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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, 2004
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, 2004 -- 621,314,779
[NATIONAL CITY LOGO]
QUARTER ENDED MARCH 31, 2004
FINANCIAL REPORT
AND FORM 10-Q
FINANCIAL REPORT AND FORM 10-Q
QUARTER ENDED MARCH 31, 2004
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. These filings are also accessible on the SEC's Web site at
www.sec.gov.
TABLE OF CONTENTS
PART I-- FINANCIAL INFORMATION Page
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 45
Consolidated Average Balance Sheets 65
Daily Average Balances/Net Interest Income/Rates 66
Item 3. Quantitative and Qualitative Disclosures About Market Risk 69
Item 4. Controls and Procedures 69
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 69
Item 2. Changes in Securities and Use of Proceeds 69
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 70
Signatures 75
2
PART I - FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Amounts) 2004 2003
------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31
Tax-equivalent net interest income $ 1,025,157 $ 1,100,728
Provision for loan losses 82,507 200,233
Fees and other income 1,117,558 1,103,316
Securities gains, net 139 170
Noninterest expense 986,340 1,008,866
Income tax expense and tax-equivalent adjustment 363,639 351,612
------------------------------------------------------------------------------------------------------
Net income $ 710,368 $ 643,503
======================================================================================================
Net income per common share
Basic $1.17 $1.05
Diluted 1.16 1.05
Dividends paid per common share .32 .305
Return on average common equity 29.58% 30.60%
Return on average assets 2.61 2.24
Net interest margin 4.16 4.21
Efficiency ratio 46.03 45.77
Average equity to average assets 8.83 7.33
Annualized net charge-offs to average portfolio
loans .42 .95
Average shares
Basic 605,916,791 611,521,806
Diluted 612,596,633 615,578,784
------------------------------------------------------------------------------------------------------
AT MARCH 31
Assets $111,355,060 $117,494,256
Portfolio loans 79,927,248 74,932,986
Loans held for sale or securitization 12,478,020 21,740,191
Securities, at fair value 6,880,816 8,464,144
Deposits 67,213,234 65,897,280
Stockholders' equity 9,854,111 8,587,163
Book value per common share $16.25 $14.05
Market value per common share 35.58 27.85
Equity to assets 8.85% 7.31%
Allowance for loan losses as a percentage of
period-end portfolio loans 1.41 1.51
Nonperforming assets to period-end
portfolio loans and other nonperforming assets .76 1.10
Common shares outstanding 606,559,564 610,971,942
Full-time equivalent employees 33,036 32,633
------------------------------------------------------------------------------------------------------
3
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
---------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts) 2004 2003
---------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 1,249,107 $ 1,398,244
Securities:
Taxable 69,293 96,976
Exempt from Federal income taxes 8,199 8,564
Dividends 4,206 5,192
Federal funds sold and security resale agreements 729 504
Other investments 12,404 10,516
---------------------------------------------------------------------------------------------------------
Total interest income 1,343,938 1,519,996
INTEREST EXPENSE
Deposits 188,545 244,351
Federal funds borrowed and security
repurchase agreements 18,004 41,585
Borrowed funds 2,958 8,998
Long-term debt and capital securities 115,804 131,771
---------------------------------------------------------------------------------------------------------
Total interest expense 325,311 426,705
---------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 1,018,627 1,093,291
PROVISION FOR LOAN LOSSES 82,507 200,233
---------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 936,120 893,058
NONINTEREST INCOME
Mortgage banking revenue 579,398 630,733
Deposit service charges 147,353 134,736
Payment processing revenue 121,619 105,411
Trust and investment management fees 75,576 69,359
Card-related fees 37,130 41,081
Brokerage revenue 32,252 24,476
Other 124,230 97,520
---------------------------------------------------------------------------------------------------------
Total fees and other income 1,117,558 1,103,316
Securities gains, net 139 170
---------------------------------------------------------------------------------------------------------
Total noninterest income 1,117,697 1,103,486
NONINTEREST EXPENSE
Salaries, benefits, and other personnel 548,891 561,162
Equipment 69,477 64,692
Net occupancy 59,959 58,356
Third-party services 68,364 65,544
Card processing 57,543 52,326
Marketing and public relations 22,260 17,312
Other 159,846 189,474
---------------------------------------------------------------------------------------------------------
Total noninterest expense 986,340 1,008,866
---------------------------------------------------------------------------------------------------------
Income before income tax expense 1,067,477 987,678
Income tax expense 357,109 344,175
---------------------------------------------------------------------------------------------------------
NET INCOME $ 710,368 $ 643,503
=========================================================================================================
NET INCOME PER COMMON SHARE
Basic $1.17 $1.05
Diluted 1.16 1.05
AVERAGE COMMON SHARES OUTSTANDING
Basic 605,916,791 611,521,806
Diluted 612,596,633 615,578,784
=========================================================================================================
See Notes to Consolidated Financial Statements
4
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2004 2003 2003
----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and demand balances due from banks $ 3,386,459 $ 3,595,706 $ 3,767,425
Federal funds sold and security resale agreements 355,240 162,347 68,616
Securities available for sale, at fair value 6,880,816 6,865,616 8,464,144
Other investments 505,183 830,887 498,148
Loans held for sale or securitization:
Commercial 7,300 16,300 12,591
Mortgage 12,470,720 14,497,277 21,727,600
Automobile -- 853,982 --
----------------------------------------------------------------------------------------------------------------------------
Total loans held for sale or securitization 12,478,020 15,367,559 21,740,191
Portfolio loans:
Commercial 19,017,015 19,164,326 22,824,571
Commercial construction 2,188,177 2,289,429 2,304,061
Real estate -- commercial 9,893,169 9,827,877 9,507,893
Real estate -- residential 27,199,655 27,393,711 21,820,145
Home equity lines of credit 12,008,704 10,950,356 8,393,176
Credit card and other unsecured lines of credit 2,234,590 2,324,198 2,023,065
Other consumer 7,385,938 7,328,956 8,060,075
----------------------------------------------------------------------------------------------------------------------------
Total portfolio loans 79,927,248 79,278,853 74,932,986
Allowance for loan losses (1,125,660) (1,125,329) (1,128,249)
----------------------------------------------------------------------------------------------------------------------------
Net portfolio loans 78,801,588 78,153,524 73,804,737
Properties and equipment 1,137,896 1,125,526 1,032,617
Other real estate owned 92,331 99,418 115,739
Mortgage servicing assets 1,199,918 1,298,417 813,312
Goodwill 1,103,340 1,103,340 1,078,281
Other intangible assets 56,336 62,475 69,193
Derivative assets 1,550,552 1,349,259 1,469,869
Accrued income and other assets 3,807,381 3,919,386 4,571,984
----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $111,355,060 $113,933,460 $117,494,256
============================================================================================================================
LIABILITIES
Deposits:
Noninterest bearing $ 16,988,347 $ 16,585,367 $ 16,878,935
NOW and money market 27,767,329 26,849,261 24,361,618
Savings 2,425,914 2,353,721 2,437,801
Consumer time 12,848,588 13,133,909 14,179,957
Other 972,734 924,969 2,945,649
Foreign 6,210,322 4,082,803 5,093,320
----------------------------------------------------------------------------------------------------------------------------
Total deposits 67,213,234 63,930,030 65,897,280
Federal funds borrowed and security repurchase agreements 9,220,268 6,693,916 12,744,562
Borrowed funds 1,381,465 6,615,460 1,735,932
Long-term debt 19,372,323 23,480,724 23,792,172
Junior subordinated debentures owed to unconsolidated
subsidiary trusts 185,568 185,568 --
Corporation-obligated mandatorily redeemable capital securities of
subsidiary trusts holding solely debentures of the Corporation -- -- 180,000
Derivative liabilities 844,178 875,737 989,625
Accrued expenses and other liabilities 3,283,913 2,823,354 3,567,522
----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 101,500,949 104,604,789 108,907,093
============================================================================================================================
STOCKHOLDERS' EQUITY
Preferred stock, no par value, authorized 5,000,000
shares, no shares outstanding -- -- --
Common stock, par value $4 per share, authorized 1,400,000,000
shares, outstanding 606,559,564 shares, 605,996,120 shares,
and 610,971,942, respectively 2,426,239 2,423,985 2,443,888
Capital surplus 1,182,405 1,116,279 1,002,194
Retained earnings 6,176,988 5,723,720 5,085,060
Accumulated other comprehensive income 68,479 64,687 56,021
----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,854,111 9,328,671 8,587,163
----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $111,355,060 $113,933,460 $117,494,256
============================================================================================================================
See Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
-----------------------------------------------------------------------------------------------------------------------------
(In Thousands) 2004 2003
-----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 710,368 $ 643,503
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 82,507 200,233
Depreciation and amortization of properties and equipment 51,047 46,525
Amortization of intangible assets and mortgage servicing assets 106,036 131,106
Accretion of premiums and discounts on securities and debt (610) (11,237)
Mortgage servicing asset impairment (recoveries) charges 118,122 (99,617)
Ineffective hedge and other derivative gains, net (504,527) (200,600)
Securities gains, net (139) (170)
Gains on loans sold or securitized, net (150,242) (87,584)
Other (gains) losses, net (5,243) 52,550
Originations and purchases of loans held for sale or securitization (18,389,795) (25,520,062)
Principal payments on and proceeds from sales of loans held for sale or securitization 19,990,777 27,194,016
Decrease in accrued interest receivable 40,272 17,805
Decrease in accrued interest payable (17,755) (30,384)
Other operating activities, net 1,341,469 861,743
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,372,287 3,197,827
-----------------------------------------------------------------------------------------------------------------------------
LENDING AND INVESTING ACTIVITIES
Net decrease in federal funds sold, security resale agreements, and other investments 132,811 438,726
Purchases of available-for-sale securities (582,978) (825,446)
Proceeds from sales of available-for-sale securities 18,890 334,245
Proceeds from maturities, calls, and prepayments of available-for-sale securities 667,723 1,201,831
Net increase in loans (809,400) (2,747,497)
Proceeds from sales or securitizations of loans 867,180 142,852
Net increase in properties and equipment (61,795) (40,519)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) lending and investing activities 232,431 (1,495,808)
-----------------------------------------------------------------------------------------------------------------------------
DEPOSIT AND FINANCING ACTIVITIES
Net increase in deposits 3,282,726 785,481
Net increase in federal funds borrowed and security repurchase agreements 2,526,352 6,216,304
Net decrease in borrowed funds (5,233,995) (9,757,977)
Repayments of long-term debt (5,050,718) (2,490,367)
Proceeds from issuances of long-term debt, net 850,000 3,761,777
Dividends paid (194,479) (186,574)
Issuances of common stock 81,551 17,965
Repurchases of common stock (75,402) (37,629)
-----------------------------------------------------------------------------------------------------------------------------
Net cash used in deposit and financing activities (3,813,965) (1,691,020)
-----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and demand balances due from banks (209,247) 10,999
Cash and demand balances due from banks, January 1 3,595,706 3,756,426
-----------------------------------------------------------------------------------------------------------------------------
CASH AND DEMAND BALANCES DUE FROM BANKS, MARCH 31 $ 3,386,459 $ 3,767,425
=============================================================================================================================
SUPPLEMENTAL INFORMATION
Cash paid for:
Interest $ 343,066 $ 457,089
Income taxes 101,857 234,262
Noncash items:
Transfers of loans to other real estate 67,054 43,257
-----------------------------------------------------------------------------------------------------------------------------
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, 2003 $ -- $2,445,966 $ 989,346 $4,658,565 $67,180 $8,161,057
Comprehensive income:
Net income 643,503 643,503
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 632,344
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
==================================================================================================================================
Balance, January 1, 2004 $ -- $2,423,985 $1,116,279 $5,723,720 $64,687 $9,328,671
Comprehensive income:
Net income 710,368 710,368
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 17,310 17,310
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 (13,518) (13,518)
------------
Total comprehensive income 714,160
Common dividends declared, $.32 per share (194,479) (194,479)
Issuance of 2,747,444 common shares under
stock-based compensation plans, including
related tax effects 10,990 70,561 81,551
Repurchase of 2,184,000 common shares (8,736) (4,045) (62,621) (75,402)
Other (390) (390)
==================================================================================================================================
BALANCE, MARCH 31, 2004 $ -- $2,426,239 $1,182,405 $6,176,988 $68,479 $9,854,111
==================================================================================================================================
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 branch bank network in Ohio, Indiana, Illinois, Kentucky, Michigan,
and Pennsylvania, and also conducts selected consumer lending businesses and
other financial services on a nationwide basis. 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 unaudited consolidated financial statements include the
accounts of the Corporation and its consolidated subsidiaries. All significant
intercompany transactions and balances have been eliminated. Certain prior
period amounts have been reclassified to conform with the current period
presentation and have been restated to reflect changes in the Corporation's
method of assessing effectiveness of its hedging activities pursuant to
Statement of Financial Accounting Standards No. 133, Accounting for Derivatives
and Hedging Activities.
CONSOLIDATION: Accounting Research Bulletin No. 51 (ARB 51), Consolidated
Financial Statements, requires a company's consolidated financial statements
include subsidiaries in which the company has a controlling financial interest.
This requirement usually has been applied to subsidiaries in which a company has
a majority voting interest. Investments in companies in which the Corporation
controls operating and financing decisions (principally defined as owning a
voting or economic interest greater than 50%) are consolidated. 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.
7
The voting interest approach defined in ARB 51 is not applicable in identifying
controlling financial interests in entities that are not controllable through
voting interests or in which the equity investors do not bear the residual
economic risks. In such instances, Financial Accounting Standards Board (FASB)
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities
(VIE), indicates when a company should include in its financial statements the
assets, liabilities and activities of another entity. In general, a VIE is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either does not have equity investors with voting rights or has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires a VIE to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
VIE's activities or entitles it to receive a majority of the entity's residual
returns or both. A company that consolidates a VIE is called the primary
beneficiary of that entity. The Corporation's consolidated financial statements
include the assets, liabilities and activities of VIEs for which it is deemed to
be the primary beneficiary.
The Corporation uses special-purpose entities (SPEs), primarily securitization
trusts, to diversify its funding sources. 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.
Where the Corporation is a transferor of assets to an SPE, the assets sold to
the SPE are no longer recorded on the 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 an SPE meets the definition of a
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 balance
sheet. Further discussion regarding these securitization trusts is included in
Note 5.
USE OF ESTIMATES: 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 2003 Annual Report on Form 10-K (Form 10-K). These
financial statements may not include all information and notes 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.
STATEMENT OF CASH FLOWS: Cash and demand balances due from banks are considered
"cash and cash equivalents" for financial reporting purposes.
BUSINESS COMBINATIONS: Business combinations are accounted for under the
purchase method of accounting. 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. Refer to Note 3 for further discussion on the
Corporation's acquisition activity.
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
8
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.
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, except for residential real estate loans, 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.
The Corporation, through its subsidiary National City Mortgage Co. (NCMC), sells
mortgage loans to the Government National Mortgage Association (GNMA) in the
normal course of business and retains the servicing rights. The GNMA programs
under which the loans are sold allow the Corporation to repurchase individual
delinquent loans that meet certain criteria from the securitized pool. At the
Corporation's option, and without GNMA's prior authorization, the Corporation
may repurchase the delinquent loan for an amount equal to 100 percent of the
remaining principal balance of the loan. Under SFAS 140, once the Corporation
has the unconditional ability to repurchase the delinquent loan, the Corporation
is deemed to have regained effective control over the loan and is required to
recognize the loan on its balance sheet and record an offsetting liability,
regardless of the Corporation's intent to repurchase the loan. As of March 31,
2004, residential real estate portfolio loans included $216 million of loans
available for repurchase under the GNMA optional repurchase programs with the
offsetting liability recorded within other borrowed funds.
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.
9
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 historical losses used in the migration analysis may not be
representative of actual unrealized losses inherent in the portfolio.
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 loan obligations. 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 OREO are recognized in noninterest expense on the date of sale.
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 losses on the income statement. Interest on trading account
securities is recorded in interest income. As of March 31, 2004, December 31,
2003, and March 31, 2003, trading account securities totaled $22 million, $22
million, and $24 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. National City held no
securities classified as held to maturity at March 31, 2004, December 31, 2003
or March 31, 2003.
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 comprised primarily of bank
and thrift common stock investments (bank stock fund), are determined using the
specific-identification method. The Corporation utilizes 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
investments in this fund are managed. 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
funds, 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 funds managed by third-party general partners 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.
Interest and dividends on principal investments are recorded in interest income
on the statement of income. Principal investment fee income, fair value
adjustments, realized gain and losses on the return of capital, and principal
investment write-offs are recognized in other noninterest income.
10
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 is obtained or
requested to be returned as 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. Goodwill is
tested at least annually for impairment. Intangible assets which have finite
lives are amortized over their estimated useful lives on a straight-line basis
not exceeding 10 years, and are subject to impairment testing. Note 10 includes
a summary of goodwill and other intangible assets.
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 Federal Deposit
Insurance Corporation (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. Legal
opinions were also obtained for the automobile loan securitization transactions
in 2004 and 2002, which were structured as two-step securitizations. While
noting each of these transactions fall 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 obtained for each of
these transactions 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
11
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.
Retained interests in the subordinated tranches and interest-only strips are
recorded at their fair value and included in the available-for-sale or trading
securities portfolio. Retained interests in the credit card and automobile loan
securitizations are classified as available-for-sale securities. Retained
interests in the SBA securitizations are classified as trading securities and
are included in other investments on the consolidated balance sheet. Subsequent
adjustments to the fair value of retained interests classified as
available-for-sale are 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. Fair value adjustments and
other-than-temporary adjustments to retained interests classified as trading
securities are recorded in other noninterest income on the income statement. 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.
12
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 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. 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 sells mortgage loans in the secondary
market and typically retains the right to service the loans sold. Upon sale, a
mortgage servicing right (MSR) asset is established, which represents the then
current fair value of future net cash flows expected to be realized for
performing the servicing activities. MSRs, when purchased, are initially
recorded at cost. MSRs are carried at the lower of the initial capitalized
amount, net of accumulated amortization and hedge accounting adjustments, or
fair value. Certain MSRs hedged with derivative instruments as part of SFAS 133
hedge relationships may be adjusted above their initial carrying value. Changes
in fair value resulting from the application of hedge accounting become part of
the carrying values of MSRs.
The fair value of MSRs 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 MSRs. 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 MSRs,
mortgage interest 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. Servicing
fees, net of amortization, impairment, and related derivative gains and losses
are recorded in mortgage banking revenue on the income statement.
13
The carrying values of MSRs (initial capitalized amount, net of accumulated
amortization and hedge accounting adjustments) are amortized in proportion to,
and over the period of, estimated net servicing income.
MSRs are evaluated for impairment in accordance with SFAS 140. For purposes of
determining impairment, the MSRs are stratified by certain risk characteristics,
primarily loan type and note rate. If temporary impairment exists within a risk
stratification tranche, a valuation allowance is established through a charge to
income equal to the amount by which the carrying value, including hedge
accounting adjustments, exceeds the fair value. If it is later determined all or
a portion of the temporary impairment no longer exists for a particular tranche,
the valuation allowance is reduced through a recovery of income.
MSRs are also reviewed for other-than-temporary impairment. Other-than-temporary
impairment exists when the recoverability of a recorded valuation allowance is
determined to be remote taking into consideration historical and projected
interest rates and loan pay-off activity. When this situation occurs, the
unrecoverable portion of the valuation allowance is applied as a direct
write-down to the carrying value of the MSRs. Unlike a valuation allowance, a
direct write-down permanently reduces the carrying value of the MSR and the
valuation allowance, precluding subsequent recoveries.
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 to all awards granted to
employees after January 1, 2003. Compensation expense for option awards granted
subsequent to January 1, 2003 were 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 market price 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 and 2004 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.
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 83%-owned payment
processing subsidiary, National Processing, Inc., on its common stock.
-----------------------------------------------------------------------------------------
Three Months Ended
March 31
-----------------------------------------------------------------------------------------
(In Thousands, Except Per Share Amounts) 2004 2003
-----------------------------------------------------------------------------------------
Net income, as reported $710,368 $643,503
Add: option expense included in reported
net income, net of related tax effects
National City common stock 3,970 316
National Processing common stock 103 --
Less: total option expense determined under
fair value method for all option awards, net
of related tax effects
National City common stock (8,903) (11,174)
National Processing common stock (1,294) (1,675)
-----------------------------------------------------------------------------------------
PRO FORMA NET INCOME $704,244 $630,970
-----------------------------------------------------------------------------------------
Pro forma net income per share:
Basic-- as reported $1.17 $1.05
Basic-- pro forma 1.16 1.03
Diluted-- as reported 1.16 1.05
Diluted-- pro forma 1.15 1.03
=========================================================================================
The fair values 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:
14
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Three Months Ended
March 31
-----------------------------------------------------------------------------------------
2004 2003
-----------------------------------------------------------------------------------------
Risk-free interest rate 3.1% 3.4%
Expected dividend yield 3.9 4.5
Expected volatility 27.0 27.1
Expected option life (in years) 5 5
Weighted-average grant-date fair value of options $6.32 $4.89
=========================================================================================
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
LOAN COMMITMENTS: On March 9, 2004, the SEC issued Staff Accounting Bulletin
(SAB) 105, "Application of Accounting Principles to Loan Commitments" stating
that the fair value of loan commitments is to be accounted for as a derivative
instrument under SFAS 133, but the valuation of such commitment should not
consider expected future cash flows related to servicing of the future loan. The
Corporation has historically valued its loan commitments including the change in
value of expected future cash flows related to servicing.
The Corporation adopted the provisions of SAB 105 as of January 1, 2004. The
impact was to decrease mortgage banking revenue by $59 million for the three
months ended March 31, 2004. This change in accounting may result in increased
volatility in earnings in the future as changes in the value of derivative
instruments utilized to hedge the loan commitments will continue to be reported
currently in earnings, while offsetting changes in certain components of the
fair value of the loan commitment will not be recognized until the loan is
closed or is sold.
