTEREST MARGIN
(a) Includes loans held for sale or securitization
59
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) Quarterly Interest
- -----------------------------------------------------------------------------------------------------------------------------
2003 2002
--------------------------------------------------------------------
FIRST Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Earning Assets:
Loans(a):
Commercial $ 245 $ 285 $ 301 $ 309 $ 317
Real estate -- commercial 145 136 133 134 131
Real estate -- residential 730 606 507 481 525
Home equity lines of credit 89 98 92 84 77
Credit card and other unsecured lines of credit 44 42 44 44 46
Other consumer 148 227 232 236 258
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 1,401 1,394 1,309 1,288 1,354
Securities available for sale, at cost:
Taxable 102 124 119 132 134
Tax-exempt 13 13 14 14 14
- -----------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 115 137 133 146 148
Federal funds sold, security resale
agreements and other investments 11 9 9 10 9
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets/total interest $ 1,527 $ 1,540 $ 1,451 $1,444 $ 1,511
income/rates...............................
Allowance for loan losses
Fair value appreciation of securities
available for sale
Nonearning assets
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW and money market accounts $ 68 $ 77 $ 78 $ 74 $ 72
Savings accounts 3 4 5 6 6
Consumer time deposits 137 149 160 166 171
Other deposits 12 15 15 16 21
Foreign deposits 23 30 27 26 31
Federal funds borrowed 36 34 25 24 33
Security repurchase agreements 6 8 9 9 9
Borrowed funds 9 12 7 5 13
Long-term debt and capital securities 132 130 146 147 150
- -----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/
total interest expense/rates $ 426 $ 459 $ 472 $ 473 $ 506
Noninterest bearing deposits
Accrued expenses and other liabilities
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
TOTAL STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.
=============================================================================================================================
NET INTEREST INCOME $ 1,101 $ 1,081 $ 979 $ 971 $ 1,005
INTEREST SPREAD
Contribution of noninterest bearing sources of funds
NET INTEREST MARGIN
(a) Includes loans held for sale or securitization
60
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) Average Annualized Rate
- ----------------------------------------------------------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------
FIRST Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Earning Assets:
Loans(a):
Commercial 4.03% 4.45% 4.80% 4.94% 4.92%
Real estate -- commercial 6.25 6.46 6.57 6.81 6.90
Real estate -- residential 6.71 6.66 7.31 7.54 7.30
Home equity lines of credit 4.36 4.97 5.04 5.04 5.06
Credit card and other unsecured lines of credit 8.68 8.53 9.20 9.64 9.70
Other consumer 7.55 8.16 8.44 8.40 8.49
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 5.89 6.10 6.46 6.59 6.58
Securities available for sale, at cost:
Taxable 5.37 5.67 6.18 6.63 6.56
Tax-exempt 8.06 8.14 8.15 8.15 8.16
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 5.58 5.84 6.33 6.75 6.69
Federal funds sold, security resale
agreements and other investments 5.71 3.88 4.03 4.48 4.73
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets/total interest income/rates 5.86% 6.06% 6.42% 6.59% 6.58%
Allowance for loan losses
Fair value appreciation of securities
available for sale
Nonearning assets
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW and money market accounts 1.18% 1.37% 1.47% 1.48% 1.50%
Savings accounts .58 .71 .80 .85 .90
Consumer time deposits 3.86 4.00 4.16 4.38 4.59
Other deposits 1.42 1.73 1.89 1.86 1.87
Foreign deposits 1.42 1.62 1.87 1.91 1.88
Federal funds borrowed 1.59 1.83 2.25 2.32 2.24
Security repurchase agreements .73 0.95 1.08 1.07 1.07
Borrowed funds 1.38 1.50 1.59 1.66 1.55
Long-term debt and capital securities 2.33 2.44 3.06 3.07 3.25
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/
total interest expense/rates 1.96% 2.14% 2.46% 2.54% 2.57%
Noninterest bearing deposits
Accrued expenses and other liabilities
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
TOTAL STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
==================================================================================================================================
NET INTEREST INCOME
INTEREST SPREAD 3.90% 3.92% 3.96% 4.05% 4.01%
Contribution of noninterest bearing sources of funds .31 .34 .38 .37 .35
NET INTEREST MARGIN 4.21% 4.26% 4.34% 4.42% 4.36%
(a) Includes loans held for sale or securitization
61
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3484
(216) 222-2000
www.NationalCity.com
TRANSFER AGENT AND REGISTRAR
National City Bank
Corporate Trust Operations
Department 5352
P.O. Box 92301
Cleveland, Ohio 44193-0900
E-mail: shareholder.inquiries@nationalcity.com
Stockholders of record may access their accounts via the Internet to review
account holdings and transaction history through National City's StockAccess at
www.ncstockaccess.com. Stockholders can also download frequently used forms from
this Web site. For log-in assistance or other inquiries, call 1-800-622-6757.