ACCOUNTING FOR CERTAIN LOANS OR DEBT SECURITIES ACQUIRED IN A TRANSFER: In
December 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
SOP 03-3 addresses the accounting for acquired loans that show evidence of
having deteriorated in terms of credit quality since their origination (i.e.
impaired loans). This SOP states that acquired loans should be recorded at their
fair value defined as the present value of future cash flows. An allowance for
loan losses would not be recognized at acquisition as credit losses would be
considered in future cash flows. Subsequent increases in expected cash flows
would be accounted for as a change in estimate of the accretable yield on a
prospective basis. Subsequent decreases in cash flows would be accounted for as
a loss contingency in the current period. SOP 03-03 is effective for loans that
are acquired in fiscal years beginning after December 15, 2004. Management will
continue to evaluate the applicability of this SOP for prospective acquisitions.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS: In
December 2003, the FASB revised SFAS 132 Employers' Disclosures about Pensions
and Other Postretirement Benefits. This Statement retains the disclosures
required by the original SFAS 132 and requires additional disclosures about the
assets, obligations, cash flows and net periodic benefit cost of defined benefit
pension and postretirement plans. In addition, this Statement requires interim
period disclosure of the components of net period benefit cost and contributions
if significantly different from previously reported amounts. See Note 21 for the
interim financial statement disclosures made pursuant to this statement.
15
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY: In May 2003, the Financial Accounting Standards Board
(FASB) issued SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This statement establishes
standards for classifying and measuring certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity. The provisions of SFAS 150 became effective June 1, 2003, for all
financial instruments created or modified after May 31, 2003, and otherwise
became effective as of July 1, 2003. The adoption of this standard did not have
a material impact on financial condition, the results of operations, or
liquidity.
In December 2003, the FASB deferred for an indefinite period the application of
the guidance in SFAS 150 to noncontrolling interests that are classified as
equity in the financial statements of a subsidiary but would be classified as a
liability in the parent's financial statements under SFAS 150. The deferral is
limited to mandatorily redeemable noncontrolling interests associated with
finite-lived subsidiaries. Management does not believe any such applicable
entities exist as of March 31, 2004, but will continue to evaluate the
applicability of this deferral to entities which may be consolidated as a result
of FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB issued
FIN 46, which 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, or the right to receive the expected residual returns of
the entity if they occur.
During the third quarter of 2003, the Corporation applied the provisions of FIN
46 to two wholly-owned subsidiary trusts that issued capital securities to
third-party investors and to certain direct and indirect interests in investment
partnerships. The application of FIN 46 resulted in the deconsolidation of the
two wholly-owned subsidiary trusts. The assets and liabilities of the subsidiary
trusts that were deconsolidated totaled $189 million and $183 million,
respectively. See Note 14 for further discussion of these trusts and the
Corporation's related obligations. The application of FIN 46 to certain direct
and indirect interests in investment partnerships resulted in the consolidation
of assets and liabilities each totaling $73 million. Of the total $73 million of
liabilities consolidated, $72 million represented amounts owed to minority
ownership interests.
In December 2003, the FASB reissued FIN 46 with certain modifications and
clarifications. Application of this guidance was effective for interests in
certain VIEs commonly referred to as special-purpose entities (SPEs) as of
December 31, 2003. Application for all other types of entities was required as
of March 31, 2004, unless previously applied.
Management evaluated the applicability of the revised FIN 46 to various other
investments and interests as of March 31, 2004, including low-income housing
partnership interests, historic tax credit partnerships, investments in certain
real estate projects, leveraged leasing structures, and certain trust accounts
to determine whether these entities are VIEs and whether the Corporation is
either a primary beneficiary or a significant interest holder in the VIE.
The impact of adopting the revised FIN 46 as of March 31, 2004 is described
below.
National City invests in low-income housing and historic tax credit projects
primarily through its subsidiary, National City Community Development
Corporation for the purpose of providing a source of private sector financing
for projects to promote economic development, create employment opportunities
and contribute to the enhancement of the community. Investments principally
consist of real estate projects and venture/working capital. The Corporation
accounts for these partnership investments under the equity method of
accounting, with a carrying value of $295 million at March 31, 2004. As a
limited partner in these projects, National City is allocated tax credits and
deductions associated with the underlying projects. The adoption of FIN 46 as of
March 31, 2004, resulted in the consolidation of one low-income housing project
with assets and liabilities each totaling $7 million. The Corporation also holds
significant interests in other low-income housing and historic tax credit
projects in which the maximum exposure to loss would be limited to the initial
capital investment contributed.
The Investment Real Estate (IRE) group, a business unit within the Wholesale
Banking line of business, delivers financial services to real estate investors
and developers. National City receives origination fees and fees for credit
administration services. IRE primarily originates collateralized and guaranteed
loan facilities for the acquisition and development of land, construction, and
semi-permanent financing. Property types include multi-family and single family
residential, retail, office, commercial and industrial property. In many cases,
these loans represent variable interests in a VIE of which National City
determined it is not the primary beneficiary. The Corporation's maximum exposure
to loss is mitigated by the underlying collateral and guarantees.
16
3. ACQUISITIONS
On April 9, 2004, the National City Corporation completed its acquisition of
Allegiant Bancorp, Inc., (Allegiant) a bank-holding company operating 35 banking
offices in the St. Louis, Missouri metropolitan area. The acquisition of
Allegiant allows the Corporation to expand its product offerings and delivery
channels into the St. Louis market. Under the terms of the merger, each share of
Allegiant common stock was exchanged for .833 shares of National City common
stock, $27.25 in cash, or a combination of cash and stock, resulting in the
issuance of approximately 14 million shares of National City common stock and
cash of $23 million. The total cost of the transaction was $492 million. The
common shares issued were valued at $32.42 per share, representing an average of
closing market prices for two days before, after, and including the date the
merger terms were agreed to and announced. The assets and liabilities of
Allegiant were recorded on the balance sheet at their respective fair values as
of the closing date. The results of Allegiant's operations will be included in
National City's income statement from the date of acquisition. As this
transaction was completed subsequent to the first quarter, the accompanying
financial statements as of and for the period ending March 31, 2004 do not
include the effect of this acquisition.
Total intangible assets of $344 million were recorded based upon the purchase
price, the fair values of the acquired net assets, and other purchase accounting
adjustments recorded as of April 9, 2004. Of this amount, $33 million was
allocated to core deposit intangibles and $5 million was allocated to noncompete
agreements. Core deposit intangibles will be amortized based upon an accelerated
method not to exceed 10 years. The remaining amount of the intangible assets,
$306 million, was recorded as goodwill. Goodwill recognized in the Allegiant
acquisition will not be deductible for income tax purposes.
The following tables summarize the estimated fair values of Allegiant's net
assets acquired on April 9, 2004, and the computation of the purchase price and
goodwill related to the Allegiant acquisition.
- ----------------------------------------------------------------------------------------------
(In Thousands) April 9, 2004
- ----------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 33,547
Securities 346,049
Loans, net of allowance for loan losses 1,957,149
Premises and other equipment 40,666
Goodwill and other intangibles 344,326
Other assets 92,762
- ----------------------------------------------------------------------------------------------
Total Assets 2,814,499
Liabilities
Deposits 1,789,972
Borrowings 497,805
Other liabilities 34,628
- ----------------------------------------------------------------------------------------------
Total Liabilities 2,322,405
- ----------------------------------------------------------------------------------------------
NET ASSETS ACQUIRED $ 492,094
==============================================================================================
- ----------------------------------------------------------------------------------------------
(In Thousands) April 9, 2004
- ----------------------------------------------------------------------------------------------
Purchase Price $ 492,094
Allegiant stockholders equity on April 9, 2004 (142,647)
- ----------------------------------------------------------------------------------------------
Excess of purchase price over carrying value of net assets acquired 349,447
Purchase accounting adjustments
Securities 1,765
Portfolio loans (54,356)
Premises and equipment 3,524
Deposits 397
Borrowings 17,250
Severance and other 3,242
Deferred tax liabilities 23,057
- ----------------------------------------------------------------------------------------------
Total tangible assets 344,326
- ----------------------------------------------------------------------------------------------
Core deposit intangibles (33,671)
Other intangibles (4,982)
- ----------------------------------------------------------------------------------------------
GOODWILL $ 305,673
==============================================================================================
17
The fair values used to value Allegiant's assets and liabilities, including
identifiable intangible assets, are preliminary and subject to refinement as
better information becomes available. Any subsequent adjustments to the fair
values of assets and liabilities acquired, identifiable intangible assets, or
other purchase accounting adjustments will result in adjustments to goodwill.
In February 2004, the Corporation signed a definitive agreement to acquire
Provident Financial Group, Inc. (Provident), a $17 billion asset bank holding
company operating 65 banking offices in the Cincinnati and Dayton, Ohio markets.
Under the terms of the purchase agreement, Provident shareholders will receive
1.135 shares of National City common stock for each share of Provident common
stock in a tax-free exchange. Based upon the most recent market price for
National City common stock, the transaction has a total indicated value of
approximately $2.1 billion. Completion of this transaction is subject to
shareholder and regulatory approvals and is expected to occur around mid-year.
4. RESTRUCTURING CHARGES
During the first quarter of 2003, the Corporation implemented various
cost-reduction initiatives and recognized severance and related charges of $72
million. Of the total charge recognized in the first quarter of 2003, $68
million was recorded to salaries, benefits, and other personnel expense and was
associated with a voluntary retirement program and position eliminations across
all lines of business. The remaining $4 million was recorded to third-party
services expense for outplacement services.
A rollforward of the severance liability for the three months ended March 31,
2004 and 2003 is presented in the table below. The table below also includes
severance expenses incurred in the normal course of business. Except for
severance charges incurred by the National Processing line of business, all
other severance and related termination expenses were recorded as unallocated
corporate charges within the Parent and Other category.
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2004 Three Months Ended March 31, 2003
- ----------------------------------------------------------------------------------------------------------------------------
PARENT AND NATIONAL Parent and National
(In Thousands) OTHER PROCESSING TOTAL Other Processing Total
- ----------------------------------------------------------------------------------------------------------------------------
Beginning balance $14,154 $1,773 $ 15,927 $13,895 $3,141 $ 17,036
Severance and related charges
and adjustments 3,333 54 3,387 71,737 30 71,767
Payments and adjustments (5,732) (372) (6,104) (15,379) (955) (16,334)
- ----------------------------------------------------------------------------------------------------------------------------
ENDING BALANCE $11,755 $1,455 $ 13,210 $70,253 $2,216 $ 72,469
============================================================================================================================
5. SECURITIZATION ACTIVITY
The Corporation periodically sells assets through securitization transactions.
On February 25, 2004, the Corporation established the National City Auto
Receivables Trust 2004-A into which it sold, through securitization, $890
million of fixed-rate, closed-end automobile loans. A pretax gain of $9 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 $32
million, $46 million, and $1 million, respectively. In addition, a servicing
asset was established in the amount of $10 million. See Note 1 for further
details regarding the accounting for servicing assets.
During 2003, the Corporation securitized five pools of Small Business
Administration (SBA) loans totaling $52 million, and recognized retained
interests in the form of interest-only strips with an initial carrying value of
approximately $4 million. The SBA loans securitized were sold servicing released
and transaction costs were expensed in conjunction with the sale.
A summary of the assumptions used to value the credit card retained interests
and automobile retained interests and servicing asset at the time of
securitizations were as follows:
--------------------------------------------------------------------------------------------------------------------------
Weighted- Variable Monthly Expected
Average Annual Principal Annual Annual
Life Coupon Rate Repayment Credit Discount
(in months) to Investors Rate Losses Rate Yield
--------------------------------------------------------------------------------------------------------------------------
CREDIT CARD:
Series 2000-1 5.5 6.86% 18.08% 4.17% 15.00% 14.43%
Series 2001-1 5.6 6.06 17.79 4.08 15.00 14.77
Series 2002-1 5.7 2.06 17.41 5.34 15.00 11.99
--------------------------------------------------------------------------------------------------------------------------
18
- -----------------------------------------------------------------------------------------------------------------------------
Weighted- Monthly Expected
Average Prepayment Cumulative Annual Weighted-
Life Speed Credit Discount Average
(in months) (% ABS) Losses Rate Coupon
- -----------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE:
Series 2002-A
Interest only strip 22.9 1.40% 2.25% 12.00% 8.71%
Servicing asset 22.9 1.40 2.25 12.00 8.71
Series 2004-A
Interest only strip 21.8 1.50% 1.75% 12.00% 6.79%
Servicing asset 21.8 1.50 1.75 11.00 6.79
=============================================================================================================================
A summary of the components of managed loans, representing 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, 2004 THREE MONTHS ENDED MARCH 31, 2004
----------------------------------------------------------------------------------
PRINCIPAL LOANS PAST DUE AVERAGE NET CREDIT
(In Millions) BALANCE 30 DAYS OR MORE BALANCES LOSSES
- ---------------------------------------------------------------------------------------------------------------------
Type of loan:
Credit card $2,474.1 $ 94.0 $2,533.6 $37.8
Automobile 4,099.0 56.8 4,198.9 11.9
SBA 41.8 11.1 31.9 --
- ---------------------------------------------------------------------------------------------------------------------
Total loans managed or
securitized 6,614.9 161.9 6,764.4 49.7
Less:
Loans securitized:
Credit card 1,450.0 46.8 1,450.0 17.2
Automobile 1,265.1 11.3 1,012.0 2.1
SBA 41.8 11.1 31.9 --
Loans held for securitization:
Automobile -- -- 529.8 --
- ---------------------------------------------------------------------------------------------------------------------
LOANS HELD IN PORTFOLIO $3,858.0 $ 92.7 $3,740.7 $30.4
=====================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------
As of March 31, 2003 Three Months Ended March 31, 2003
----------------------------------------------------------------------------------
Principal Loans Past Due Average Net Credit
(In Millions) Balance 30 Days or More Balances Losses
- ---------------------------------------------------------------------------------------------------------------------
Type of loan:
Credit card $2,365.8 $95.8 $2,382.2 $27.7
Automobile 4,325.6 70.7 4,368.8 13.2
SBA 39.6 1.4 25.8 --
- ---------------------------------------------------------------------------------------------------------------------
Total loans managed or
securitized 6,731.0 167.9 6,776.8 40.9
Less:
Loans securitized:
Credit card 1,450.0 52.1 1,450.0 15.3
Automobile 744.5 10.4 790.8 2.7
SBA 39.6 1.4 25.8 --
Loans held for securitization -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
LOANS HELD IN PORTFOLIO $4,496.9 $104.0 $4,510.2 $22.9
=====================================================================================================================
19
The Corporation's on-balance-sheet credit card receivables are expected to
increase following the revolving period of the securitization, which generally
approximates 48 months.
Certain cash flows received from the securitization trusts follow:
- ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED Three Months Ended
MARCH 31, 2004 March 31, 2003
------------------------------------------------------------------------------
CREDIT CARD AUTOMOBILE SBA Credit Card Automobile SBA
- ----------------------------------------------------------------------------------------------------------------------------------
(In Millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Proceeds from new securitizations $ -- $811.2 $ -- $ -- $ -- $40.3
Proceeds from collections reinvested in
previous securitizations 766.3 -- -- 758.4 -- --
Servicing fees received 7.3 2.6 -- 7.3 2.0 --
Other cash flows received on retained interest 22.6 2.6 .3 24.3 5.4 .1
Proceeds from sales of previously charged-off
accounts -- -- -- .4 -- --
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, 2004 fair values to immediate 10% and 20% adverse
changes in those assumptions follows. Actual credit losses experienced through
March 2004 on the pool of automobile loans securitized have been consistent with
initial projections. As such, the expected static pool loss assumption would
perform consistent with that disclosed in the sensitivity analysis. 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.
- ----------------------------------------------------------------------------------------------------------------------------------
Variable
Annual
Weighted- Coupon Monthly Expected
average Rate Principal Annual Annual
Fair Life To Repayment Credit Discount
(Dollars in Millions) Value (in months)(b) Investors(b) Rate(b) Losses(b) Rate(b) Yield(b)
- ----------------------------------------------------------------------------------------------------------------------------------
CREDIT CARD LOANS
Interest-only strips(a) $7.6 3.3 1.31% 17.62% 5.09% 15.00% 10.11%
AS OF MARCH 31, 2004
Decline in fair value of 10% adverse
change $.4 $ .6 $2.0 $-- $3.9
Decline in fair value of 20% adverse
change .9 1.0 4.0 -- 7.6
==================================================================================================================================
(a) Represents interest-only strips recognized in connection with the credit
card securitization series 2000-1, 2001-1 and 2002-1
(b) Represents weighted-average assumptions and aggregate declines in fair
value for all credit card securitization series
20
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted- Monthly Expected
average Prepayment Cumulative Annual Weighted-
Fair Life Speed Credit Discount average
(Dollars in Millions) Value (in months)(b) (% ABS)(b)(c) Losses(b)(d) Rate(b) Coupon(b)
- -----------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE LOANS
Interest-only strip(a) $47.5 18.3 1.47% 1.89% 12.00% 7.44%
AS OF MARCH 31, 2004
Decline in fair value of 10% adverse
change $2.4 $3.1 $ .9 $12.2
Decline in fair value of 20% adverse
change 4.6 6.3 1.8 24.1
Servicing asset(a) $14.5 14.0 1.47% 1.89% 11.34% 7.44%
AS OF MARCH 31, 2004(E)
Decline in fair value of 10% adverse
change $ .7 $ -- $ .2 $ --
Decline in fair value of 20% adverse
change 1.4 -- .3 .1
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Represents interest-only strips and servicing assets associated with the
automobile securitization series 2004-A and 2002-A
(b) Represents weighted-average assumptions and aggregate declines in fair
value for all automobile securitization series
(c) Absolute prepayment speed
(d) The expected static pool loss assumption performed consistent with the
expected cumulative credit loss assumptions
(e) Carrying value of servicing assets at March 31, 2004 was $13.2 million
6. LOANS AND LEASE FINANCINGS
Total loans outstanding were recorded net of unearned income and deferred loan
fees and costs of $201 million, $209 million, and $332 million at March 31,
2004, December 31, 2003, and March 31, 2003, 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, railroad
equipment, and airplanes. The Corporation ceased originating retail automobile
leases in December 2000 and the portfolio is running off over time. A summary of
lease financings by type at March 31 follows:
- -------------------------------------------------------------------------------------------------------------
(In Thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------------
COMMERCIAL
Direct financings $1,071,930 $1,298,518
Leveraged leases 275,398 302,676
- -------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL LEASE FINANCINGS 1,347,328 1,601,194
CONSUMER
Retail automobile lease financings 104,911 440,044
- -------------------------------------------------------------------------------------------------------------
TOTAL NET INVESTMENT IN LEASE FINANCINGS $1,452,239 $2,041,238
=============================================================================================================
The components of the net investment in lease financings at March 31 follow:
- -------------------------------------------------------------------------------------------------------------
(In Thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------------
COMMERCIAL
Lease payments receivable $1,170,837 $1,443,536
Estimated residual value of leased assets 457,172 509,556
- -------------------------------------------------------------------------------------------------------------
Gross investment in commercial lease financings 1,628,009 1,953,092
Unearned income (280,681) (351,898)
- -------------------------------------------------------------------------------------------------------------
TOTAL NET INVESTMENT IN COMMERCIAL LEASE FINANCINGS $1,347,328 $1,601,194
- -------------------------------------------------------------------------------------------------------------
CONSUMER
Lease payments receivable $ 24,149 $ 123,562
Estimated residual value of leased assets 86,743 348,523
- -------------------------------------------------------------------------------------------------------------
Gross investment in consumer lease financings 110,892 472,085
Unearned income (5,981) (32,041)
- -------------------------------------------------------------------------------------------------------------
TOTAL NET INVESTMENT IN CONSUMER LEASE FINANCINGS $ 104,911 $ 440,044
=============================================================================================================
21
A rollforward of the residual value component of lease financings follows:
- -------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
- -------------------------------------------------------------------------------------------------------------
(In Thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------------
COMMERCIAL
Beginning balance $487,007 $561,438
Additions 2,597 1,303
Runoff (32,432) (15,791)
Write-downs -- (37,394)
- -------------------------------------------------------------------------------------------------------------
ENDING BALANCE $457,172 $509,556
- -------------------------------------------------------------------------------------------------------------
CONSUMER
Beginning balance $121,630 $446,872
Additions -- --
Runoff (34,887) (73,094)
Recoveries (write-downs) -- (25,255)
- -------------------------------------------------------------------------------------------------------------
ENDING BALANCE $ 86,743 $348,523
=============================================================================================================
7. ALLOWANCE FOR LOAN LOSSES
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) 2004 2003
- --------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF PERIOD $1,125,329 $1,098,588
Provision 82,507 200,233
Charge-offs:
Commercial 30,139 103,484
Commercial construction 1 119
Real estate - commercial 1,789 2,801
Real estate - residential 28,141 41,212
Home equity lines of credit 5,899 5,597
Credit cards and other unsecured lines of credit 30,671 21,810
Other consumer 27,145 35,256
- --------------------------------------------------------------------------------------------------
Total charge-offs 123,785 210,279
Recoveries:
Commercial 14,334 11,062
Commercial construction 40 19
Real estate - commercial 3,366 511
Real estate - residential 9,536 10,517
Home equity lines of credit 2,052 1,512
Credit cards and other unsecured lines of credit 1,813 2,157
Other consumer 10,468 13,929
- --------------------------------------------------------------------------------------------------
Total recoveries 41,609 39,707
Net charge-offs 82,176 170,572
- --------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $1,125,660 $1,128,249
==================================================================================================
Nonperforming loans totaled $505 million, $550 million, and $696 million as of
March 31, 2004, December 31, 2003, and March 31, 2003, respectively. For loans
classified as nonperforming at March 31, 2004, the contractual interest due and
actual interest recognized on those loans for the first three months of 2004 was
$15 million and $1 million, respectively. Included in nonperforming loans were
impaired loans, as defined under SFAS 114, aggregating $215 million, $263
million, and $383 million at March 31, 2004, December 31, 2003, and March 31,
2003, respectively. Average impaired loans for the first three months of 2004
and 2003 totaled $239 million and $387 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, 2004, December 31, 2003, and March 31, 2003 was $33 million, $22
million, and $73 million, respectively. At March 31, 2004, December 31, 2003,
and March 31, 2003, impaired loans with an associated allowance totaled $99
million, $75 million, and $237 million, respectively, while impaired loans with
no associated allowance totaled $116 million, $188 million, and $146 million,
respectively, for these same period ends. There was no interest recognized
during the first three months of 2004 and 2003 on impaired loans while they were
considered impaired.
22
8. SECURITIES
Securities available for sale follow:
- ----------------------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
(In Thousands) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2004
U.S. Treasury and Federal agency debentures $ 416,195 $ 49,607 $ -- $ 465,802
Mortgage-backed securities 4,152,183 121,837 7,265 4,266,755
Asset-backed and corporate debt securities 806,899 6,531 773 812,657
States and political subdivisions 657,944 48,426 7 706,363
Other 617,600 12,103 464 629,239
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES $ 6,650,821 $ 238,504 $8,509 $6,880,816
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 2003
U.S. Treasury and Federal agency debentures $ 636,800 $ 44,316 $ 11 $ 681,105
Mortgage-backed securities 3,927,888 109,059 9,762 4,027,185
Asset-backed and corporate debt securities 930,894 5,919 2,140 934,673
States and political subdivisions 672,063 49,685 14 721,734
Other 494,405 6,515 1 500,919
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES $ 6,662,050 $ 215,494 $11,928 $6,865,616
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, 2003
U.S. Treasury and Federal agency debentures $ 1,074,007 $ 55,616 $ 10 $ 1,129,613
Mortgage-backed securities 4,247,906 181,798 811 4,428,893
Asset-backed and corporate debt securities 1,437,178 7,047 5,717 1,438,508
States and political subdivisions 650,475 52,937 903 702,509
Other 759,991 19,704 15,074 764,621
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES $ 8,169,557 $ 317,102 $ 22,515 $ 8,464,144
===================================================================================================================================
The other category includes Federal Reserve Bank 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 an amortized cost and fair value of
$38 million and $42 million, respectively, at March 31, 2004, compared to an
amortized cost and fair value of $7 million and $8 million, respectively, at
December 31, 2003, and an amortized cost and fair value of $237 million and $226
million, respectively, at March 31, 2003.
The following table presents the age of gross unrealized losses and fair value
by investment category.
- -----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2004
----------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
(In Thousands) VALUE LOSSES VALUE LOSSES VALUE LOSSES
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $695,569 $7,264 $ 202 $ 1 $695,771 $7,265
Asset-backed securities 14,932 55 171,797 718 186,729 773
States and political subdivisions 1,004 -- 188 7 1,192 7
Other 10,974 463 3 1 10,977 464
- -----------------------------------------------------------------------------------------------------------------------------------
Total $722,479 $7,782 $172,190 $727 $894,669 $8,509
===================================================================================================================================
Management does not believe any individual unrealized loss as of March 31, 2004
represents an other-than-temporary impairment. The unrealized losses reported
for mortgage-backed securities relate primarily to securities issued by FNMA,
FHLMC and private institutions. These unrealized losses are primarily
attributable to changes in interest rates and individually were 2% or less of
their respective amortized cost basis. The Corporation has both the intent and
ability to hold the securities contained in the previous table for a time
necessary to recover the amortized cost.
At March 31, 2004, the fair value of securities pledged to secure public and
trust deposits, U.S. Treasury notes, security repurchase agreements, and
derivative instruments totaled $5.2 billion.
23
At March 31, 2004, 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, 2004 and 2003, gross securities gains of
$139,000 and $386,000, respectively, were recognized. There were no gross
securities losses recognized for the three months ended March 31, 2004. For the
three months ended March 31, 2003, gross securities losses of $216,000 were
recognized.
9. PRINCIPAL INVESTMENTS
The principal investment portfolio is managed within the Wholesale Banking line
of business. The principal investment portfolio primarily consists of
investments in the consumer, retail, manufacturing, automotive, commercial
services, and building products industries with the largest industry
constituting approximately 22% of the total portfolio. A rollforward of
principal investments follows:
- -----------------------------------------------------------------------------------------
Three Months Ended
March 31
- -----------------------------------------------------------------------------------------
(In Thousands) 2004 2003
- -----------------------------------------------------------------------------------------
DIRECT INVESTMENTS:
Carrying value at beginning of period $300,077 $317,089
Investments-- new fundings 11,645 15,722
Returns of capital and write-offs (22,666) (4,520)
Fair value adjustments (602) 316
- -----------------------------------------------------------------------------------------
Carrying value at end of period $288,454 $328,607
- -----------------------------------------------------------------------------------------
INDIRECT INVESTMENTS:
Carrying value at beginning of period $294,939 $254,899
Investments-- new fundings 10,038 13,611
Returns of capital and write-offs (8,395) (3,921)
Fair value adjustments (119) 49
- -----------------------------------------------------------------------------------------
Carrying value at end of period $296,463 $264,638
- -----------------------------------------------------------------------------------------
TOTAL PRINCIPAL INVESTMENTS:
Carrying value at beginning of period $595,016 $571,988
Investments-- new fundings 21,683 29,333
Returns of capital and write-offs (31,061) (8,441)
Fair value adjustments (721) 365
- -----------------------------------------------------------------------------------------
CARRYING VALUE AT END OF PERIOD $584,917 $593,245
=========================================================================================
- -----------------------------------------------------------------------------------------
Three Months Ended
March 31
- -----------------------------------------------------------------------------------------
(In Thousands) 2004 2003
- -----------------------------------------------------------------------------------------
PRINCIPAL INVESTMENT REVENUE (a) $10,333 $8,693
- -----------------------------------------------------------------------------------------
NET PRINCIPAL INVESTMENT GAINS (LOSSES) (b) $22,906 $6,464
=========================================================================================
(a) Consists primarily of interest, dividends, and fee income
(b) Consists of fair value adjustments, 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.
24
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying value of goodwill at March 31, 2004, December 31, 2003, and March
31, 2003 was $1.1 billion. A rollforward of goodwill by line of business as of
March 31, 2004 follows:
- ------------------------------------------------------------------------------------------------------------------------------
JANUARY 1 GOODWILL IMPAIRMENT MARCH 31
(In Thousands) 2004 ACQUIRED LOSSES 2004
- ------------------------------------------------------------------------------------------------------------------------------
Consumer and Small Business Financial Services $ 513,281 -- -- $ 513,281
Wholesale Banking 86,729 -- -- 86,729
National City Mortgage Co. 55,785 55,785
National Consumer Finance 206,032 -- -- 206,032
Asset Management 126,207 -- -- 126,207
National Processing 115,306 -- -- 115,306
Parent and Other -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,103,340 -- -- $1,103,340
==============================================================================================================================
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 are
amortized over their estimated useful lives, which range from one to 10 years.
A summary of core deposit, credit card, and merchant portfolios and other
intangible assets follows:
- ---------------------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2004 2003 2003
- ---------------------------------------------------------------------------------------------------------------------------
CORE DEPOSIT INTANGIBLES
Gross carrying amount $ 93,328 $ 93,328 $ 93,328
Less: accumulated amortization 81,410 78,162 68,417
- ---------------------------------------------------------------------------------------------------------------------------
NET CARRYING AMOUNT 11,918 15,166 24,911
- ---------------------------------------------------------------------------------------------------------------------------
CREDIT CARD INTANGIBLES
Gross carrying amount 17,323 17,323 17,323
Less: accumulated amortization 14,603 14,321 13,349
- ---------------------------------------------------------------------------------------------------------------------------
NET CARRYING AMOUNT 2,720 3,002 3,974
- ---------------------------------------------------------------------------------------------------------------------------
MERCHANT PORTFOLIOS AND OTHER INTANGIBLES
Gross carrying amount 74,736 74,736 63,577
Less: accumulated amortization 33,038 30,429 23,269
- ---------------------------------------------------------------------------------------------------------------------------
NET CARRYING AMOUNT 41,698 44,307 40,308
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FINITE-LIVED INTANGIBLES
Gross carrying amount 185,387 185,387 174,228
Less: accumulated amortization 129,051 122,912 105,035
- ---------------------------------------------------------------------------------------------------------------------------
NET CARRYING AMOUNT $ 56,336 $ 62,475 $ 69,193
===========================================================================================================================
Amortization expense on finite-lived intangible assets totaled $6 million and $5
million for the three months ended March 31, 2004 and 2003, respectively.
Amortization expense on finite-lived intangible assets is expected to total $23
million, $11 million, $9 million, $8 million, and $4 million in 2004, 2005,
2006, 2007, and 2008, respectively. These amounts are exclusive of any
amortization associated with finite-lived intangible assets to be recognized in
connection with pending acquisitions.
25
11. MORTGAGE SERVICING RIGHT (MSR) ASSETS
The unpaid principal balance of residential mortgage loans serviced for third
parties was $144.6 billion at March 31, 2004 compared to $141.1 billion at
December 31, 2003 and $112.4 billion at March 31, 2003.
Changes in the carrying value of MSRs and the associated valuation allowance
follow:
- ---------------------------------------------------------------------------------------------------
Three Months Ended
March 31
- ---------------------------------------------------------------------------------------------------
(In Thousands) 2004 2003
- ---------------------------------------------------------------------------------------------------
MORTGAGE SERVICING ASSETS
Balance at beginning of period $1,300,612 $ 949,539
Additions 140,139 267,309
Amortization (99,897) (125,711)
SFAS 133 hedge basis adjustments (18,134) (40,790)
Sales (2,485) (2,306)
- ---------------------------------------------------------------------------------------------------
CARRYING VALUE BEFORE VALUATION ALLOWANCE AT END
OF PERIOD $1,320,235 $1,048,041
- ---------------------------------------------------------------------------------------------------
VALUATION ALLOWANCE
Balance at beginning of period $ (2,195) $ (334,346)
Impairment (charges) recoveries (118,122) 99,617
- ---------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD (120,317) (234,729)
- ---------------------------------------------------------------------------------------------------
NET CARRYING VALUE OF MSRS AT END OF PERIOD $1,199,918 $813,312
===================================================================================================
FAIR VALUE OF MSRS AT END OF PERIOD $1,239,647 $ 813,312
===================================================================================================
MSRs are evaluated for impairment and a valuation allowance is established
through a charge to income when the carrying value of the MSR, including hedge
accounting adjustments, exceeds the fair value and is determined to be
temporary. Other-than-temporary impairment is recognized when the recoverability
of a recorded valuation allowance is determined to be remote taking into
consideration historical and projected interest rates and loan pay-off activity.
When this situation occurs, the unrecoverable portion of the valuation allowance
is applied as a direct write-down to the carrying value of the MSRs. Unlike a
valuation allowance, a direct write-down permanently reduces the carrying value
of the MSR and the valuation allowance, precluding subsequent recoveries. There
were no other-than-temporary writedowns recognized during the first quarters of
2004 and 2003.
The fair value of MSRs 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 valuation. 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 MSRs,
mortgage interest 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. At March 31,
2004, the fair value of MSRs exceeded the carrying value reported in the
consolidated balance sheet by $40 million. This difference represents increases
in the fair value of certain MSRs accounted for under SFAS 140 that could not be
recorded above their cost basis, net of accumulated amortization and SFAS 133
adjustments.
The key economic assumptions used to estimate the value of the MSRs at March 31,
2004, December 31, 2003, and March 31, 2003 are presented in the table that
follows. A sensitivity analysis of the current fair value to immediate 10% and
20% adverse changes in those assumptions as of March 31, 2004 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 MSR is calculated independently without changing any other
assumption. In reality, changes in one factor may result in changes in another
(for example, changes in mortgage interest rates, which drive changes in
prepayment rate estimates, could result in changes in the discount rates), which
might magnify or counteract the sensitivities.
26
- ------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(Dollars in Thousands) 2004 2003 2003
- ------------------------------------------------------------------------------------------------------------
Fair value $1,239,647 $1,443,629 $813,312
Weighted-average life (in years) 3.2 3.8 2.7
Weighted-average constant prepayment rate (CPR) 28.91% 24.24% 40.94%
Weighted-average discount rate 9.38 9.56 9.55
Prepayment rate:
Decline in fair value from 10% adverse change $83,496
Decline in fair value from 20% adverse change 146,514
Discount rate:
Decline in fair value from 10% adverse change 32,211
Decline in fair value from 20% adverse change 62,629
============================================================================================================
The key economic assumptions used in determining the fair value of MSRs
capitalized during the three-month periods ended March 31, were as follows:
- ------------------------------------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------------------------------------
Weighted-average CPR 27.03% 34.04%
Weighted-average life (in years) 3.6 3.8
Weighted-average discount rate 9.48% 9.50%
- ------------------------------------------------------------------------------------------------------------
Risk associated with declines in the estimated fair value due to increases in
mortgage loan prepayments is managed using derivative instruments that are
expected to increase in value when interest rates decline. The Corporation
typically strives to include the derivative instruments it uses to protect the
value of the MSRs in SFAS 133 hedge relationships in order to record gains and
losses on both the assets and the associated derivative instruments
simultaneously in the income statement. MSRs not included in the SFAS 133
relationships may not be written up above their initial carrying value, adjusted
for amortization, limiting the amount of gains that might otherwise be
recognized to offset losses on the derivative instruments, which are always
carried at fair value. Notes 1 and 22 provide further discussion on how
derivative instruments are accounted for, the nature of the derivative
instruments used by the Corporation, the risks associated with the use of
derivative instruments, and ineffective hedge and other gains and losses
generated by derivative instruments during the current and prior year.
12. BORROWED FUNDS
Detail of borrowed funds follows:
- ------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2004 2003 2003
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury notes $ 569,492 $5,654,745 $ 351,871
Senior bank notes -- -- 555,000
Commercial paper and other 811,973 960,715 829,061
- ------------------------------------------------------------------------------------------------------------
TOTAL BORROWED FUNDS $1,381,465 $6,615,460 $1,735,932
============================================================================================================
WEIGHTED-AVERAGE RATE .88% .78% 1.32%
============================================================================================================
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 and are callable on demand.
Commercial paper is issued by the Corporation's subsidiary, National City Credit
Corporation, and is due in three months or less.
The commercial paper and other category at March 31, 2004 and December 31, 2003
include the liability related to mortgage loans available for repurchase under
GNMA optional repurchase programs. See further discussion in Note 1.
27
13. LONG-TERM DEBT
The composition of long-term debt follows. This note excludes the discussion and
amounts associated with the junior subordinated notes owed to the unconsolidated
subsidiary trusts. See Note 14 for further discussion on these obligations.
- ---------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2004 2003 2003
- ---------------------------------------------------------------------------------------------------------------
3.20% senior notes due 2008 $ 301,152 $ 295,590 $ 295,416
3.125% senior notes due 2009 197,537 -- --
6.625% subordinated notes due 2004 -- 249,978 249,881
8.50% subordinated notes due 2004 -- 149,989 149,895
7.75% subordinated notes due 2004 199,914 199,850 199,658
7.20% subordinated notes due 2005 255,992 256,912 260,066
5.75% subordinated notes due 2009 332,264 326,933 332,044
6.875% subordinated notes due 2019 809,119 785,646 799,984
Other 1,760 1,760 2,640
- ---------------------------------------------------------------------------------------------------------------
TOTAL HOLDING COMPANY 2,097,738 2,266,658 2,289,584
6.50% subordinated notes due 2003 -- -- 200,540
7.25% subordinated notes due 2010 268,444 263,790 269,798
6.30% subordinated notes due 2011 229,611 224,940 229,308
7.25% subordinated notes due 2011 198,510 198,461 198,313
6.25% subordinated notes due 2011 340,944 333,766 339,997
6.20% subordinated notes due 2011 551,011 537,793 546,824
4.63% subordinated notes due 2013 299,257 299,237 --
4.25% subordinated notes due 2018 229,736 221,969 --
Senior bank notes 11,488,669 15,266,153 15,715,745
Federal Home Loan Bank advances 3,668,403 3,867,957 4,002,063
- ---------------------------------------------------------------------------------------------------------------
TOTAL BANK SUBSIDIARIES 17,274,585 21,214,066 21,502,588
- ---------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $19,372,323 $23,480,724 $23,792,172
===============================================================================================================
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 and caps, to manage interest rate risk on its long-term
debt. Interest rate swaps are used to hedge the fair value of certain fixed-rate
debt by converting the debt to variable rate and are also used to hedge the cash
flow variability associated with certain variable-rate debt by converting the
debt to fixed rate. Interest rate caps are used to hedge cash flow variability
by capping the interest payments associated with variable-rate debt issuances.
Interest rate swaps and caps used to convert the Corporation's debt are based on
the one- or three-month London Interbank Offering Rate (LIBOR) rate, the Federal
Funds rate, or the Prime rate. Further discussion on derivative instruments is
included in Notes 1 and 22.
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.
A summary of par values and weighted-average rates of long-term debt as of March
31, 2004 follows. The weighted-average effective rate includes the effects of
derivative instruments used to manage interest rate risk.
- ---------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average
(Dollars in Thousands) Par Value Contractual Rate Effective Rate
- ---------------------------------------------------------------------------------------------------------------
Senior notes $ 500,000 3.17% 1.28%
Subordinated notes 3,425,000 6.32 2.70
Senior bank notes 11,398,500 1.62 1.42
FHLB advances 3,658,982 1.29 2.02
Other 1,760 12.95 12.95
- ---------------------------------------------------------------------------------------------------------------
Total long-term debt $18,984,242 2.44% 1.76%
===============================================================================================================
All senior notes and subordinated notes of the holding company and subordinated
notes of the bank subsidiaries were issued at fixed rates, pay interest
semi-annually and may not be redeemed prior to maturity. In March 2004, the
holding company issued senior notes with a par value of $200 million.
28
Senior bank notes are issued by National City's bank subsidiaries. For the first
three months of 2004, senior bank notes with a par value of $650 million were
issued by the bank subsidiaries. At March 31, 2004, senior bank notes totaling
$1.5 billion were contractually based on a fixed rate of interest and $9.9
billion were contractually based on a variable rate of interest. Senior bank
notes have maturities ranging from 2004 to 2078.
FHLB advances at March 31, 2004, contractually consisted of $189 million of
fixed-rate obligations and $3.5 billion of variable-rate obligations. FHLB
advances are collateralized by qualifying residential real estate loans and have
maturities ranging from 2004 to 2023.
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 its
long-term debt rating. The fee is currently 10 basis points on the amount of the
credit facility. There have been no borrowings outstanding under this agreement.
14. JUNIOR SUBORDINATED DEBENTURES OWED TO UNCONSOLIDATED SUBSIDIARY TRUSTS AND
CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY DEBENTURES OF THE CORPORATION
National City has sponsored two 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
corporation-obligated mandatorily redeemable capital securities (the capital
securities) to third-party investors and investing the proceeds from the sale of
such capital securities solely in junior subordinated debt securities of the
Corporation (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. 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 the First
of America and Fort Wayne capital trusts are first redeemable, in whole or in
part, by the Corporation on January 31, 2007 and April 15, 2007, respectively.
In the third quarter of 2003, as a result of applying the provisions of FIN 46
governing when an equity interest should be consolidated, the Corporation was
required to deconsolidate these subsidiary trusts from its financial statements.
The deconsolidation of the net assets and results of operations of the trusts
had virtually no impact on the Corporation's financial statements or liquidity
position since the Corporation continues to be obligated to repay the debentures
held by the trusts and guarantees repayment of the capital securities issued by
the trusts. The consolidated debt obligation related to the trusts increased
from $180 million to $186 million upon deconsolidation with the difference
representing the Corporation's common ownership interest in the trusts.
The capital securities held by the trusts qualify as Tier 1 capital for the
Corporation under Federal Reserve Board guidelines. On May 6, 2004, the Federal
Reserve issued proposed rules that retain Tier 1 capital treatment for trust
preferred securities but with stricter limits. Under the proposal, after a
three-year transition period, the aggregate amount of trust preferred securities
and certain other capital elements will retain its current limit of 25 percent
of tier 1 capital elements, net of goodwill. The amount of trust preferred
securities and certain other elements in excess of the limit could be included
in tier 2 capital, subject to restrictions. This proposal will have no impact on
the Corporation's tier 1 capital.
Consolidated debt obligations related to subsidiary trusts holding solely
debentures of the Corporation follows:
- ---------------------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Thousands) 2004 2003 2003
- ---------------------------------------------------------------------------------------------------------------------------
8.12% junior subordinated debentures owed to First of America
Capital Trust I due January 31, 2027 $154,640 $154,640 --
9.85% junior subordinated debentures owed to Fort Wayne
Capital Trust I due April 15, 2027 30,928 30,928 --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL JUNIOR SUBORDINATED DEBENTURES OWED TO UNCONSOLIDATED
SUBSIDIARY TRUSTS 185,568 185,568 --
- ---------------------------------------------------------------------------------------------------------------------------
8.12% capital securities of First of America Capital Trust I
due January 31, 2027 -- -- $150,000
9.85% capital securities of Fort Wayne Capital Trust I
due April 15, 2027 -- -- 30,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL SECURITIES OF CONSOLIDATED SUBSIDIARY TRUSTS -- -- 180,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CONSOLIDATED DEBT OBLIGATIONS RELATED TO SUBSIDIARY TRUSTS $185,568 $185,568 $180,000
===========================================================================================================================
29
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
2004 2003 2003
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) AMOUNT RATIO Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
Total equity/assets $9,854,111 8.85% $ 9,328,671 8.19% $ 8,587,163 7.31%
Total common equity/assets 9,854,111 8.85 9,328,671 8.19 8,587,163 7.31
Tangible common equity/tangible assets 8,694,435 7.89 8,162,856 7.24 7,439,689 6.39
Tier 1 capital 8,863,695 9.36 8,420,382 8.79 7,536,440 7.82
Total risk-based capital 12,946,221 13.67 12,561,061 13.12 11,219,925 11.65
Leverage 8,863,695 8.19 8,420,382 7.43 7,536,440 6.55
==================================================================================================================================
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 and 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 Corporation'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 3.00%, respectively. The capital levels at all of National City's
subsidiary banks are maintained at or above the well-capitalized minimums of
6.00%, 10.00%, and 5.00% for the Tier 1 capital, total risk-based capital, and
leverage ratios, respectively. As of the most recent notification from the
Federal Deposit Insurance Corporation, which was March 15, 2004, 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, 2003 and March 31,
2003, each of the subsidiary banks were also categorized as well-capitalized.