INVESTOR INFORMATION
Betsy Figgie
Investor Relations
Department 2101
P.O. Box 5756
Cleveland, Ohio 44101-0756
1-800-622-4204
E-mail: investor.relations@nationalcity.com
WEB SITE ACCESS TO UNITED STATES SECURITIES AND EXCHANGE COMMISSION FILINGS
All reports filed electronically by National City Corporation with the United
States Securities and Exchange Commission (SEC), including the annual report on
Form 10-K, quarterly reports on Form 10-Q, and current event reports on Form
8-K, as well as any amendments to those reports, are accessible at no cost on
the Corporation's Web site at www.NationalCity.com/investorrelations. These
filings are also accessible on the SEC's Web site at www.sec.gov.
CORPORATE GOVERNANCE
National City's corporate governance practices are described in the following
documents, which are available on the Corporation's Web site or which may be
obtained in print form through the investor relations department: Corporate
Governance Guidelines, Code of Ethics, Code of Ethics for Senior Financial
Officers, Audit Committee Charter, Nominating and Board of Directors Governance
Committee Charter, and Compensation Committee Charter.
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.
The common stock of National City's 85%-owned payment 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.
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 National City shares in the open market by reinvesting
dividends and through optional cash payments. National City absorbs the fees and
brokerage commissions on shares acquired through the Plan. To obtain a Plan
prospectus and authorization card, please call 1-800-622-6757. The Plan
prospectus is also available on the Corporation's web site.
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 INVESTORS STANDARD
RATINGS 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 A/B
Certificates of
deposit AA Aa3 A+
Senior bank notes AA- Aa3 A+
Subordinated bank
notes A+ A1 A
- --------------------------------------------------------
62
FORM 10-Q -- MARCH 31, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL CITY CORPORATION
____________________________________________
(Registrant)
Date: May 14, 2003
/s/ DAVID A. DABERKO
--------------------------------------------
David A. Daberko
Chairman and Chief Executive Officer
/s/ JEFFREY D. KELLY
--------------------------------------------
Jeffrey D. Kelly
Executive Vice President and
Chief Financial Officer
63
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, David A. Daberko, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National City
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ DAVID A. DABERKO
------------------------------------
David A. Daberko
Chairman and Chief Executive Officer
64
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Jeffrey D. Kelly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National City
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ JEFFREY D. KELLY
------------------------------------
Jeffrey D. Kelly
Executive Vice President and Chief
Financial Officer
65
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 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).
3.2 National City Corporation First Restatement of By-laws
adopted April 27, 1987 (as Amended through October 28, 2002)
(filed as Exhibit 3.3 to Registrant's Quarterly Report on
Form 10-Q for the quarter and nine months ended September
30, 2002, and incorporated herein by reference).
4.1 The Registrant 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 Registrant.
10.1 National City Corporation 1989 Stock Option Plan (filed as
Exhibit 10.1).
10.2 National City Corporation's 1993 Stock Option Plan (filed as
Exhibit 10.5 to Registration Statement No. 33-49823 and
incorporated herein by reference).
10.3 National City Corporation 150th Anniversary Stock Option
Plan (filed as Exhibit 4 to Registrant's Form S-8
Registration Statement No. 33-58815 dated April 25, 1995,
and incorporated herein by reference).
10.4 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).
10.5 National City Corporation Supplemental Executive Retirement
Plan, as Amended and Restated July 1, 2002 (filed as Exhibit
10.7 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, and incorporated herein by
reference).
10.6 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).
10.7 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 10.7).
10.8 Central Indiana Bancorp Option Plan effective March 15, 1991
(filed as Exhibit 10.8).
10.9 Central Indiana Bancorp 1993 Option Plan effective October
12, 1993 (filed as Exhibit 10.9).
10.10 Form of contracts with David A. Daberko, 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, John D. Gellhausen, Herbert R.
Martens, Jr., Thomas W. Golonski, Stephen A. Stitle, James
R. Bell III, Peter E. Raskind, Philip L. Rice, Timothy J.
Lathe, Janis E. Lyons, J. Armando Ramirez, Paul G. Clark,
Shelley J. Seifert, and Ted M. Parker (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).
10.11 Split Dollar Insurance Agreement effective January 1, 1994,
between National City Corporation and certain key employees
(filed as Exhibit 10.11).