As discussed in Note 14, the capital securities held by the First of America and
Fort Wayne subsidiary trusts qualify as Tier 1 capital for the Corporation under
Federal Reserve Board guidelines. On May 6, 2004, the Federal Reserve issued
proposed rules that retain Tier 1 capital treatment for trust preferred
securities but with stricter limits. Under the proposal, after a three-year
transition period, the aggregate amount of trust preferred securities and
certain other capital elements will retain its current limit of 25 percent of
tier 1 capital elements, net of goodwill. The amount of trust preferred
securities and certain other elements in excess of the limit could be included
in tier 2 capital, subject to restrictions. This proposal will have no impact on
the Corporation's tier 1 capital.
The Corporation's subsidiary banks are required to maintain noninterest bearing
reserve balances with the Federal Reserve Bank. The required reserve balance was
$119 million at March 31, 2004.
Under current Federal Reserve regulations, the banking subsidiaries are limited
in the amount they may loan to the parent company and its nonbank subsidiaries.
Loans to a single affiliate may not exceed 10% and loans to all affiliates may
not exceed 20% of the bank's capital stock, surplus and undivided profits, plus
the allowance for loan losses. Loans from subsidiary banks to nonbank
affiliates, including the parent company, are also required to be
collateralized.
Dividends paid by subsidiary banks to the parent company are also subject to
certain legal and regulatory limitations. At March 31, 2004, the subsidiary
banks may pay dividends of $1.9 billion, plus an additional amount equal to
their net profits for 2004, as defined by statute, up to the date of any such
dividend declaration, without prior regulatory approval.
30
16. STOCKHOLDERS' EQUITY
A summary of activity in accumulated other comprehensive income follows:
- --------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
- --------------------------------------------------------------------------------------------------------
(In Thousands) 2004 2003
- --------------------------------------------------------------------------------------------------------
Accumulated unrealized gains on securities
available for sale at January 1, net of tax $132,318 $ 223,073
Net unrealized gains (losses) for the period, net of tax expense
(benefit) of $9,369 in 2004 and $(16,952) in 2003 17,400 (31,482)
Reclassification adjustment for gains included in net income,
net of tax expense of $49 in 2004 and $60 in 2003 (90) (111)
- --------------------------------------------------------------------------------------------------------
Effect on other comprehensive income for the period 17,310 (31,593)
- --------------------------------------------------------------------------------------------------------
Accumulated unrealized gains on securities available for sale
at March 31, net of tax $149,628 $ 191,480
========================================================================================================
Accumulated unrealized losses on derivatives used in cash
flow hedging relationships at January 1, net of tax $(67,631) $(155,893)
Net unrealized losses for the period, net of tax benefit
of $18,956 in 2004 and $2,540 in 2003 (35,204) (4,717)
Reclassification adjustment for losses included in net income,
net of tax benefit of $11,677 in 2004 and $13,543 in 2003 21,686 25,151
- --------------------------------------------------------------------------------------------------------
Effect on other comprehensive income for the period (13,518) 20,434
- --------------------------------------------------------------------------------------------------------
Accumulated unrealized losses on derivatives used in cash
flow hedging relationships at March 31, net of tax $(81,149) $(135,459)
========================================================================================================
Accumulated other comprehensive income at
January 1, net of tax $64,687 $ 67,180
Other comprehensive income (loss), net of tax 3,792 (11,159)
- --------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME AT MARCH 31,
NET OF TAX $68,479 $ 56,021
========================================================================================================
In February 2004, the Corporation's Board of Directors authorized the repurchase
of up to 50 million shares of National City common stock, subject to an
aggregate purchase limit of $2.0 billion. This new authorization replaced all
prior share repurchase authorizations. During the first three months of 2004 and
2003, the Corporation repurchased 2.2 million and 1.4 million shares,
respectively, of its common stock under the prior authorizations. As of March
31, 2004, 50.0 million shares remain authorized for repurchase.
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) 2004 2003
- --------------------------------------------------------------------------------------------------
BASIC
Net income applicable to common stock $710,368 $643,503
- --------------------------------------------------------------------------------------------------
Average common shares outstanding 605,916,791 611,521,806
- --------------------------------------------------------------------------------------------------
Net income per common share-- basic $1.17 $1.05
==================================================================================================
DILUTED
Net income $710,368 $643,503
- --------------------------------------------------------------------------------------------------
Average common shares outstanding 605,916,791 611,521,806
Stock award adjustment 6,679,842 4,056,978
- --------------------------------------------------------------------------------------------------
Average common shares outstanding-- diluted 612,596,633 615,578,784
- --------------------------------------------------------------------------------------------------
Net income per common share-- diluted $1.16 $1.05
==================================================================================================
Basic net income per common share is calculated by dividing net income 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 certain unvested restricted stock and unexercised stock option
awards were converted or exercised into common shares. For the three month
periods ended March 31, 2004 and 2003, options to purchase 5,017,568 and
30,706,530 shares of common stock, respectively, were outstanding but not
included in the computation of diluted net income per share because the option
exercise price exceeded the fair value of the stock and consequently their
inclusion would have had an anti-dilutive effect.
31
18. INCOME TAX EXPENSE
The composition of income tax expense follows:
- ---------------------------------------------------------------------------------------------
Three Months Ended
March 31
- ---------------------------------------------------------------------------------------------
(In Thousands) 2004 2003
- ---------------------------------------------------------------------------------------------
Applicable to income exclusive of securities gains $357,061 $344,115
Applicable to securities gains 48 60
- ---------------------------------------------------------------------------------------------
INCOME TAX EXPENSE $357,109 $344,175
=============================================================================================
The effective tax rate was 33.5% and 34.8% for the three months ended March 31,
2004 and 2003, respectively. The lower tax rate for 2004 reflects a reduction in
certain deferred tax liabilities due to the favorable conclusion of several tax
examinations.
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) 2004 2003 2003
- ----------------------------------------------------------------------------------------------------------------
Commitments to extend credit:
Commercial $14,660,384 $15,201,047 $13,921,312
Residential real estate 18,690,423 10,556,066 27,596,714
Revolving home equity and credit card lines 24,396,670 23,936,622 22,703,751
Other 391,733 521,813 368,603
Standby letters of credit 3,753,102 3,765,284 3,873,809
Commercial letters of credit 267,617 150,640 114,590
Net commitments to sell mortgage loans and
mortgage-backed securities 13,289,382 13,126,094 22,057,588
Commitments to fund principal investments 241,025 226,793 240,260
Commitments to fund civic and community investments 201,898 200,477 171,976
================================================================================================================
Commitments to extend credit are agreements to lend. Since many of these
commitments expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash-flow requirements. Certain lending commitments
for 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 changes in mortgage interest rates
are recorded on the balance sheet as either derivative assets or derivative
liabilities and are included in other loans in the table. Further discussion on
derivative instruments is included in Notes 1 and 22.
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 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
the fair value of these contracts are recorded on the balance sheet as either
derivative assets or derivative liabilities. Further discussion on derivative
instruments is included in Notes 1 and 22.
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 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.
32
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 commitments to fund civic and community investments
represent funds committed for existing and future projects.
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 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 $20.1 billion and $27.5
billion for the first three months of 2004 and 2003, respectively. Total loans
repurchased or indemnified during the first quarters of 2004 and 2003 were $57
million and $77 million, respectively. Loans indemnified that remain outstanding
as of March 31, 2004 totaled $222 million. In addition, total loans sold of $934
million remained uninsured as of March 31, 2004. The volume and balance of
uninsured government loans may be affected by processing or notification delays.
Management believes the majority of the uninsured loans at March 31, 2004 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 $28 million and $7 million for the first
quarter of 2004 and 2003, respectively. At March 31, 2004 and 2003, the
liability for estimated losses on repurchase and indemnification was $174
million and $128 million, respectively, and was included in other liabilities on
the balance sheet.
The guarantee liability for standby letters of credit was $7 million at March
31, 2004 and was recorded in other liabilities on the 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, as defined below, transactions and unresolved chargebacks in
the process of resolution. For the four-month period from December 2003 through
March 2004, this amount totaled approximately $55 billion. At March 31, 2004,
the Corporation had $5 million of unresolved chargebacks that were in process of
resolution.
For the quarters ended March 31, 2004 and 2003, the Corporation processed $40
million in chargebacks presented by issuing banks. Actual losses recorded for
the three months ended March 31, 2004 and 2003 were $1 million and $944,000,
respectively. The Corporation accrues for probable losses based on historical
experience and at March 31, 2004 and 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. Where the product or service is not provided, however, until
some time after the purchase (delayed-delivery), the potential for this
contingent liability increases. For the three months ended March 31, 2004, the
Corporation processed approximately $3 billion of merchant transactions related
to delayed-delivery purchases.
The Corporation currently processes card transactions for United Airlines, Inc.,
which is currently operating under Chapter 11 protection. 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 United Airlines but does not intend to renew
the contract when its current term expires. In the event of liquidation of
United Airlines, 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, 2004, the estimated dollar
value of tickets purchased, but as yet unflown, under the United Airlines
merchant processing
33
contract, was approximately $814 million. Based upon available information, this
amount represents management's best estimate of its maximum potential chargeback
exposure related to United Airlines, Inc. As of March 31, 2004, the Corporation
held no significant collateral under this contract.
During 2003 and 2004, the Corporation's obligation to process card transactions
for three other airline merchants ceased with these merchants transitioning to
new processors. At March 31, 2004, the estimated dollar value of tickets
purchased, but as yet unflown, under these concluding contracts was
approximately $208 million. This amount represents management's best estimate of
its maximum potential chargeback exposure under these contracts. As of March 31,
2004, the Corporation held cash collateral of $2 million and third-party
indemnifications of $110 million against this remaining chargeback exposure.
In November 2003, Congress passed the Federal Aviation Administration
Reauthorization Act. This legislation included an extension of the airline
ticket re-accommodation provision, which requires airlines to honor tickets
through November 2004 for other airlines that may suspend, interrupt or
discontinue services due to insolvency or liquidation.
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 is unlikely.
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. In compliance with applicable
banking regulations, the Corporation may extend credit to certain officers and
directors of the Corporation and its banking subsidiaries in the ordinary course
of business under substantially the same terms as comparable third-party lending
arrangements.
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.
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 market price of the common
stock on the date of grant. These options generally become exercisable to the
extent of 25% to 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 market price of the common stock on the date the additional option is
granted. Additional options vest six months from the date of grant and have a
contractual term equal to the remaining term of the original option.
On January 1, 2003, the Corporation prospectively adopted the fair value method
of accounting for stock options under SFAS 123. Further discussion of the impact
of this change is included in Note 1. During the first quarter of 2004 and
2003, compensation expense recognized related to National City's stock option
plans totaled $6 million and $500,000, respectively.
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. The Corporation generally recognized
compensation expense over the restricted period. The weighted-average grant-date
fair value of restricted share awards granted during the first quarter of 2004
and 2003 were $33.69 and $27.79, respectively. Compensation expense recognized
for restricted share plans during the first quarter of 2004 and 2003, totaled $6
million and $3 million, respectively.
34
OPTION AND RESTRICTED STOCK AWARD ACTIVITY: Stock option and restricted
stock award activity follows:
- ---------------------------------------------------------------------------------------------
Weighted-
Average
Shares Outstanding Exercise
------------------------------------------ Price Per
Awards Options Share
- ---------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
January 1, 2004 3,781,641 50,851,242 $28.52
Cancelled (63,893) (95,527) 29.77
Exercised (239,767) (3,533,017) 24.06
Granted 253,412 791,590 34.70
- ---------------------------------------------------------------------------------------------
MARCH 31, 2004 3,731,393 48,014,288 $28.94
=============================================================================================
As of March 31, 2004 and 2003, 13 million and 17 million shares, respectively,
were available for grant under the stock option plans, and 3 million and 5
million shares, respectively, under the restricted stock plans.
Cancelled activity includes both forfeited and expired awards and options.
Information about stock options outstanding at March 31, 2004 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 22,658 $9.35 .8 22,658 $9.35
12.00-16.99 1,171,655 14.61 1.0 1,171,655 14.61
17.00-21.99 5,093,252 17.76 5.2 5,093,252 17.76
22.00-26.99 829,837 25.45 3.1 821,837 25.45
27.00-31.99 25,584,432 28.93 6.5 21,230,776 29.22
32.00-37.81 15,312,454 34.01 6.1 8,849,287 34.10
- --------------------------------------------------------------------------------------------------------------
TOTAL 48,014,288 $28.94 6.0 37,189,465 $28.25
==============================================================================================================
At March 31, 2004 and 2003, options for 37,189,465 and 37,821,746 shares of
common stock, respectively, were exercisable.
On April 27, 2004, stockholders approved the National City Corporation Long-Term
Cash and Equity Incentive Plan (the Long-Term Incentive Plan), which
consolidates and replaces all long-term incentive programs under one plan and
formalizes the use of performance measures in connection with all long-term
awards. Under the Long-Term Incentive Plan no more than 45 million shares of
National City common stock may be made the subject of option rights, stock
appreciation rights, restricted awards, common stock awards, or restricted stock
units, in the aggregate. In addition to the aggregate limit on awards of
National City common stock, the Long-Term Incentive Plan includes the following
limitations: no more than 18 million shares may be awarded in the form of
restricted stock, restricted stock units, or common stock awards; and no more
than 40 million shares may be awarded in the form of incentive stock options.
The existing stock option plans and restricted stock plans will be terminated,
except with respect to additional options that National City is contractually
obligated to issue.
21. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
National City has a noncontributory, defined benefit pension plan covering
substantially all employees. Pension benefits are derived from a cash balance
formula, whereby credits based on salary, age, and years of service are credited
to employee accounts. Actuarially-determined pension costs are charged to
current operations. The funding policy is to pay at least the minimum amount
required by the Employee Retirement Income Security Act of 1974.
35
National City also has a benefit plan offering postretirement medical and life
insurance benefits. The medical portion of the plan is contributory and the life
insurance coverage is noncontributory to the participants. The Corporation has
no plan assets attributable to the plan and funds the benefits as claims arise.
Benefit costs related to this plan are recognized in the periods employees
provide service for such benefits. The Corporation reserves the right to
terminate or make plan changes at any time.
Using an actuarial measurement date of October 31, 2003 and 2002, components of
net periodic benefit and net periodic cost for the three-month periods ended
March 31 follow:
- -------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
- -------------------------------------------------------------------------------------------------------------
(In Thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------------
PENSION BENEFITS
Service cost $ 13,847 $12,791
Interest cost 20,681 20,021
Expected return on plan assets (31,825) (35,861)
Amortization of prior service cost 418 (1,189)
Transition benefit (1,189) (51)
Recognized net actuarial (gain) loss 325 365
- -------------------------------------------------------------------------------------------------------------
NET PERIODIC COST (BENEFIT) $ 2,257 $ (3,924)
=============================================================================================================
OTHER POSTRETIREMENT BENEFITS
Service cost $ 833 $ 736
Interest cost 2,354 2,336
Amortization of prior service cost 24 33
Transition obligation 350 351
Recognized net actuarial loss 498 397
- -------------------------------------------------------------------------------------------------------------
NET PERIODIC COST $ 4,059 $ 3,853
=============================================================================================================
Actuarial assumptions used to calculate the net periodic pension benefit and
cost were as follows:
Pension Benefits Other Postretirement Benefits
- -------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 6.25% 6.75% 6.25 6.75%
Rate of compensation increase 2.75-7.50 2.75-7.50 2.75-7.50 2.75-7.50
Expected long-term return on plan assets 8.5 9.5 -- --
- -------------------------------------------------------------------------------------------------------------
In December 2003, President Bush signed into law a bill that expands Medicare
benefits, primarily adding a prescription drug benefit for Medicare-eligible
retirees beginning in 2006. The law also provides a federal subsidy to companies
which sponsor postretirement benefit plans that provide prescription drug
coverage. FASB Staff Position 106-1, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003, permits deferring the recognition of the new Medicare provisions' impact
due to lack of specific authoritative guidance on accounting for the federal
subsidy. The Corporation has elected to defer accounting for the effects of this
new legislation until the specific authoritative guidance is issued.
Accordingly, the postretirement benefit obligations and net periodic costs
reported in the 2003 Form 10-K and accompanying financial statements and notes
do not reflect the impact of this legislation. The accounting guidance, when
issued, could require changes to previously reported financial information. The
Corporation anticipates its benefit costs after 2006 will be somewhat lower as a
result of the new Medicare provisions, however, the adoption of this standard is
not expected to have a material impact on results of operations, financial
position, or liquidity.
The Corporation also maintains nonqualified supplemental retirement plans for
certain key employees. All benefits provided under these plans are unfunded, and
payments to plan participants are made by the Corporation. At March 31, 2004,
December 31, 2003, and March 31, 2003, obligations of $84 million, $83 million,
and $83 million, respectively, were included in accrued expenses and other
liabilities for these plans. Expenses related to these plans totaled $3 million
and $4 million for the first quarter of 2004 and 2003, respectively.
Substantially all employees are eligible to contribute a portion of their pretax
compensation to a defined contribution plan. The Corporation may make
contributions to the plan for employees with one or more years of service in the
form of National City common stock in varying amounts depending on participant
contribution levels. In 2004 and 2003, the Corporation provided up to a 6.9%
matching contribution. Matching contributions totaled $22 million and $23
million for the first quarter of 2004 and 2003, respectively.
36
22. 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, 2004, these collateral agreements covered
99.8% 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. At March 31,
2004, the Corporation held cash, U.S. government, and U.S. government-sponsored
agency securities with a fair value of $731 million to collateralize net gains
with counterparties and had pledged or delivered to counterparties U.S.
government and U.S. government-sponsored agency securities with a fair value of
$29 million to collateralize net losses with counterparties. The Corporation
typically does not have collateral agreements covering open forward commitments
to sell or purchase mortgage loans or 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, 2004,
December 31, 2003, and March 31, 2003.
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 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 certificates of deposit, long-term
FHLB advances, corporate and subordinated long-term debt, and senior bank notes.
37
For the three-month periods ended March 31, 2004 and 2003, the Corporation
recognized total net ineffective fair value hedge (losses) gains of $(23)
million and $32 million, respectively. Of the total (losses) gains recognized,
net ineffective hedge gains related to servicing assets were $6 million and $26
million for the first three months of 2004 and 2003, respectively. For the first
three months of 2004, net ineffective hedge losses related to mortgage loans
held for sale were $36 million. Mortgage loans held for sale were not designated
in a hedge relationship at December 31, 2003 and March 31, 2003. Ineffective
hedge gains (losses) for mortgage servicing assets and mortgage loans held for
sale 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 were $7 million and $6 million for the first
three months of 2004 and 2003, respectively. There were no components of
derivative instruments which were excluded from the assessment of hedge
effectiveness during the first three months of 2004 and 2003.
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 uses forward starting pay-fixed interest rate swaps and
caps to hedge forecasted cash flows associated with debt instruments expected to
be issued subsequent to 2004.
For the three-month periods ended March 31, 2004 and 2003, the Corporation
recognized net ineffective cash flow hedge gains (losses) of $73,000 and
$(137,000), 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 2004 and 2003.
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, 2004, December 31, 2003
and March 31, 2003, accumulated other comprehensive income included a deferred
after-tax net loss of $81 million, $68 million and $135 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, 2004, is projected to be reclassified into interest expense in
conjunction with the recognition of interest payments on funding products
through August 2008, with $72 million of net loss expected to be reclassified
within the next year. During the three-month periods ended March 31, 2004 and
2003, pretax losses of $30 million and $39 million, respectively, were
reclassified into interest expense as adjustments to interest payments on
variable-rate funding products. Additionally, during the first quarter of 2004,
a pretax loss of $4 million was reclassified into interest expense for cash flow
hedges that have been discontinued, because forecasted debt issuances originally
contemplated were not probable of occurring.
The tables on the following pages provide further information regarding
derivative instruments designated in fair value and cash flow hedges at March
31, 2004, December 31, 2003, and March 31, 2003.
38
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, 2004, December 31, 2003, and March 31, 2003 follows:
- -----------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2004 December 31, 2003
----------------------------------------------------------------------------------
DERIVATIVE NET Derivative
------------------ INEFFECTIVE -------------------------
NOTIONAL HEDGE GAINS Notional
(In Millions) AMOUNT ASSET LIABILITY (LOSSES)(a) Amount Asset Liability
- -----------------------------------------------------------------------------------------------------------------------------
FAIR VALUE HEDGES
Loans
Receive-fixed interest rate swaps $ 60 $ 2.2 $ -- $ 60 $ 1.4 $ --
Receive-fixed interest rate
swaptions sold 55 -- .1 55 -- .2
Pay-fixed interest rate swaps 3,299 1.0 209.7 3,379 3.5 195.0
Callable pay-fixed interest rate swaps 43 -- 4.0 43 -- 4.0
Pay-fixed interest rate swaptions sold 205 -- 9.5 205 -- 7.1
Interest rate caps sold 715 -- .8 815 -- 1.4
Interest rate floors sold 360 -- 8.7 360 -- 7.7
Interest rate futures purchased 2,311 -- -- 2,173 -- --
Interest rate futures sold 2,914 -- -- 3,086 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total 9,962 3.2 232.8 $ 6.6 10,176 4.9 215.4
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage loans held for sale
Forward commitments to sell mortgage
loans and mortgage-backed securities 12,254 6.8 -- -- -- --
Receive-fixed interest rate swaps 2,415 91.7 9.7 -- -- --
Pay-fixed interest rate swaps 800 -- 34.0 -- -- --
Pay-fixed interest rate swaptions
purchased 1,950 11.9 -- -- -- --
Pay-fixed interest rate swaptions
sold 2,970 -- 130.6 -- -- --
Interest rate caps purchased 13,400 30.3 -- -- -- --
Interest rate futures purchased 2,575 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total 36,364 140.7 174.3 (35.5) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage servicing assets
Forward commitments to
purchase mortgage loans and
mortgage-backed securities 5,815 2.2 18.5 2,904 31.7 --
Receive-fixed interest rate swaps 10,810 666.6 27.7 10,206 376.2 48.2
Receive-fixed interest rate
swaptions sold -- -- -- 415 -- 8.6
Pay-fixed interest rate swaps 250 -- 10.3 30 -- .1
Pay-fixed interest rate swaptions
purchased 4,150 68.2 -- 3,515 62.5 --
Pay-fixed interest rate swaptions
sold 500 -- 13.0 1,295 -- 76.2
Principal-only interest rate swaps 140 6.5 3.5 123 6.9 .5
Interest rate caps purchased 33,500 68.8 -- 30,410 83.5 --
- -----------------------------------------------------------------------------------------------------------------------------
Total 55,165 812.3 73.0 6.2 48,898 560.8 133.6
- -----------------------------------------------------------------------------------------------------------------------------
Funding
Receive-fixed interest rate swaps 4,905 426.7 21.6 4,550 350.8 35.7
Callable receive-fixed interest
rate swaps 310 10.5 2.4 310 9.2 3.2
- -----------------------------------------------------------------------------------------------------------------------------
Total 5,215 437.2 24.0 -- 4,860 360.0 38.9
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED IN FAIR
VALUE HEDGES 106,706 1,393.4 504.1 (22.7) 63,934 925.7 387.9
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOW HEDGES
Funding
Pay-fixed interest rate swaps 8,165 .2 70.0 10,945 2.1 52.1
Interest rate caps purchased 3,500 .4 -- 3,500 3.0 --
- -----------------------------------------------------------------------------------------------------------------------------
Total 11,665 .6 70.0 .1 14,445 5.1 52.1
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED IN CASH FLOW 11,665 .6 70.0 14,445 5.1 52.1
HEDGES .1
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVES USED FOR INTEREST
RATE RISK MANAGEMENT AND DESIG-
NATED IN SFAS 133 RELATIONSHIPS $118,371 $1,394.0 $574.1 $(22.6) $78,379 $930.8 $440.0
=============================================================================================================================
(a) Represents net ineffective hedge gain (loss) on hedging strategy for the
three-month period ended March 31, 2004.
39
- ---------------------------------------------------------------------------------------------------------------------------
March 31, 2003
-------------------------------------------------------------------
Derivative
----------------------------------------------------
Net Ineffective
Notional 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
Pay-fixed interest 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
- ---------------------------------------------------------------------------------------------------------------------------
Available for sale securities
Receive-fixed interest rate swaps 250 -- 3.0
- ---------------------------------------------------------------------------------------------------------------------------
Total 250 -- 3.0 --
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage servicing assets
Forward commitments to purchase
mortgage loans and mortgage-
backed securities 2,460 11.1 --
Receive-fixed interest rate swaps 4,005 348.4 --
Receive-fixed interest rate swaptions sold 250 -- 6.6
Pay-fixed interest rate swaptions purchased 2,960 50.8 --
Pay-fixed interest rate swaptions sold 2,254 -- 112.5
Principal-only interest rate swaps 501 30.3 6.5
Interest rate caps purchased 18,146 35.8 --
Interest rate floors purchased 60 .2 --
Interest rate futures purchased 975 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total 31,611 476.6 125.6 25.8
- ---------------------------------------------------------------------------------------------------------------------------
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 49,119 923.2 418.0 32.3
- ---------------------------------------------------------------------------------------------------------------------------
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 $64,469 $935.6 $566.5 $32.2
===========================================================================================================================
(a) Represents net ineffective hedge gain (loss) on hedging strategy for the
three-month period ended March 31, 2003.
40
OTHER DERIVATIVE ACTIVITIES: The derivative portfolio also includes derivative
financial instruments not included in SFAS 133 hedge relationships. Those
derivatives include 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 commercial
banking 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 financial instruments are
included in mortgage banking revenue on the income statement, while gains and
losses on other derivative financial instruments are included in other
noninterest income. A summary of derivative financial instruments not in SFAS
133 hedge relationships by type of activity follows:
- ------------------------------------------------- --------------------------------------------- ----------------------------
Net Derivative Asset (Liability) Net Gains (Losses)
--------------------------------------------------------------------------
Three Months Ended
MARCH 31 December 31 March 31 March 31
----------------------------
(In Millions) 2004 2003 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
OTHER DERIVATIVE INSTRUMENTS
Mortgage-banking-related:
Mortgage servicing asset risk management $(92.7) $ 36.1 $ (10.3) $406.6 $ 15.6
Mortgage loan commitments and
commitment and mortgage loan risk
management (41.2) (72.1) 124.0 119.2 152.1
- ----------------------------------------------------------------------------------------------------------------------------
Total mortgage-banking related (133.9) (36.0) 113.7 525.8 167.7
- ----------------------------------------------------------------------------------------------------------------------------
Customer risk management 16.2 15.0 18.0 2.0 3.4
Other 4.2 3.7 (20.6) (.6) (2.7)
- ----------------------------------------------------------------------------------------------------------------------------
Total other 20.4 18.7 (2.6) 1.4 .7
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER DERIVATIVE INSTRUMENTS $(113.5) $ (17.3) $111.1 $527.2 $168.4
============================================================================================================================
23. LINE OF BUSINESS RESULTS
National City operates six major lines of business: Consumer and Small Business
Financial Services, Wholesale Banking, National City Mortgage Co., National
Consumer Finance, Asset Management, and National Processing. Effective for the
first quarter of 2004, National City Mortgage Co., formerly a business unit
within National Consumer Finance, was designated as a separate line of business.
Prior periods have been restated to conform to the current line of business
reporting structure.
Consumer and Small Business Financial Services (CSB) 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, CSB's activities
also include small business services, dealer finance, education finance, retail
brokerage, and lending-related insurance services. Consumer lending products
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. CSB'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. Expenses include personnel and support
costs, in addition to credit costs.
National City Mortgage Co. (NCMC) originates conventional residential mortgage
and home equity loans both within National City's six-state footprint and
nationally. NCMC's activities also include servicing mortgage loans for
third-party investors. Mortgage loans originated by NCMC generally represent
loans collateralized by one-to-four-family residential real estate and are made
to borrowers in good credit standing. These loans are typically sold to primary
mortgage market aggregators (Fannie Mae, Freddie Mac, Ginnie Mae, or the Federal
Home Loan Banks) and jumbo loan investors. During the first three months of
2004, approximately 53% of NCMC mortgage loans were originated through wholesale
and correspondent channels, while 47% were originated through retail mortgage
branches operated by NCMC nationally, or through CSB bank branches within
National City's six-state footprint. Significant revenue streams for NCMC
include net interest income on loans held for sale and fee income related to the
origination, sale and servicing of loans. Expenses include personnel costs,
branch office costs, third-party outsourcing and loan collection expenses.
41
National Consumer Finance (NCF) is comprised of three business units and
originates home equity loans and nonconforming residential mortgage loans
nationally through correspondent relationships and a network of brokers.
Nonconforming mortgage loans are originated by First Franklin Financial
Corporation (First Franklin), a business unit within NCF, principally through
wholesale channels, including a national network of brokers and mortgage
bankers. Historically, approximately half of First Franklin originated loans are
retained in portfolio at National City Home Loan Services, another business unit
within NCF; the rest are sold servicing released to secondary market investors.
The percentage of loans sold versus retained in any given period will vary
depending on product mix and market conditions. Nonconforming mortgages are
generally not readily saleable to primary mortgage market aggregators primarily
due to the credit characteristics of the borrower, the underlying documentation,
the loan-to-value ratio, or the size of the loan, among other factors. The
National Home Equity business unit within NCF 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 and sale 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, and
acts as the investment advisor for the Armada(R) mutual funds. 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
83%-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 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 related to credit card and automobile loans are also considered
funding activities and the effects of such securitizations are included within
the Parent and Other category. The credit card and automobile loans 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,
intersegment revenue and expense eliminations, and unallocated corporate income
and expense. The intersegment revenue and expense amounts presented 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 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 on the following page.
42
- -----------------------------------------------------------------------------------------------------------------------------------
CONSUMER AND
SMALL
BUSINESS NATIONAL NATIONAL
FINANCIAL WHOLESALE CITY CONSUMER ASSET NATIONAL PARENT CONSOLIDATED
(In Thousands) SERVICES BANKING MORTGAGE CO. FINANCE MANAGEMENT PROCESSING AND OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31, 2004
Net interest income
(expense)(a) $ 495,607 $ 256,167 $ 141,651 $ 259,827 $ 26,238 $ 895 $ (155,228) $1,025,157
Provision (benefit) for
loan losses 75,323 10,656 4,498 11,061 228 -- (19,259) 82,507
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income
(expense) after provision 420,284 245,511 137,153 248,766 26,010 895 (135,969) 942,650
Noninterest income 180,303 99,815 458,985 134,686 92,652 121,991 29,265 1,117,697
Noninterest expense 352,799 124,255 155,317 118,649 77,470 103,314 54,536 986,340
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 247,788 221,071 440,821 264,803 41,192 19,572 (161,240) 1,074,007
Income tax expense
(benefit)(a) 93,664 82,388 167,499 100,096 15,570 7,608 (103,186) 363,639
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 154,124 $ 138,683 $ 273,322 $ 164,707 $ 25,622 $ 11,964 $ (58,054) $ 710,368
===================================================================================================================================
Intersegment revenue
(expense) $ (877) $ 3,956 $ 11,656 $ (5,994) $ 1,475 $ 1,378 $ (11,594) $ --
Average assets (in millions) 27,027 29,119 16,384 24,347 2,970 699 8,877 109,423
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
CONSUMER AND
SMALL
BUSINESS NATIONAL NATIONAL
FINANCIAL WHOLESALE CITY CONSUMER ASSET NATIONAL PARENT CONSOLIDATED
(In Thousands) SERVICES BANKING MORTGAGE CO. FINANCE MANAGEMENT PROCESSING AND OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter ended March 31, 2003
Net interest income
(expense)(a) $ 488,831 $ 259,902 $ 284,364 $ 171,212 $ 25,029 $ 683 $ (129,293) $1,100,728
Provision (benefit) for
loan losses 70,465 115,774 11,148 19,338 1,584 -- (18,076) 200,233
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income
(expense) after provision 418,366 144,128 273,216 151,874 23,445 683 (111,217) 900,495
Noninterest income 161,689 87,138 577,602 67,404 82,706 106,123 20,824 1,103,486
Noninterest expense 352,511 137,454 173,158 72,479 75,809 92,564 104,891 1,008,866
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 227,544 93,812 677,660 146,799 30,342 14,242 (195,284) 995,115
Income tax expense
(benefit) (a) 86,012 34,708 266,311 55,490 11,469 5,695 (108,073) 351,612
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 141,532 $ 59,104 $ 411,349 $ 91,309 $ 18,873 $ 8,547 $ (87,211) $ 643,503
===================================================================================================================================
Intersegment revenue
(expense) $ (982) $ 6,196 $ 9,278 $ (3,142) $ 2,015 $ 1,411 $ (14,776) $ --
Average assets (in millions) 25,803 31,198 28,869 16,357 2,916 533 10,642 116,318
===================================================================================================================================
(a) Includes tax-equivalent adjustment for tax-exempt interest income
43
24. 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) 2004 2003 2003
- -------------------------------------------------------------------------------------------------
ASSETS
Cash and demand balances due from banks $ 5,567 $ 1,521 $ 1,500
Loans to and receivables from subsidiaries 675,428 819,115 87,219
Securities 211,072 164,179 428,045
Other investments 143,682 479,394 147,040
Investments in:
Subsidiary banks 10,306,232 9,642,417 9,877,907
Nonbank subsidiaries 651,878 608,916 554,173
Goodwill 58,566 58,566 58,566
Derivative assets 155,042 124,901 143,819
Other assets 667,872 668,633 637,659
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $12,875,339 $12,567,642 $11,935,928
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt $ 2,097,738 $ 2,266,658 $ 2,289,585
Borrowed funds from subsidiaries 185,568 185,568 403,568
Derivative liabilities 2,463 4,695 13,586
Accrued expenses and other liabilities 735,459 782,050 642,026
- -------------------------------------------------------------------------------------------------
Total liabilities 3,021,228 3,238,971 3,348,765
Stockholders' equity 9,854,111 9,328,671 8,587,163
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,875,339 $12,567,642 $11,935,928
=================================================================================================
Securities and other investments totaling $110 million at March 31, 2004, were
restricted for use in certain nonqualified benefit plans. The borrowed funds
from subsidiaries balance includes the junior subordinated debt securities
payable to the two wholly-owned subsidiary trusts (the trusts) that were
deconsolidated as a result of applying the provisions of FIN 46. The holding
company continues to guarantee the capital securities issued by the trusts,
which totaled $180 million at March 31, 2004. Refer to Note 14 for further
discussion on FIN 46 and the deconsolidation of the trusts. The holding company
also guarantees commercial paper issued by its subsidiary National City Credit
Corporation, which borrowings totaled $497 million at March 31, 2004.
Additionally, the holding company guarantees National City Bank of Kentucky's
financial obligation under this subsidiary'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) 2004 2003
- ---------------------------------------------------------------------------------------------------
INCOME
Dividends from:
Subsidiary banks $ -- $ --
Nonbank subsidiaries 2,000 --
Interest on loans to subsidiaries 890 291
Interest and dividends on securities 1,274 2,118
Securities gains, net 103 --
Other income 6,640 392
- ---------------------------------------------------------------------------------------------------
TOTAL INCOME 10,907 2,801
===================================================================================================
EXPENSE
Interest on debt and other borrowings 20,438 24,781
Other expense 10,696 1,096
- ---------------------------------------------------------------------------------------------------
TOTAL EXPENSE 31,134 25,877
===================================================================================================
Income (loss) before taxes and equity in undistributed
net income of subsidiaries (20,227) (23,076)
Income tax (benefit) (25,906) (19,408)
- ---------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed net income of
subsidiaries 5,679 (3,668)
Equity in undistributed net income of subsidiaries 704,689 647,171
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 710,368 $ 643,503
===================================================================================================
44
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------
Three Months Ended
March 31
- ---------------------------------------------------------------------------------------------
(In Thousands) 2004 2003
- ---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 710,368 $ 643,503
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries (704,689) (647,171)
Depreciation and amortization of properties and equipment 471 222
Decrease in receivables from subsidiaries 223,687 14,770
Securities gains, net (103) --
Other gains, net (1,160) (15)
Amortization of premiums and discounts on securities and debt (74) (497)
Decrease in accrued expenses and other liabilities (50,373) (108,460)
Other, net 14,961 (3,167)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 193,088 (100,815)
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities (71,974) (242,695)
Proceeds from sales and maturities of securities 28,709 35,000
Net change in other investments 335,712 409,083
Principal collected on loans to subsidiaries 160,000 647,334
Loans to subsidiaries (240,000) (50,000)
Investments in subsidiaries -- (507)
Returns of investment from subsidiaries 4 --
Net (increase) decrease in properties and equipment (13,163) 10,840
- ---------------------------------------------------------------------------------------------
Net cash provided by investing activities 199,288 809,055
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in borrowed funds -- (802,000)
Issuance of debt 200,000 300,000
Repayment of debt (400,000) --
Dividends paid (194,479) (186,574)
Issuances of common stock 81,551 17,965
Repurchases of common stock (75,402) (37,629)
- ---------------------------------------------------------------------------------------------
Net cash used in financing activities (388,330) (708,238)
- ---------------------------------------------------------------------------------------------
Increase in cash and demand balances due from banks 4,046 2
Cash and demand balances due from banks, January 1 1,521 1,498
- ---------------------------------------------------------------------------------------------
CASH AND DEMAND BALANCES DUE FROM BANKS, MARCH 31 $ 5,567 $ 1,500
=============================================================================================
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 22,279 $ 24,740
=============================================================================================
Retained earnings of the holding company included $7.6 billion, $6.9 billion,
and $6.6 billion of equity in undistributed net income of subsidiaries at March
31, 2004, December 31, 2003, and March 31, 2003, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL REVIEW
This Quarterly Report contains forward-looking statements. See page 64 for
further information on the risks and uncertainties associated with
forward-looking statements.
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, 2004 and serves to update the 2003 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 45 of this Form 10-Q. Certain prior period amounts have been have been
restated to reflect changes in the Corporation's method of assessing
effectiveness of its hedging activities pursuant to Statement of Financial
Accounting Standards No. 133, Accounting for Derivatives and Hedging Activities.
45
OVERVIEW
The primary source of National City's revenue is net interest income from loans
and deposits, and fees from financial services provided to customers. Business
volumes tend to be influenced by overall economic factors including market
interest rates, business spending, and consumer confidence, as well as
competitive conditions within the marketplace.
National City's first quarter 2004 net income was $710 million, or $1.16 per
diluted share, compared to $643 million, or $1.05 per diluted share in the first
quarter of 2003. All lines of business, with the exception of National City
Mortgage Co., reported increased net income in the first quarter of 2004
compared to the same period in the prior year.
Average portfolio loans for the first quarter increased 8% from the first
quarter a year ago and 2% from the immediate preceding quarter. Commercial loans
outstanding during the first quarter declined in comparison to a year ago but
have shown some recent signs of recovery. The average balance outstanding of
commercial loans grew in both February and March compared to the low point
reached in January. Mortgage and home equity loans experienced strong growth in
the first quarter of 2004 as a result of the continued low interest rate
environment. The warehouse balance (mortgage loans held for sale) declined in
comparison to the prior year but still made a significant contribution to net
interest income in the first quarter of 2004. Derivative-related gains from
hedging of mortgage servicing rights also had a positive contribution on the
first quarter results. Interest rates began to rise in April. Accordingly,
management anticipates that these rising rates will cause mortgage originations
to slow and derivative-related gains to decline in the second quarter and over
the balance of 2004.
Core deposits continued to grow, although at a slower rate than was experienced
in the prior year. Competition for new account openings has increased, but
retention has improved. Credit quality continued to improve during the first
quarter, resulting in a significant decrease in the loan loss provision in
comparison to the prior year. Nonperforming assets at March 31, 2003 were $606
million in comparison to $657 million at year end and $822 million a year ago.
Current trends in credit continue to be favorable.
RESULTS OF OPERATIONS
NET INTEREST INCOME
This section should also be reviewed in conjunction with the daily average
balances/net interest income/rates table presented on pages 66-68 of this
financial review.
Net interest income is discussed and presented in this financial review on a
tax-equivalent basis, recognizing that interest on certain loans and securities
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
2004, the fourth quarter of 2003, and the first quarter of 2003, respectively.
Tax-equivalent net interest income for the first quarter of 2004 was $1.0
billion, virtually unchanged from the previous quarter, and down from $1.1
billion for the first quarter of 2003. The year-over-year decrease in net
interest income was primarily the result of lower average balances in the
mortgage warehouse.
Net interest margin was 4.16% in the first quarter of 2004, compared to 4.03% in
the fourth quarter of 2003 and 4.21% in last year's first quarter. The sustained
low interest rate environment, which results in reduced asset yields and
narrower spreads on deposits, continues to have an unfavorable impact on net
interest margin. The improvement in net interest margin on a linked-quarter
basis was primarily attributed to a slightly improved asset mix and the maturity
of higher yielding long-term debt during the first quarter of 2004.
Further discussion of trends in the loans and securities portfolios and detail
on the mix of funding sources that impact net interest income and net interest
margin is included in the Financial Condition section of this financial review
beginning on page 52.
46
NONINTEREST INCOME
Details of noninterest income follow:
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended
- ----------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2004 2003 2003
- ----------------------------------------------------------------------------------------------------------------
Mortgage banking revenue $ 579 $451 $ 631
Deposit service charges 147 146 135
Payment processing revenue 122 135 105
Trust and investment management fees 76 72 69
Card-related fees 37 42 41
Brokerage revenue 32 31 24
Other service fees 23 24 28
Other 102 80 70
- ----------------------------------------------------------------------------------------------------------------
TOTAL FEES AND OTHER INCOME 1,118 981 1,103
Securities gains, net -- 10 --
- ----------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME $1,118 $991 $1,103
================================================================================================================
Details of mortgage banking revenue follow:
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended
- ----------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2004 2003 2003
- ----------------------------------------------------------------------------------------------------------------
Servicing revenue:
Net servicing fees $120 $116 $ 120
Amortization of mortgage servicing assets (100) (73) (126)
Mortgage servicing asset impairment (charge) recovery (118) 13 100
Mortgage servicing asset ineffective hedge and
other derivative gains (losses), net 413 (9) 42
Other 1 5 --
- ----------------------------------------------------------------------------------------------------------------
Net servicing revenue 316 52 136
NCMC origination and sales revenue 122 334 426
First Franklin origination and sales revenue 141 65 69
- ----------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE BANKING REVENUE $579 $451 $ 631
================================================================================================================
Virtually all NCMC's mortgage loan production is sold into the secondary market
with servicing retained. Historically, approximately half of First Franklin's
loan production is sold to third parties servicing released, with the remainder
held in portfolio. The exact percentage of First Franklin loans sold versus
retained will vary based upon product mix and market conditions. Information on
mortgage loan originations and sales follows:
- --------------------------------------------------------------------------------------------------------
Three Months Ended
- --------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2004 2003 2003
- --------------------------------------------------------------------------------------------------------
NCMC loans originated for sale $14,069 $14,189 $24,300
Total First Franklin loan originations 5,673 6,203 3,488
First Franklin portfolio loan originations (1,113) (3,227) (1,756)
- --------------------------------------------------------------------------------------------------------
Total First Franklin loans originated for sale 4,560 2,976 1,732
- --------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE LOANS ORIGINATED FOR SALE $18,629 $17,165 $26,032
========================================================================================================
NCMC loan sales $15,697 $22,164 $25,611
First Franklin loan sales 4,433 2,379 1,851
- --------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE LOAN SALES $20,130 $24,543 $27,462
========================================================================================================
The linked-quarter growth in mortgage banking revenue was primarily attributed
to successful hedging strategies to protect the value of mortgage servicing
rights (MSRs) and an increase in origination and sales revenue at First
Franklin, offset by declines in origination and sales revenue at NCMC. In
addition, a change in accounting for mortgage loan commitments made as of
January 1, 2004, to conform to the recently issued SEC Staff Accounting Bulletin
105 had the effect of reducing first quarter origination and sales revenue by
$59 million as compared to previous accounting practice. The year-over-year
decrease in mortgage banking revenue was the result of the declines in
origination and sales revenue more than offsetting increases in net MSR hedging
gains.