10.12 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 dated March 19, 1998, and
incorporated herein by reference).
10.13 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 dated March 19, 1998,
and incorporated herein by reference).
10.14 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 dated March 19, 1998,
and incorporated herein by reference).
10.15 National City Corporation 1997 Stock Option Plan as Amended
and Restated effective October 22, 2001 (filed as Exhibit
10.17 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, and incorporated herein
by reference).
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.16 National City Corporation 1997 Restricted Stock Plan as
Amended and Restated effective October 31, 2001 (filed as
Exhibit 10.18 to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001, and incorporated
herein by reference).
10.17 The National City Corporation Retention Plan for Executive
Officers effective April 22, 2002 (filed as Exhibit 10.19 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002, and incorporated herein by reference).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 National City Corporation Supplemental Cash Balance Pension
Plan as Amended and Restated effective November 1, 2001
(filed as Exhibit 10.25 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001, and
incorporated herein by reference).
10.24 The National City Corporation 2001 Stock Option Plan as
Amended and Restated effective October 22, 2001 (filed as
Exhibit 10.27 to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001, and incorporated
herein by reference).
10.25 National City Savings and Investment Plan No. 3 (filed as
Exhibit 4.3 to Registrant's Form S-8 Registration Statement
No. 333-61712 dated as of May 25, 2001, and incorporated
herein by reference).
10.26 Amendment No. 1 to the National City Savings and Investment
Plan No. 3 (filed as Exhibit 4.5 to Registrant's
Post-Effective Amendment No. 1 [on Form S-8] Registration
Statement No. 333-61712 and incorporated herein by
reference).
10.27 National City Corporation 2002 Restricted Stock Plan (filed
as Exhibit A to Registrant's Proxy Statement dated March 8,
2002, and incorporated herein by reference).
10.28 The National City Corporation Long-Term Deferred Share
Compensation Plan effective April 22, 2002 (filed as Exhibit
10.33 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, and incorporated herein by
reference).
10.29 The National City Corporation Deferred Compensation Plan as
Amended and Restated effective July 23, 2002 (filed as
Exhibit 10.34 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002, and incorporated herein
by reference).
10.30 Form of Agreement Not To Compete with David A. Daberko,
Robert G. Siefers and William E. MacDonald III (filed as
Exhibit 10.35 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002, and incorporated herein
by reference).
10.31 Visa(R) U.S.A. Inc. limited guaranty between National City
Corporation and Visa(R) U.S.A. Inc. dated August 6, 2002
(filed as Exhibit 10.36 to Registrant's Quarterly Report on
Form 10-Q for the quarter and nine months ended September
30, 2002, and incorporated herein by reference).
10.32 The National City Corporation Executive Savings Plan, as
Amended and Restated effective January 1, 2003 (filed as
Exhibit 10.32 to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, and incorporated
herein by reference).
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.33 The National City Corporation Savings and Investment Plan,
as Amended and Restated effective January 1, 2001 (filed as
Exhibit 10.33 to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, and incorporated
herein by reference).
10.34 The National City Corporation Savings and Investment Plan
No. 2, as Amended and Restated effective January 1, 2001
(filed as Exhibit 10.34 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, and
incorporated herein by reference).
10.35 Amendment No. 1 to the National City Savings and Investment
Plan, as Amended and Restated effective January 1, 2001
(filed as Exhibit 10.35 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, and
incorporated herein by reference).
10.36 Amendment No. 1 to the National City Savings and Investment
Plan No. 2, as Amended and Restated effective January 1,
2001 (filed as Exhibit 10.36 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2002,
and incorporated herein by reference).
10.37 Amendment No. 1 to the Split Dollar Insurance Agreement
effective January 1, 2003 (filed as Exhibit 10.37 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, and incorporated herein by
reference).
10.38 Credit Agreement dated as of April 12, 2001, by and between
National City and the banks named therein (filed as Exhibit
4.2 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001, and incorporated herein by
reference) and the Assumption Agreement dated June 11, 2002
(filed as Exhibit 4.2 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, and
incorporated herein by reference).
10.39 MasterCard International Incorporated limited guaranty
between National City Corporation and MasterCard
International Incorporated dated April 30, 2003 (filed as
exhibit 10.39).
12.1 Computation of Ratio of Earnings to Fixed Charges (filed as
Exhibit 12.1).
99.1 Chief Executive Officer 906 Certification dated May 14, 2003
for National City Corporation's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003 (filed as Exhibit
99.1).
99.2 Chief Financial Officer 906 Certification dated May 14, 2003
for National City Corporation's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003 (filed as Exhibit
99.2).