47
NCMC typically retains the right to service the mortgage loans it sells. Upon
sale, the NCMC recognizes an MSR asset, which represents the present value of
the estimated future net servicing cash flows over the estimated life of the
underlying loan. As a result of the high volume of mortgage loan production and
sales over the past year, the unpaid principal balance of loans serviced for
third parties increased to $144.6 billion at March 31, 2004, up from $141.1
billion at December 31, 2003 and $112.4 billion at March 31, 2003. The carrying
value of MSRs also grew over the past year and was $1.2 billion at March 31,
2004, $1.3 billion at December 31, 2003, and $813 million at March 31, 2003.
The value of MSRs is sensitive to changes in interest rates. In a low rate
environment, as was experienced during the first quarter of 2004 and much of
2003, mortgage loan refinancings generally increase, causing actual and expected
loan prepayments to increase, which drives down the estimated value of existing
MSRs. Conversely, as interest rates rise, mortgage loan refinancings generally
decline, causing actual and expected loan prepayments to decrease, which drives
up the estimated value of existing MSRs. The Corporation manages the risk
associated with declines in the value of MSRs by using derivative instruments.
Further detail on MSRs, including a sensitivity analysis of the effect changes
in assumptions have on the value of servicing assets, is included in Note 11 to
the consolidated financial statements.
Deposit service charges remained strong in the first quarter of 2004. The
year-over-year growth in deposit service charges was primarily attributed to
increases in overdraft and non-sufficient fund (NSF) fees resulting from higher
core deposit balances and an increased number of accounts.
The year-over-year growth in payment processing revenue generated by National
Processing, Inc. (NPI), National City's 83%-owned subsidiary, was the result of
higher transaction volumes, the purchase of Bridgeview Payment Solutions (BPS)
in the second quarter of 2003, and the benefit of rate changes implemented by
VISA(R) and MasterCard(R), offset by revenue declines associated with lower
transaction volume processed for the airline and travel industries. The increase
in transaction volume reflects growth from existing accounts and the addition of
new regional merchant customers. The decline in the airline and travel
industries transaction volume is a result of the decision to discontinue
servicing the airline industry. The linked-quarter decline in payment processing
revenue was mainly attributed to seasonally lower transaction volume following
the fourth quarter holiday season.
Trust and investment management fees increased on a linked-quarter and
year-over-year comparison primarily as the result of higher values of assets
under administration upon which fees are calculated, reflecting improved equity
market conditions. At March 31, 2004, assets under administration were $111.9
billion, compared to $111.8 billion at December 31, 2003, and $101.1 billion at
March 31, 2003.
Brokerage revenue grew during the first quarter of 2004 over the prior year due
to increased fees and commissions associated with investment banking and retail
brokerage equity trading activities. Trading activity increased as a result of
the recovery in the equity markets and the realignment and integration of retail
brokerage activities with the retail branch network in 2003.
Other noninterest income increased both on a linked-quarter and year-over-year
basis due to higher current year principal investment gains and a gain on the
securitization of automobile loans, offset by derivative-related losses.
Principal investment gains for the first quarter of 2004 were $23 million,
compared to $6 million for the same quarter a year ago and no gain recognized
during the previous quarter. First quarter 2004 results also included a gain of
$9 million on the securitization of $890 million of automobile loans with no
similar gains recognized in the comparative periods. The derivative-related
losses were primarily attributed to current year decreases in the fair value of
derivative instruments used to economically hedge deferred compensation
liabilities and a $4 million loss associated with the discontinuation of a cash
flow hedge recognized in the first quarter of 2004.
The majority of net security gains recognized during the fourth quarter of 2003
were generated from the Corporation's internally-managed equity portfolio of
bank and thrift common stocks (bank stock fund). Bank stock gains, included in
net security gains, were $103 thousand and $8 million for the first quarter of
2004 and fourth quarter of 2003, respectively. There were no bank stock fund
gains recognized during the first quarter of 2003.
48
NONINTEREST EXPENSE
Details of noninterest expense follow:
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended
- ------------------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2004 2003 2003
- ------------------------------------------------------------------------------------------------------------------------
Salaries, benefits, and other personnel $549 $ 541 $ 561
Third-party services 68 88 65
Equipment 69 75 65
Net occupancy 60 61 58
Card processing 58 60 52
Postage and supplies 34 35 33
Marketing and public relations 22 30 17
Telecommunications 19 22 21
State and local taxes 15 16 16
Travel and entertainment 16 19 13
Goodwill and other intangible asset amortization 6 6 5
Other 70 92 103
- ------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE $986 $1,045 $1,009
========================================================================================================================
Details of salaries, benefits, and other personnel expense follow:
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended
- ------------------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(Dollars in Millions) 2004 2003 2003
- ------------------------------------------------------------------------------------------------------------------------
Salaries and wages $313 $ 313 $ 299
Incentive compensation 157 167 171
Deferred personnel costs (81) (101) (110)
Stock-based compensation 12 10 4
Payroll taxes 44 28 43
Contract labor 19 38 20
Medical and other benefits 46 45 44
Defined contribution plans 22 13 23
Defined benefit pension plan 2 (4) (4)
Market valuation adjustments on deferred compensation liabilities 3 19 (1)
Severance and other 12 13 72
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SALARIES, BENEFITS, AND OTHER PERSONNEL $549 $ 541 $ 561
========================================================================================================================
FULL-TIME-EQUIVALENT EMPLOYEES 33,036 33,331 32,633
========================================================================================================================
The year-over-year decrease in salaries, benefits, and other personnel expense
was mainly attributed to lower severance costs and incentive compensation,
offset by increases in salaries, payroll taxes, stock-based compensation,
defined pension costs and a reduction in deferred personnel costs. During the
first quarter of 2003, the Corporation recorded $68 million in severance and
related charges in connection with certain cost-reduction initiatives with no
similar charge recorded in 2004. Salaries and payroll taxes rose mainly due to
the year-over-year increase in full-time-equivalent employees. The reductions in
incentive compensation and deferred personnel costs were primarily attributed
lower mortgage origination volumes in 2004. The increase in stock-based
compensation resulted from the application of SFAS 123 to all new stock options
granted in 2004 and 2003. The higher defined pension benefit cost recognized
during the first quarter of 2004 resulted primarily from decreases in the
discount rate and expected long-term rate of return assumptions used in the
actuarial calculation. The aforementioned changes in incentive compensation,
deferred personnel costs, payroll taxes, and defined pension cost also affected
the linked-quarter increase in salaries, wages, and other personnel expense.
Offsetting the linked-quarter increase in salaries, benefits, and other
personnel expense were reductions in contract labor and market valuation
adjustments on deferred compensation liabilities. Contract labor decreased
during the first quarter due to higher costs incurred during the fourth quarter
of 2003 for the completion of various information technology projects. The
year-over-year increase in full-time equivalent employees was the result of
higher levels of staffing to support the mortgage and home equity related
businesses, offset by personnel reductions in 2003 throughout the Corporation
associated with the aforementioned cost reduction initiative. The reduced
staffing levels on a linked-quarter basis were primarily at National City
Mortgage Co.
49
Third-party services expense decreased on a linked-quarter comparison due to
declines in professional service and consulting fees and a decrease in
outsourcing activities associated with lower levels of mortgage banking volume.
Card processing expense increased on a year-over-year comparison primarily due
to higher processing volumes at National Processing.
The year-over-year increase in marketing and public relations expense was
primarily related to higher television and print advertising costs associated
with a new advertising campaign. The linked-quarter decrease in marketing and
public relations expense was primarily attributed to higher advertising expenses
incurred during the 2003 fourth quarter for that campaign.
The year-over-year and linked-quarter decreases in other noninterest expense
primarily reflect the timing and amount of charges for automobile lease and
commercial lease residual value write-downs and the revaluation of civic and
community development investments. The first quarter of 2003 included automobile
lease and commercial lease residual value charges of $25 million and $16
million, respectively, with no similar charges recognized during the 2004 first
quarter. The fourth quarter of 2003 included an automobile residual value
insurance recovery of $2 million and civic and community development investment
revaluation charges of $23 million. Civic and community development charges
recognized during the first quarter of 2004 were $12 million.
The efficiency ratio, calculated as noninterest expense divided by the sum of
tax-equivalent net interest income and total fees and other income, was 46.0%
and 45.8% for the first quarters of 2004 and 2003, respectively.
INCOME TAXES
The effective tax rate was 33.5% for the first three months of 2004 compared to
34.8% for the first three months of 2003. The lower tax rate in 2004 reflects a
reduction in deferred tax balances in the amount of $23 million due to the
favorable conclusion of several tax examinations. The effective tax rate for
2004 is forecasted to be 36% exclusive of the first quarter adjustment.
LINE OF BUSINESS RESULTS
National City is functionally managed along six major business lines. Effective
for the first quarter of 2004, National City Mortgage Co. was designated as
separate line of business to better reflect how management evaluates this
business. Further discussion about this change and a description of each
business line, including its products, customers and markets served, and
selected financial information for the first quarter of 2004 and 2003 is
included in Note 23 to the consolidated financial statements.
Net income (loss) by line of business follows:
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended
- -----------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2004 2003 2003
- -----------------------------------------------------------------------------------------------------------------
Consumer and Small Business Financial Services $154 $145 $141
Wholesale Banking 139 81 59
National City Mortgage Co. 273 263 411
National Consumer Finance 165 91 91
Asset Management 26 23 19
National Processing 12 15 9
Parent and Other (59) (74) (87)
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED NET INCOME $710 $544 $643
=================================================================================================================
Consumer and Small Business Financial Services (CSB): The increase in net income
during the first quarter of 2004 is reflective of continued growth in core
deposits, fee revenue, and consumer lending. Although net interest income has
benefited from loan and deposit growth, the sustained low interest rate
environment has reduced the net interest margin on deposits. Noninterest income
has benefited from core deposit growth as higher volumes of transactions and
number of accounts have led to increases in deposit and other service fees.
Deposit growth slowed in the most recent quarter, reflecting a more competitive
environment. Noninterest expense included an automobile lease residual value
charge of $25 million for the first quarter of 2003, with no similar charge
recorded in the first quarter of 2004, and a recovery of $2 million for the
fourth quarter of 2003.
50
Wholesale Banking: Growth in net income on a linked-quarter and year-over-year
comparison primarily reflects lower credit costs, the result of an overall
improvement in net charge-offs, nonperforming loans, and other problem assets
during the 2004 first quarter. Those trends are expected to continue over the
balance of 2004. There were no commercial lease residual value charges
recognized in noninterest expense during the first quarter of 2004 and fourth
quarter of 2003, compared to charges of $16 million for the first quarter of
2003. Noninterest income in the 2004 first quarter included principal investment
gains of $23 million, up from $89 thousand and $6 million for the fourth and
first quarters of 2003, respectively.
National City Mortgage Co. (NCMC): The linked-quarter increase in net income was
primarily related to higher MSR net hedging gains, offset by lower production
revenue attributed to lower first quarter mortgage origination and sales levels
and a change in accounting for mortgage loan commitments made to conform to the
recently issued SEC Staff Accounting Bulletin 105, which had the effect of
lowering first quarter revenue by $59 million. Net income declined on a
year-over-year comparison as the first quarter 2004 decrease in production
revenue more than offset the effect of MSR net hedging gains. Also affecting net
income on a linked-quarter and year-over-year comparison were reductions in
noninterest expense and net interest income, reflective of lower amounts of
production-based incentive compensation and lower levels of loans held for sale,
respectively. Average mortgage loans held for sale were $10.1 billion, $15.4
billion, and $21.7 billion at March 31, 2004, December 31, 2003, and March 31,
2003, respectively.
National Consumer Finance (NCF): Linked-quarter and year-over-year net income
continued to benefit from residential real estate production originated by the
First Franklin business unit and home equity production originated nationally by
the National Home Equity business unit. Strong growth in portfolio loans,
including retained First Franklin loans, over the past several years has had a
positive impact on net interest income. Historically, approximately half of all
residential real estate loans originated by First Franklin have been retained in
portfolio, and at March 31, 2004, the First Franklin portfolio grew to $15.6
billion, up from $15.1 billion at December 31, 2003 and $10.4 billion at March
31, 2003. Over the past year, $9.6 billion of First Franklin loans were retained
in portfolio. Increases in noninterest income and expense resulted from higher
First Franklin loan origination and sales revenue and related incentive
compensation, respectively.
Asset Management: Net income increased during the first quarter of 2004
principally due to higher levels of assets under administration, resulting in
higher fee income. Assets under administration were $111.9 billion, $111.8
billion, and $101.1 billion at March 31, 2004, December 31, 2003, and March 31,
2003, respectively. The growth in assets under administration is primarily the
result of appreciation in the equity markets.
National Processing: The year-over-year growth in net income reflects increases
in transaction volume, the second quarter 2003 acquisition of Bridgeview Payment
Solutions, and the benefit of rate changes implemented by VISA(R) and
MasterCard(R) in 2003. These favorable factors were partially offset by price
compression in the national merchant base and a decline in transactions
processed for the airline industry. The lower airline volumes are the result of
the strategic decision in 2002 to discontinue serving this customer base as
existing contractual obligations expire. The last remaining airline contract
expires in 2005. The linked-quarter decrease in net income was mainly attributed
to seasonally lower transaction volume following the fourth quarter holiday
season.
Parent and Other: This category includes the results of investment funding
activities, unallocated corporate income and expense, and intersegment revenue
and expense eliminations. The major item affecting the year-over-year decrease
was lower severance and related charges, which were $3 million in the first
quarter of 2004, compared to $72 million for the same period last year. In
addition, a tax benefit of $23 million was recorded in the first quarter of 2004
from the favorable conclusion of several tax examinations. The year-over-year
decrease in net loss was partially offset by a first quarter 2004 gain of $9
million related to the securitization of $890 million of automobile loans, with
no similar gain recognized during the first quarter of 2003. Items affecting the
linked-quarter decline in net loss were the aforementioned first quarter 2004
securitization gain and tax benefit, coupled with lower bank stock fund gains
and civic and community development investment write-downs. Bank stock fund
gains and civic and community development writedowns were $103 thousand and
$(12) million, respectively, for the first quarter of 2004, compared to $8
million and $(23) million, respectively, for the fourth quarter of 2003.
51
FINANCIAL CONDITION
This section should also be reviewed in conjunction with the average balance
sheets presented on pages 65-66 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) 2004 2003 2003
- ---------------------------------------------------------------------------------------------------------------
Portfolio loans
Commercial $18,860 $ 20,022 $ 22,415
Commercial construction 2,245 2,445 2,181
Real estate-- commercial 9,819 9,587 9,420
Real estate-- residential 27,076 25,564 21,025
Home equity lines of credit 11,396 10,410 8,152
Credit card and other unsecured lines of credit 2,283 2,330 2,033
Other consumer 7,406 7,543 7,957
- ---------------------------------------------------------------------------------------------------------------
Total portfolio loans 79,085 77,901 73,183
Loans held for sale or securitization 12,323 17,680 22,524
Securities (at amortized cost) 6,537 6,534 8,295
Other 814 1,103 783
- ---------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $98,759 $103,218 $104,785
===============================================================================================================
The increase in portfolio loans was primarily driven by the retention of
residential real estate loan production from First Franklin and home equity loan
production from the National Home Equity division. During the first quarter of
2004, $1.1 billion of First Franklin's production was retained for the
residential real estate portfolio, compared to $3.2 billion a quarter ago and
$1.8 billion in the first quarter a year ago. Over the past year, $9.6 billion
of First Franklin loans were retained in portfolio. Period-end First Franklin
residential real estate loans grew to $15.6 billion at March 31, 2004, up from
$15.1 billion last quarter and $10.4 billion at March 31, 2003. Additionally,
during 2003, $1.2 billion of adjustable-rate mortgage loans originated by NCMC
were retained in portfolio, including $672 million in the first quarter of 2003
and $196 million in the first quarter of 2004. Home equity production remained
strong during the first quarter of 2004, benefiting from the sustained low
interest rate environment and continued focus on the national home equity
market. Partially offsetting the increases in average portfolio loans during the
first quarter of 2004 were the securitization of $890 million of automobile
loans and the continued run-off of the automobile lease portfolio, both of which
affected the decrease in the other consumer portfolio. Average balances of
commercial loans have declined over the past year as paydowns have exceeded new
volume, but that trend appears to have reversed during the first quarter, and
growth is expected over the remainder of 2004.
Average loans held for sale decreased during the first quarter of 2004 from
their peak levels in 2003 due to lower mortgage loan origination volumes at
NCMC, offset to some extent by strong mortgage loan origination activity at
First Franklin. Balances are expected to decline over the remainder of 2004.
The year-over-year decrease in average securities was primarily the result of
sales and principal paydowns in the mortgage-backed and asset-backed securities
portfolio.
52
The following table summarizes the period-end commercial, commercial
construction, and commercial real estate portfolios by major industry and
exposure to individual borrowers as of March 31, 2004.
- ---------------------------------------------------------------------------------------------------------------------
Average Largest Loan
Outstanding % to Loan Balance to a Single
(Dollars in Millions) Balance Total Per Obligor Obligor
- ---------------------------------------------------------------------------------------------------------------------
Real estate $ 9,678 31% $.80 $ 42
Consumer cyclical 4,901 16 .80 108
Consumer noncyclical 3,738 12 .40 35
Industrial 3,265 10 .90 51
Basic materials 2,646 9 1.30 35
Financial 1,817 6 1.40 45
Services 1,250 4 .40 68
Energy and utilities 548 2 1.00 20
Technology 240 1 2.20 21
Miscellaneous 1,668 5 .20 19
- ---------------------------------------------------------------------------------------------------------------------
29,751 96
Commercial leasing-- all industries 1,347 4
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $31,098 100%
=====================================================================================================================
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) 2004 2003 2003
- -------------------------------------------------------------------------------------------------------------------
Noninterest bearing deposits $ 15,658 $ 16,089 $ 15,689
Interest bearing core deposits 42,702 42,390 40,398
- -------------------------------------------------------------------------------------------------------------------
Total core deposits 58,360 58,479 56,087
Purchased deposits 7,378 8,465 9,972
Short-term borrowings 9,536 9,746 14,942
Long-term debt 21,339 25,056 22,826
- -------------------------------------------------------------------------------------------------------------------
Total purchased funding 38,253 43,267 47,740
Stockholders' equity 9,659 9,390 8,529
- -------------------------------------------------------------------------------------------------------------------
TOTAL FUNDING $106,272 $111,136 $112,356
===================================================================================================================
TOTAL INTEREST BEARING LIABILITIES $ 80,955 $ 85,657 $ 88,138
===================================================================================================================
TOTAL CORE DEPOSITS, EXCLUDING MORTGAGE ESCROW DEPOSITS $ 54,913 $ 54,785 $ 51,869
===================================================================================================================
The percentage of each funding source to total funding follows:
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
- -------------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
2004 2003 2003
- -------------------------------------------------------------------------------------------------------------------
Noninterest bearing deposits 14.7% 14.5% 14.0%
Interest bearing core deposits 40.2 38.1 35.9
- -------------------------------------------------------------------------------------------------------------------
Total core deposits 54.9 52.6 49.9
Purchased deposits 6.9 7.6 8.9
Short-term borrowings 9.0 8.8 13.3
Long-term debt 20.1 22.5 20.3
- -------------------------------------------------------------------------------------------------------------------
Total purchased funding 36.0 38.9 42.5
Stockholders' equity 9.1 8.5 7.6
- -------------------------------------------------------------------------------------------------------------------
TOTAL 100.0% 100.0% 100.0%
===================================================================================================================
The first quarter decline in average core deposits from the fourth quarter was
due to lower mortgage escrow deposits. Excluding these deposits, core deposits
grew for the 14th consecutive quarter. This growth continues to be reflective of
new account acquisition and retention, attractive product offerings such as free
checking and online bill payment, and an ongoing emphasis on service quality and
customer care. Average purchased deposits and short-term borrowings, which are
mainly used to fund asset growth in mortgage loans held for sale, decreased on a
linked-quarter and year-over-year comparison in direct correlation with lower
average balances of mortgage loans held for sale. The linked-quarter and
year-over-year decrease in long-term debt was mainly the result of paydowns and
maturities more than offsetting the impact of new debt issuances during the
first quarter of 2004.
53
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.
Stockholders' equity was $9.9 billion at March 31, 2004, up from $9.3 billion
and $8.6 billion at December 31, 2003 and March 31, 2003, respectively. Equity
as a percentage of assets was 8.85% at March 31, 2004, compared to 8.19% at
December 31, 2003 and 7.31% a year ago. Book value per common share rose to
$16.25 at March 31, 2004, up from $15.39 and $14.05 at December 31, 2003 and
March 31, 2003, respectively.
The following table summarizes share repurchase activity for the first quarter
of 2004.
- ----------------------------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of Shares that
Total Number Average Purchased Under Publicly May Yet Be Purchased Under
of Shares Price Paid Announced Share Repurchase the Share Repurchase
Period Purchased Per Share Authorizations Authorizations
- ----------------------------------------------------------------------------------------------------------------------------------
January 1 to January 31, 2004 1,352,000(a) $34.32 1,352,000(a) 26,506,000
February 1 to February 29, 2004 832,000(a) $34.86 832,000(a) 50,000,000(b)
March 1 to March 31, 2004 -- -- -- 50,000,000(b)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 2,184,000 $34.53 2,184,000 50,000,000(b)
==================================================================================================================================
(a) Repurchases made under the October 25, 1999 and February 24, 2003 share
repurchase authorizations.
(b) Shares available to be repurchased under the new February 16, 2004 share
repurchase authorization.
On October 25, 1999, the Corporation's Board of Directors authorized a share
repurchase program for the repurchase of up to 30 million shares of National
City common stock, subject to an aggregate purchase limit of $1.0 billion. On
February 24, 2003, the Corporation's Board of Directors authorized the
repurchase of up to 25 million shares of National City common stock, subject to
a purchase limit of $800 million. Shares repurchased under these programs were
purchased on the open market and are held for reissue in connection with the
Corporation's compensation plans and for general corporate purposes. During the
first quarter of 2004 and 2003, the Corporation repurchased 2.2 million and 1.4
million shares of its common stock, respectively, under these authorizations.
On February 16, 2004, the Corporation's Board of Directors authorized a share
repurchase program for the repurchase of up to 50 million shares of National
City common stock, subject to an aggregate purchase limit of $2.0 billion. This
new authorization has no date of expiration and replaced all previous
authorizations. To date, no shares have been repurchased under this
authorization.
The Corporation's businesses typically generate significant amounts of capital
each year in excess of normal dividend and reinvestment requirements. Subject to
ongoing capital, investment, and acquisition considerations, management intends
to continue share repurchases in 2004. Recent share repurchase activity has been
limited by restrictions arising from pending acquisitions. Such restrictions
will likely result in no further share repurchase activity until after
shareholder approval of the Provident Financial Group, Inc. acquisition.
The dividend payout is continually reviewed by management and the Board of
Directors. National City declared and paid dividends per common share of $.32
during the first quarter of 2004, up one and a half cents from the quarterly
dividend per share declared and paid in the first quarter of last year. The
dividend payout ratio, representing dividends per share divided by earnings per
share, was 27.6% and 29.1% for the first quarters of 2004 and 2003,
respectively.
At March 31, 2004, the Corporation's market capitalization was $21.6 billion.
National City Corporation's common stock is traded on the New York Stock
Exchange under the symbol "NCC." Historical stock price information is presented
in the following table.
- ------------------------------------------------------------------------------------------------------------------------
2004 2003
-------------------- -----------------------------------------------------------------------
FIRST Fourth Third Second First
NYSE: NCC QUARTER Quarter Quarter Quarter Quarter
- ----------------------- -------------------- ------------------- ------------------ ----------------- --------------
High $37.10 $34.44 $34.56 $34.97 $29.45
Low 32.14 29.46 29.03 27.72 26.53
Close 35.58 33.94 29.46 32.71 27.85
========================================================================================================================
54
RISK MANAGEMENT
National City management, with the oversight of the Board of Directors, has in
place various committees and organizational structures for managing and
mitigating risk on an enterprise-wide basis. The following discussion addresses
the three major risks facing National City: credit, market, and liquidity.
CREDIT RISK
The Corporation's lending activities 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. The policies governing nonperforming loans and charge-offs are
consistent with regulatory standards.
The most significant factor affecting the level of net charge-offs and
nonperforming and delinquent loans during the first quarter of 2004 and the
allowance for loan losses at March 31, 2004 was the overall improvement in the
economy over the past year, which lessened the financial stress on companies
that had manifested itself through increased levels of delinquencies and net
charge-offs in 2003.
There are no particular industry or geographic concentrations in net charge-offs
or nonperforming or delinquent loans.
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) 2004 2003 2003
- ------------------------------------------------------------------------------------------------------
Commercial $16 $ 68 $ 93
Commercial construction -- 1 --
Real estate-- commercial (1) 10 2
Real estate-- residential 18 22 31
Home equity lines of credit 4 4 4
Credit card and other
unsecured lines of credit 29 25 20
Other consumer 16 21 21
- ------------------------------------------------------------------------------------------------------
TOTAL NET CHARGE-OFFS $82 $151 $171
======================================================================================================
Net charge-offs as a percentage of average loans by portfolio type follow:
- ------------------------------------------------------------------------------------------------------
Three Months Ended
- ------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
2004 2003 2003
- ------------------------------------------------------------------------------------------------------
Commercial .34% 1.37% 1.67%
Commercial construction (.01) .13 .02
Real estate-- commercial (.06) .41 .10
Real estate-- residential .28 .33 .59
Home equity lines of credit .14 .15 .20
Credit card and other
unsecured lines of credit 5.08 4.29 3.92
Other consumer .91 1.04 1.09
=====================================================================================================
TOTAL NET CHARGE-OFFS
TO AVERAGE PORTFOLIO LOANS (ANNUALIZED) .42% .76% .95%
=====================================================================================================
Net charge-offs decreased on a linked-quarter and year-over-year comparison
primarily due to lower commercial losses, reflective of the improvement in the
economy, lower levels of nonperforming loans, and loan sales. The first quarter
2004 decline in residential real estate net charge-offs reflects improvement in
the overall credit quality of the portfolio, including the fourth quarter sale
of $950 million of the former Altegra portfolio. The linked-quarter increase in
credit card and other unsecured lines of credit net charge-offs was reflective
of higher losses associated with the growth and seasoning of the portfolio
coupled with higher levels of consumer bankruptcies. The decrease in other
consumer net charge-offs reflects improvement in credit quality including a
reduction in the portfolio through the continued runoff of the automobile lease
business.
55
NONPERFORMING ASSETS: Details of nonperforming assets follow:
- ----------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(Dollars in Millions) 2004 2003 2003
- ----------------------------------------------------------------------------------------------------------
Commercial $200 $257 $379
Commercial construction 4 7 6
Real estate-- commercial 68 67 78
Real estate-- residential 233 219 233
- ----------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING LOANS 505 550 696
Other real estate owned (OREO) 92 99 116
Mortgage loans held for sale 9 8 10
- ----------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS $606 $657 $822
==========================================================================================================
NONPERFORMING ASSETS AS A PERCENTAGE OF:
PERIOD-END PORTFOLIO LOANS AND OTHER
NONPERFORMING ASSETS .76% .83% 1.10%
PERIOD-END TOTAL ASSETS .54 .58 .70
==========================================================================================================
Detail of loans 90 days past due accruing interest follows:
- ----------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2004 2003 2003
- ----------------------------------------------------------------------------------------------------------
Commercial $ 26 $ 20 $ 42
Commercial construction 10 3 5
Real estate - commercial 35 32 18
Real estate - residential 416 428 447
Home equity lines of credit 14 15 14
Credit card and other unsecured lines of credit 17 18 16
Other consumer 10 12 12
Mortgage loans held for sale and other 36 37 57
- ----------------------------------------------------------------------------------------------------------
TOTAL LOANS 90 DAYS PAST DUE ACCRUING INTEREST $564 $565 $611
==========================================================================================================
In general, many of the same factors that affected comparability in net
charge-offs also drove changes in nonperforming assets and loans 90 days past
due. Additionally, the reduction in commercial nonperforming loans benefited
from sales of nonperforming loans to third parties, which totaled $11 million,
$27 million and $32 million for first quarter of 2004, the fourth quarter of
2003, and first quarter of 2003, respectively. The year-over-year decrease in
nonperforming mortgage loans held for sale and 90 days past due accruing
interest was primarily attributed to the lower mortgage warehouse.
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 of the overall allowance is based
on the size and current risk characteristics of the loan portfolio and includes
an assessment of individual problem loans, actual loss experience, current
economic events in specific industries and geographical areas, and other
pertinent factors, including general economic conditions, unemployment levels,
and regulatory guidance.
The allowance for loan losses as a percentage of portfolio loans was 1.41% at
March 31, 2004. The provision for loan losses was $83 million for the first
quarter of 2004, down from $148 million last quarter and down from $200 million
recorded for the same quarter last year. The lower loss provision in 2004 is
reflective of the overall improvement in credit quality driven mainly by lower
commercial losses and delinquent loans.
An allocation of the ending allowance for loan losses by portfolio type follows:
- ----------------------------------------------------------------------------------------------------------------
MARCH 31 December 31 March 31
(In Millions) 2004 2003 2003
- ----------------------------------------------------------------------------------------------------------------
Commercial $ 424 $ 383 $ 468
Commercial construction and real estate -
Commercial 62 56 56
Real estate-- residential 118 125 141
Home equity lines of credit and other consumer loans 78 94 76
Credit card and other unsecured lines of credit 118 129 76
Unallocated 326 338 311
- ----------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCE $1,126 $1,125 $1,128
================================================================================================================
56
The allowance allocated to the commercial portfolio at March 31, 2004 decreased
on a year-over-year comparison due to the aforementioned overall improvement in
credit quality and sales of nonperforming commercial loans. The higher allowance
allocated to the commercial portfolio at March 31, 2004 from year-end was
primarily the result of refinements made to the loan loss allocation methodology
and to the effect of recent experience on the loss factors used in the
allocation model. The linked-quarter and year-over-year decline in the allowance
allocated to the residential real estate portfolio was reflective of reduced
estimated inherent risk in the portfolio due to improved credit quality and the
aforementioned sale of the former Altegra portfolio in the fourth quarter of
2003. The linked-quarter decline in the allowance allocated to home equity and
other consumer loans was primarily attributed to lower estimated inherent risk
in the portfolio, reflective of improved credit quality. The allowance allocated
to the credit card and other unsecured lines of credit at March 31, 2004
increased over the prior year primarily due to the same factors that drove the
increases in net charge-offs previously discussed.
The unallocated allowance, which is maintained to absorb estimated probable
inherent but undetected losses in the loan portfolio, remained relatively
unchanged at March 31, 2004 based upon management's judgment and reflects
continued uncertainty surrounding economic conditions in the near-term,
including in the primary Midwest geographic region in which the company
operates. Although most observable credit quality indicators have shown
improvement, there are also increased risks that additional undetected losses
exist in light of the severity of the past recession and ongoing uncertainty.
Such uncertainty is evidenced by lagging job creation, volatility of interest
rates and energy prices, the impacts of terrorism and war, budget shortfalls at
all levels of government, and continuing slow demand for capital investments,
especially in the manufacturing sector, all of which has led to greater
volatility in historical loss rates used in National City's credit risk models.
Additionally, as the result of acquisitions and expansion of lending activities
into new products and markets, the portfolio mix has changed in recent years. As
a result, historical loss experience data used in the allowance allocation
estimates may not correspond exactly to the characteristics of the current
portfolio. Also, in some portfolio sectors, robust data representative of a
complete economic cycle is not available. In light of these factors, management
believes that the actual risk of loss in the portfolio may be greater than the
estimates in the historical loss allocation models.
MARKET RISK
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 Risk and Public Policy 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, 2004, this portfolio had a cost basis and fair value of $38 million
and $42 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
market value modeling. 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. 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.
57
Market implied forward rates over the next 12 months are used as the base rate
scenario in the earnings simulation model. A high rate scenario and a low rate
scenario are also modeled and consist of statistically determined two-standard
deviation moves above and below market implied forward rates over the next 12
months. These rate scenarios are non-parallel in nature and result in short and
long-term rates moving in different magnitudes. Resulting net incomes from the
base, high, and low scenarios are compared and the percentage change from base
net income is limited by ALCO policy to -4.0%.
The most recent earnings simulation model prepared for the April 2004 ALCO
meeting projects net income would be 1.4% higher than base net income if rates
were two standard deviations higher than the implied forward curve over the next
12 months. The model also projects a decrease in net income of 9.1% if rates
were two standard deviations below the implied forward curve over the same
period. The projected decrease in net income is above the ALCO guideline of
- -4.0%, however, management believes a sustained 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 sales income while servicing-related income may rise due to
lower prepayments. 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.
Market Value Modeling: Market Value of Equity (MVE) analysis is used to estimate
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 MVE of the balance sheet is defined as the discounted present value
of asset cash flows, minus the discounted value of liability cash flows, plus
the discounted value of any off-balance sheet cash flows. Unlike the earnings
simulation model, MVE analysis has no horizon limitations and does not truncate
cash flows after 12 months. In addition, MVE analysis is performed on the
balance sheet as of a single point in time and does not include estimates of
future business volumes. As with earnings simulations, assumptions driving
timing and magnitude of balance sheet cashflows are critical inputs to the
model. Particularly important are assumptions driving loan and security
prepayments and noncontractual deposit balance and rate behavior.
The sensitivity of MVE to changes in interest rates is an indication of the
longer-term interest rate risk embedded in the balance sheet. This risk may not
be present in an earnings simulation due to the short time horizon or effect of
estimated new business volumes in the earnings simulation model. A primary
measure of the sensitivity of MVE to movements in rates is defined as the
Duration of Equity (DOE). DOE represents the estimated percentage change in MVE
for a 1% instantaneous, parallel shift in the yield curve. Generally the larger
the DOE the more sensitive the value of the balance sheet is to movements in
rates. A positive DOE indicates the MVE should increase as rates fall, or
decrease as rates rise. A negative DOE indicates that MVE should increase as
rates rise, or decrease as rates fall. Due to the embedded options in the
balance sheet, DOE is not constant and can shift with movements in the level or
shape of the yield curve. ALCO has set limits on the maximum and minimum
acceptable DOE at +3.0 and -1.0, respectively, as measured between +/- 150 basis
point instantaneous, parallel shifts in the yield curve.
The most recent market value model prepared for the April 2004 ALCO meeting
estimated the current DOE at -0.6. DOE would rise to +0.1 given a parallel shift
of the yield curve up 150 basis points and would be within the maximum
constraint of +3.0. DOE would fall to -3.1 given a parallel shift of the yield
curve down 150 basis points and would be out of the minimum constraint of -1.0,
however management believes the likelihood of a sustained 150 basis point fall
in rates from current rate levels to be unlikely.
At the end of 2003, the interest-rate-risk position, as presented and discussed
in the 2003 Form 10-K, was asset sensitive, meaning net income should increase
as rates rise and decrease as rates fall. During the first three months of 2004,
the Corporation maintained an asset sensitive interest-rate-risk position both
from an earnings simulation and DOE perspective due to management's expectation
that rates would 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 22 to the consolidated financial
statements.
58
LIQUIDITY RISK
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 objective of liquidity risk management is to
ensure that 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 risk management also
includes ensuring cash flow needs are met at a reasonable cost. The Corporation
maintains a liquidity risk management policy which identifies the primary
sources of liquidity, establishes procedures for monitoring and measuring
liquidity, and establishes minimum liquidity requirements in compliance 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 crisis. The liquidity position is continually monitored and reviewed
by 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 2004. Core deposits, the most significant source of funding,
comprised approximately 55% of funding at March 31, 2004, 56% of funding at
December 31, 2003, and 50% of funding at March 31, 2003. Asset securitization
vehicles have also been used as a source of funding over the past several years.
During the first quarter of 2004, the Corporation securitized $890 million of
automobile loans. 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 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. During the first
three months of 2004, the bank subsidiaries declared and paid cash dividends
totaling $2 million. Additionally, there were no returns of capital provided to
the holding company by the bank subsidiaries during the first quarter of 2004.
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, 2004, December 31,
2003 and March 31, 2003, $497 million, $693 million and $871 million,
respectively, of commercial paper borrowings were outstanding.
The holding company has a $500 million internal line of credit with its banking
subsidiaries to provide additional liquidity support. There were no borrowings
under this agreement at March 31, 2004, December 31, 2003, and March 31, 2003.
The holding company also has a $375 million revolving credit agreement with a
group of unaffiliated financial institutions, which serves as a back-up
liquidity facility. No borrowings have occurred under this facility. This
facility expires in 2005 with a provision to extend the expiration date under
certain circumstances.
The Corporation also has in place a shelf registration with the SEC to allow for
the sale, over time, of up to $1.5 billion in senior subordinated debt
securities, preferred stock, depositary shares, and common stock issuable in
connection with conversion of the aforementioned securities. During the first
quarter of 2004, the holding company issued $200 million of senior notes under
this shelf registration, leaving $1.3 billion available for future issuance.
59
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES,
AND OFF-BALANCE SHEET ARRANGEMENTS
The following table presents, as of March 31, 2004, significant fixed and
determinable contractual obligations by payment date. The payment amounts
represent those amounts contractually due to the recipient and do not include
accrued interest, unamortized premiums or discounts, hedge basis adjustments, or
other similar carrying value adjustments. 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(a) $53,392 $ -- $ -- $ -- $53,392
Consumer and brokered certificates
of deposits(b)(c) 5,146 7,015 1,688 1,383 15,232
Federal funds borrowed and security
repurchase agreements(b) 9,221 -- -- -- 9,221
Borrowed funds(b) 12 1,166 -- -- -- 1,166
Long-term debt(b)(c) 13, 14 8,065 6,135 3,473 4,542 22,215
Operating leases(d) 123 182 135 290 730
Purchase obligations 132 145 60 6 343
==============================================================================================================================
(a) Excludes interest.
(b) Includes interest on both fixed and variable rate obligations. The interest
associated with variable rate obligations is based upon interest rates in
effect at March 31, 2004. The contractual amounts to be paid on variable
rate obligations are affected by changes in market interest rates. Future
changes in market interest rates could materially affect the contractual
amounts to be paid.
(c) Excludes unamortized premiums or discounts, hedge basis adjustments, or
other similar carrying value adjustments.
(d) Represents obligations as of December 31, 2003, which are not materially
different from the operating lease obligations at March 31, 2004.
The Corporation's operating lease obligations represent short and long-term
lease and rental payments for facilities, certain software and data processing
and other equipment. Purchase obligations represent obligations under agreements
to purchase goods or services that are enforceable and legally binding and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. The purchase obligation amounts presented above
primarily relate to certain contractual payments for services provided for
information technology, data processing, capital expenditures, and the
outsourcing of certain operational activities.
The Corporation also has obligations under its postretirement plan as described
in Note 21 to the consolidated financial statements. The postretirement benefit
payments represent actuarially determined future benefit payments to eligible
plan participants. The Corporation reserves the right to terminate the
postretirement benefit plan at any time. The Corporation does not have any
commitments or obligations to the defined benefit pension plan at March 31,2004
due to the funded status of the plan.
The Corporation also enters into derivative contracts under which it either
receives cash from or pays 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,
involve monthly cash settlement. Because the derivative liabilities recorded on
the balance sheet at March 31, 2004 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 22 to the consolidated
financial statements.
60
Commitments: The following table details the amounts and expected maturities of
significant commitments as of March 31, 2004. Further discussion of these
commitments is included in Note 19 to the consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
One Year One to Three to Over
(In Millions) or Less Three Years Five Years Five Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments to extend credit:
Commercial $8,644 $4,407 $1,503 $106 $14,660
Residential real estate 18,690 -- -- -- 18,690
Revolving home equity and credit card lines 24,397 -- -- -- 24,397
Other 392 -- -- -- 392
Standby letters of credit 2,143 1,011 484 115 3,753
Commercial letters of credit 261 7 -- -- 268
Net commitments to sell mortgage loans and mortgage-
backed securities 13,289 -- -- -- 13,289
Commitments to fund principal investments 31 111 43 56 241
Commitments to fund civic and community investments 105 39 25 33 202
===================================================================================================================================
Commitments to extend credit, including loan commitments, standby letters of
credit, and commercial letters of credit do not necessarily represent future
cash requirements, in that these commitments often expire without being drawn
upon.
The commitments to fund principal investments primarily relate to indirect
investments in various private equity funds managed by third-party general and
limited partners. These estimated commitments were based primarily on the
expiration of each fund's investment period at March 31, 2004. The timing of
these payments could change due to extensions in the investment periods of the
funds or by the rate the commitments are invested, both of which are determined
by either the general and/or limited partners of the funds.
The commitments to fund civic and community investments represent future cash
outlays for the construction and development of properties for low-income
housing, small business real estate, and historic tax credit projects. The
timing and amounts of these commitments are projected based upon the financing
arrangements provided in each project's partnership or operating agreement, and
could change due to variances in the construction schedule, project revisions,
or the cancellation of the project.
Contingent Liabilities: The Corporation may also incur 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.
Off-Balance Sheet Arrangements: The Corporation's significant off-balance sheet
arrangements include the use of special-purpose entities, generally
securitization trusts, to diversify its funding sources. During the past three
years, National City has sold credit card receivables and automobile loans to
securitization trusts which are considered qualifying 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.
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 or judgments that affect
the amounts reported in the financial statements and accompanying notes. These
estimates 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 or judgments. Certain policies inherently have
a greater reliance on the use of estimates, and as such have a greater
possibility of producing results that could be materially different than
originally reported. Estimates or 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.
61
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. Management views critical accounting policies to be those which are
highly dependent on subjective or complex judgments, estimates and assumptions,
and where changes in those estimates and assumptions could have a significant
impact on the financial statements. Management currently views the determination
of the allowance for loan losses, the valuation of mortgage servicing assets,
and the valuation of derivative instruments to be critical accounting policies.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan and lease portfolio. Estimating the amount of
the allowance for loan losses 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. 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.
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 Statement of Financial Accounting
Standards No. (SFAS) 5, Accounting for Contingencies, or SFAS 114, Accounting by
Creditors for Impairment of a Loan. 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. These analyses involve a
high degree of judgment in estimating the amount of loss associated with
specific loans, including estimating the amount and timing of future cash flows
and collateral values. 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 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. Uncertainty
surrounding the strength and timing of economic cycles also affects estimates of
loss. The historical loss experience used in the migration analysis may not be
representative of actual unrealized losses inherent in the portfolio.
There are many factors affecting the allowance for loan losses; some are
quantitative while others require qualitative judgment. Although management
believes its process for determining the allowance adequately considers all of
the potential factors that could potentially result in credit losses, the
process includes subjective elements and may be susceptible to significant
change. To the extent actual outcomes differ from management estimates,
additional provision for credit losses could be required that could adversely
affect earnings or financial position in future periods. The allowance for loan
losses is assigned to the Corporation's business lines based on the nature of
the loan portfolio in each business line. The Wholesale Banking, Consumer and
Small Business Financial Services, and National Consumer Finance business lines
have been assigned the majority of the allocated allowance and accordingly would
be the business lines most affected by actual outcomes differing from management
estimates.
The Credit Risk section of this financial review includes a discussion of the
factors driving changes in the allowance for loan losses during the current
period.
MORTGAGE SERVICING RIGHT (MSR) ASSETS
Servicing residential mortgage loans for third-party investors represents a
significant business activity of the National City Mortgage Co. line of
business. As of March 31, 2004, MSR assets totaled $1.2 billion. MSRs do not
trade in an active open market with readily observable market prices. Although
sales of MSRs do occur, the exact terms and conditions may not be readily
available. As such, MSRs are established and valued using discounted cash flow
modeling techniques which require management to make estimates regarding
estimated future net servicing cash flows, taking into consideration actual and
expected mortgage loan prepayment rates, discount rates, servicing costs, and
other economic factors. The expected and actual rates of mortgage loan
prepayments are the most
62
significant factors driving the value of MSRs. 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 MSRs,
mortgage interest 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. MSRs are
carried at the lower of the initial capitalized amount, net of accumulated
amortization and hedge accounting adjustments, or fair value. Certain MSRs
hedged with derivative instruments as part of SFAS 133 hedge relationships may
be adjusted above their initial carrying value. Management compares its fair
value estimates and assumptions to observable market data where available and to
recent market activity and believes that the fair values and related assumptions
are comparable to those used by other market participants.
Note 11 to the consolidated financial statements includes a sensitivity analysis
showing the effects immediate 10% and 20% adverse changes in the mortgage loan
prepayment and discount rate assumptions used to estimate the fair value of MSRs
would have on the fair value. Management mitigates risk associated with declines
in the estimated fair value of its MSRs due to increases in mortgage loan
prepayments through the use of derivative instruments that are expected to
increase in value when interest rates decline. The effects of recognized changes
in the values of the MSRs and the related derivative instruments are include in
mortgage banking revenue on the income statement. Note 11 to the financial
statements includes discussion of the impacts of valuation changes on current
period income.
DERIVATIVE INSTRUMENTS
The Corporation regularly uses derivative instruments as part of its risk
management activities to protect the value of certain assets and liabilities and
future cash flows against adverse price or interest rate movements. As of March
31, 2004, the recorded fair value of derivative assets and liabilities were $1.6
billion and $844 million, respectively. All derivative instruments are carried
at fair value on the balance sheet. The valuation of derivative instruments is
considered critical because most are valued using discounted cash flow modeling
techniques in the absence of market value quotes. Therefore, management must
make estimates regarding the amount and timing of future cash flows, which are
susceptible to significant change in future periods based on changes in interest
rates. The cash flow projection models are acquired from third parties and the
assumptions used by management are based on yield curves, forward yield curves,
and implied volatilities observable in the cash and derivatives market. The
pricing models are also regularly validated by testing through comparison with
other third parties.
Because the majority of the derivative instruments are used to protect the value
of other assets and liabilities on the balance sheet, changes in the value of
the derivatives instruments are typically offset by changes in the value of the
assets and liabilities being hedged, although income statement volatility can
still occur if the derivative instruments are not effective in hedging changes
in the value of those assets and liabilities. Changes in the fair values of
derivative instruments associated with mortgage banking activities are included
in mortgage banking revenue on the consolidated income statement and affect the
results of the National City Mortgage Co. line of business. Changes in the fair
values of other derivatives are included in other income on the income statement
and are primarily generated from investment funding activities and are not
allocated to the business lines. Notes 1 and 22 to the consolidated financial
statements also provide further discussion on the accounting and use of
derivative instruments.
Any material effect on the financial statements related to these critical
accounting areas is also discussed in this financial review.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
Note 2 to the consolidated financial statements discusses new accounting
policies adopted by the Corporation during 2004 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 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.
63
FORWARD LOOKING STATEMENTS
- --------------------------
This Quarterly Report contains forward-looking statements. Forward-looking
statements provide current expectations or forecasts of future events and are
not guarantees of future performance, nor should they be relied upon as
representing management's views as of any subsequent date. The forward-looking
statements are based on management's expectations and are subject to a number of
risks and uncertainties. Although management believes that the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially from those expressed or implied in such statements. Risks and
uncertainties that could cause actual results to differ materially include,
without limitation, the Corporation's ability to effectively execute its
business plans; changes in general economic and financial market conditions;
changes in interest rates; changes in the competitive environment; continuing
consolidation in the financial services industry; new litigation or changes in
existing litigation; losses, customer bankruptcy, claims and assessments;
changes in banking regulations or other regulatory or legislative requirements
affecting the Corporation's business; and changes in accounting policies or
procedures as may be required by the Financial Accounting Standards Board or
other regulatory agencies. Additional information concerning factors that could
cause actual results to differ materially from those expressed or implied in
forward-looking statements is available in the Corporation's annual report on
Form 10-K for the year ended December 31, 2003, and subsequent filings with the
United States Securities and Exchange Commission (SEC). Copies of these filings
are available at no cost on the SEC's Web site at www.sec.gov or on the
Corporation's Web site at www.NationalCity.com. Management may elect to update
forward-looking statements at some future point; however, it specifically
disclaims any obligation to do so.
64
CONSOLIDATED AVERAGE BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------
Three Months Ended
- ----------------------------------------------------------------------------------------------------------
MARCH 31 March 31
(In Millions) 2004 2003
- ----------------------------------------------------------------------------------------------------------
ASSETS
Earning Assets:
Portfolio loans:
Commercial $18,860 $ 22,415
Commercial construction 2,245 2,181
Real estate-- commercial 9,819 9,420
Real estate-- residential 27,076 21,025
Home equity lines of credit 11,396 8,152
Credit card and other unsecured lines of credit 2,283 2,033
Other consumer 7,406 7,957
- ----------------------------------------------------------------------------------------------------------
Total portfolio loans 79,085 73,183
Loans held for sale or securitization:
Commercial 13 14
Mortgage 11,780 22,510
Automobile 530 --
- ----------------------------------------------------------------------------------------------------------
Total loans held for sale or securitization 12,323 22,524
Securities available for sale, at cost 6,537 8,295
Federal funds sold and security resale agreements 260 118
Other investments 554 665
- ----------------------------------------------------------------------------------------------------------
Total earning assets 98,759 104,785
Allowance for loan losses (1,124) (1,101)
Fair value appreciation of securities available for sale 220 324
Cash and demand balances due from banks 3,015 3,376
Properties and equipment 1,128 1,038
Other real estate owned 98 115
Mortgage servicing assets 1,341 762
Goodwill 1,103 1,078
Other intangible assets 59 72
Derivative assets 783 935
Accrued income and other assets 4,041 4,934
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $109,423 $116,318
==========================================================================================================
LIABILITIES
Deposits:
Noninterest bearing $ 15,658 $15,689
NOW and money market 27,325 23,489
Savings 2,369 2,458
Consumer time 13,008 14,451
Brokered retail CDs 499 2,871
Other 359 499
Foreign 6,520 6,602
- ----------------------------------------------------------------------------------------------------------
Total deposits 65,738 66,059
- ----------------------------------------------------------------------------------------------------------
Federal funds borrowed and security repurchase agreements 7,942 12,306
Borrowed funds 1,594 2,636
Long-term debt 21,339 22,826
Derivative liabilities 435 574
Accrued expenses and other liabilities 2,716 3,388
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 99,764 107,789
STOCKHOLDERS' EQUITY
Preferred -- --
Common 9,659 8,529
- ----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,659 8,529
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $109,423 $116,318
==========================================================================================================
65
DAILY AVERAGE BALANCES/NET INTEREST INCOME/RATES
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) Daily Average Balance
- ----------------------------------------------------------------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
FIRST Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Earning Assets:
Loans(a):
Commercial $ 18,873 $ 20,035 $ 21,165 $ 22,014 $ 22,429
Commercial construction 2,245 2,445 2,425 2,318 2,181
Real estate-- commercial 9,819 9,587 9,450 9,475 9,420
Real estate-- residential 38,856 42,624 51,111 46,574 43,535
Home equity lines of credit 11,396 10,410 9,612 8,761 8,152
Credit card and other unsecured lines of credit 2,283 2,330 2,170 2,084 2,033
Other consumer 7,936 8,150 8,167 7,957 7,957
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 91,408 95,581 104,100 99,183 95,707
Securities available for sale, at cost:
Taxable 5,879 5,860 5,988 6,721 7,650
Tax-exempt 658 674 679 676 645
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 6,537 6,534 6,667 7,397 8,295
Federal funds sold, security resale
agreements and other investments 814 1,103 1,217 775 783
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets/total interest income/rates 98,759 103,218 111,984 107,355 104,785
Allowance for loan losses (1,124) (1,125) (1,144) (1,127) (1,101)
Fair value appreciation of securities
available for sale 220 201 202 302 324
Nonearning assets 11,568 12,172 12,609 12,505 12,310
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $109,423 $114,466 $123,651 $119,035 $116,318
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
NOW and money market accounts $27,325 $ 26,845 $ 26,091 $ 25,045 $ 23,489
Savings accounts 2,369 2,367 2,422 2,447 2,458
Consumer time deposits 13,008 13,178 13,337 13,972 14,451
Other deposits 858 1,205 3,241 3,207 3,370
Foreign deposits 6,520 7,260 7,186 6,950 6,602
Federal funds borrowed 4,996 5,765 7,632 9,054 9,171
Security repurchase agreements 2,946 2,989 3,028 2,899 3,135
Borrowed funds 1,594 992 1,087 1,527 2,636
Long-term debt 21,339 25,056 27,569 23,914 22,826
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/
Total interest expense/rates 80,955 85,657 91,593 89,015 88,138
Noninterest bearing deposits 15,658 16,089 19,408 17,596 15,689
Accrued expenses and other liabilities 3,151 3,330 3,479 3,638 3,962
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 99,764 105,076 114,480 110,249 107,789
TOTAL STOCKHOLDERS' EQUITY 9,659 9,390 9,171 8,786 8,529
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $109,423 $114,466 $123,651 $119,035 $116,318
==================================================================================================================================
TAX-EQUIVALENT NET INTEREST INCOME
==================================================================================================================================
INTEREST SPREAD
Contribution of noninterest bearing sources of funds
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN
==================================================================================================================================
(a) Includes loans held for sale or securitization
66
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) Quarterly Interest
- ------------------------------------------------------------------------------------------------------------------------------
2004 2003
----------------------------------------------------------------------
FIRST Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Earning Assets:
Loans(a):
Commercial $ 175 $ 183 $ 198 $ 217 $ 220
Commercial construction 24 25 27 26 25
Real estate-- commercial 143 144 146 146 145
Real estate-- residential 608 683 807 744 730
Home equity lines of credit 123 103 99 95 89
Credit card and other unsecured lines of credit 47 45 43 41 44
Other consumer 131 138 140 143 148
- ------------------------------------------------------------------------------------------------------------------------------
Total loans 1,251 1,321 1,460 1,412 1,401
Securities available for sale, at cost:
Taxable 74 73 71 93 102
Tax-exempt 12 12 13 13 13
- ------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 86 85 84 106 115
Federal funds sold, security resale
agreements and other investments 13 10 10 10 11
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets/total interest income/rates $1,350 $1,416 $1,554 $1,528 $1,527
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 $ 57 $ 59 $ 63 $ 67 $ 68
Savings accounts 2 2 3 3 3
Consumer time deposits 112 118 120 131 137
Other deposits 2 4 8 10 12
Foreign deposits 15 17 19 25 23
Federal funds borrowed 14 16 27 35 36
Security repurchase agreements 4 4 4 5 6
Borrowed funds 3 2 2 5 9
Long-term debt 116 153 157 145 132
- ------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/
total interest expense/rates $ 325 $ 375 $ 403 $ 426 $ 426
Noninterest bearing deposits
Accrued expenses and other liabilities
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
TOTAL STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.
==============================================================================================================================
TAX-EQUIVALENT NET INTEREST INCOME $1,025 $1,041 $1,151 $1,102 $1,101
==============================================================================================================================
INTEREST SPREAD
Contribution of noninterest bearing sources of funds
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN
==============================================================================================================================
(a) Includes loans held for sale or securitization
67
- -------------------------------------------------------------------------------------------------------------------------------
Average Annualized Rate
- -------------------------------------------------------------------------------------------------------------------------------
2004 2003
------------- -------------------------------------------------------
FIRST Fourth Third Second First
QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Earning Assets:
Loans(a):
Commercial 3.72% 3.63% 3.73% 3.94% 3.97%
Commercial construction 4.30 4.07 4.48 4.49 4.65
Real estate-- commercial 5.87 5.99 6.10 6.18 6.25
Real estate-- residential 6.26 6.41 6.31 6.39 6.71
Home equity lines of credit 4.33 3.97 4.11 4.36 4.36
Credit card and other unsecured lines of credit 8.30 7.57 7.81 8.06 8.68
Other consumer 6.62 6.76 6.79 7.19 7.55
- -------------------------------------------------------------------------------------------------------------------------------
Total loans 5.49 5.52 5.59 5.70 5.89
Securities available for sale, at cost:
Taxable 5.01 4.92 4.81 5.47 5.37
Tax-exempt 7.53 7.50 7.50 7.68 8.06
- -------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 5.26 5.19 5.08 5.68 5.58
Federal funds sold, security resale
agreements and other investments 6.49 3.26 3.29 5.33 5.71
- -------------------------------------------------------------------------------------------------------------------------------
Total earning assets/total interest income/rates 5.48% 5.47% 5.53% 5.70% 5.86%
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 .83% .88% .96% 1.07% 1.18%
Savings accounts .35 .36 .39 .46 .58
Consumer time deposits 3.47 3.55 3.58 3.74 3.86
Other deposits 1.13 1.07 1.05 1.26 1.42
Foreign deposits .94 .94 1.05 1.42 1.42
Federal funds borrowed 1.13 1.09 1.37 1.57 1.59
Security repurchase agreements .55 .53 .53 .71 .73
Borrowed funds .75 .96 .98 1.21 1.38
Long-term debt 2.18 2.42 2.26 2.44 2.33
- -------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/
total interest expense/rates 1.62% 1.74% 1.75% 1.92% 1.96%
Noninterest bearing deposits
Accrued expenses and other liabilities
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
TOTAL STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
===============================================================================================================================
TAX-EQUIVALENT NET INTEREST INCOME
===============================================================================================================================
INTEREST SPREAD 3.86% 3.73% 3.78% 3.78% 3.90%
Contribution of noninterest bearing sources of funds .30 .30 .32 .33 .31
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.16% 4.03% 4.10% 4.11% 4.21%
===============================================================================================================================
(a) Includes loans held for sale or securitization
68
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures contained in the Market Risk Management section of the
Management Discussion and Analysis of Financial Condition and Results of
Operations on 57-58 of this report are incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
National City Corporation's management is responsible for establishing and
maintaining effective disclosure controls and procedures, as defined under Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of March 31,
2004, 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 that disclosure controls and procedures as of March 31,
2004 were effective in ensuring material information required to be disclosed in
this Quarterly Report on Form 10-Q was recorded, processed, summarized, and
reported on a timely basis. Additionally, there were no changes in the
Corporation's internal control over financial reporting that occurred during the
quarter ended March 31, 2004 that have materially affected, or are reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
National City and its subsidiaries are 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. Management
believes that 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. For additional information on contingent
liabilities and guarantees, refer to Note 19 to the Consolidated Financial
Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The share repurchase disclosures contained in the Financial Condition section of
the Management Discussion and Analysis of Financial Condition and Results of
Operations on page 54 of this report are incorporated herein by reference.
69
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Any exhibits within exhibit numbers 3, 4, 10 or 14 documented in this index as
being filed with the United States Securities and Exchange Commission (SEC) as
part of the March 31, 2004 Form 10-Q have been filed separately with the SEC and
are available on request from the Secretary of the Corporation at the principal
executive offices or through the SEC at www.sec.gov.
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 National City'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 National City's Quarterly Report on
Form 10-Q for the quarter and nine months ended September
30, 2002, and incorporated herein by reference).
4.1 Amended and Restated Certificate of Incorporation of
National City Corporation dated April 13, 1999 (filed as
Exhibit 3.2 to National City's Quarterly Report on Form 10-Q
for the quarter and nine months ended September 30, 2000,
and incorporated herein by reference) related to the capital
stock of National City Corporation.
4.2 National City Corporation First Restatement of By-laws
adopted April 27, 1987 (as Amended through October 28, 2002)
(filed as Exhibit 3.3 to National City's Quarterly Report on
Form 10-Q for the quarter and nine months ended September
30, 2002, and incorporated herein by reference) related to
stockholder rights.
4.3 National City agrees to furnish upon request to the
Commission a copy of each instrument defining the rights of
holders of Senior and Subordinated debt of National City.
10.1 National City Corporation 1989 Stock Option Plan (filed as
Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003, and incorporated
herein by reference).
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 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003,
and incorporated herein by reference).
10.8 Central Indiana Bancorp Option Plan effective March 15, 1991
(filed as Exhibit 10.8 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003, and
incorporated herein by reference).
10.9 Central Indiana Bancorp 1993 Option Plan effective October
12, 1993 (filed as Exhibit 10.9 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003,
and incorporated herein by reference).
10.10 Form of contracts with David A. Daberko, William E.
MacDonald III, Jon L. Gorney, 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, 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. 333-45609 dated February 4, 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 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003, and
incorporated herein by reference).
70
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
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).
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 29, 2003 (filed as Exhibit 10.17 to
Registrant's Quarterly Report on Form 10-Q for the quarter
and six months ended June 30, 2003, and incorporated herein
by reference).
10.18 Integra Financial Corporation Employee Stock Option Plan
(filed as Exhibit 4.3 to Registrant's Post-Effective
Amendment No. 1 [on Form S-8] to Form S-4 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 Post-Effective
Amendment No. 1 [on Form S-8] to Form S-4 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
Post-Effective Amendment No. 1 [on Form S-8] to Form S-4
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 The National City Corporation Management Incentive Plan for
Senior Officers, as Amended and Restated effective February 23,
2004 (filed as Exhibit D to Registrant's Proxy Statement dated
March 11, 2004, 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 to 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).
71
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.30 Form of Agreement Not To Compete with David A. Daberko 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).
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 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003, and incorporated
herein by reference).
10.40 The National City Corporation Long-Term Cash and Equity
Incentive Plan (filed as Exhibit 99.1 to Registrant's
Current Report on Form 8-K filed April 6, 2004, and
incorporated herein by reference).
10.41 Agreement Not to Compete with Robert J. Ondercik.
10.42 Amendment No. 2 to the National City Savings and Investment
Plan, as Amended and Restated effective January 1, 2001.
10.43 Amendment No. 2 to the National City Savings and
Investment Plan No. 2, as Amended and Restated effective
January 1, 2001.
10.44 Amendment No. 3 to the National City Savings and Investment
Plan, as Amended and Restated effective January 1, 2001 (filed
as Exhibit 10.1 to the Registrant's Post-Effective Amendment
No. 3 to Form S-8 Registration Statement No. 333-61712 dated
April 19, 2004, and incorporated herein by reference).
10.45 Amendment No. 3 to the National City Savings and Investment
Plan No. 2, as Amended and Restated effective January 1, 2001
(filed as Exhibit 10.2 to the Registrant's Post-Effective
Amendment No. 3 to Form S-8 Registration Statement No.
333-61712 dated April 19, 2004, and incorporated herein by
reference).
10.46 Amendment No. 4 to the National City Savings and Investment
Plan, as Amended and Restated effective January 1, 2001
(filed as Exhibit 10.3 to the Registrant's Post-Effective
Amendment No. 3 to Form S-8 Registration Statement No.
333-61712 dated April 19, 2004, and incorporated herein by
reference).
10.47 Allegiant Bancorp, Inc. 2002 Stock Incentive Plan (filed as
Appendix A to Allegiant Bancorp, Inc.'s Proxy Statement for
its 2002 Annual Meeting, and incorporated herein by reference).
10.48 Allegiant Bancorp, Inc. 2000 Stock Incentive Plan (filed as
Annex A to Allegiant Bancorp, Inc.'s Proxy Statement for
its 2000 Annual Meeting, and incorporated herein by reference).
12.1 Computation of Ratio of Earnings to Fixed Charges.
14.1 Code of Ethics (filed as Exhibit 14.1 to Registrant's
Current Report on Form 8-K filed on July 31, 2003, and
incorporated herein by reference).
14.2 Code of Ethics for Senior Financial Officers (filed as
Exhibit 14.2 to Registrant's Current Report on Form 8-K
filed on July 31, 2003, and incorporated herein by
reference).
31.1 Chief Executive Officer Sarbanes-Oxley Act 302 Certification
dated May 7, 2004 for National City Corporation's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2004.
31.2 Chief Financial Officer Sarbanes-Oxley Act 302 Certification
dated May 7, 2004 for National City Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004.
32.1 Chief Executive Officer Sarbanes-Oxley Act 906 Certification
dated May 7, 2004 for National City Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004.
32.2 Chief Financial Officer Sarbanes-Oxley Act 906 Certification
dated May 7, 2004 for National City Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004.
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REPORTS ON FORM 8-K
The following reports were filed or furnished, as indicated in the individual
report, by National City Corporation during the three-month period ended March
31, 2004 through the date of this Form 10-Q filing:
January 15, 2004 National City issued a news release announcing its financial
results for the fourth quarter and fiscal year ended
December 31, 2003 and the availability of the December 31,
2003 Condensed Financial Supplement on its Web site at
www.NationalCity.com. The news release also announced that
National City restated its results for 2001, 2002, and the
nine-month period ended September 30, 2003 related to the
application of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging
Activities.
January 26, 2004 National City announced the posting of its December 31, 2003
Financial Supplement to its Web site.
February 17, 2004 National City issued a news release announcing that it
entered into a definitive agreement to acquire Provident
Financial Group, Inc.
March 11, 2004 National City announced the posting of its Mid-Quarter
Update to Financial Supplement to its Web site.
March 17, 2004 National City filed the following exhibits related to the
issuance of $200 million, 3.125% Senior Notes due April 30,
2009, under National City Corporation's Form S-3 shelf
registration dated May 5, 2003: an offering prospectus, an
underwriting agreement between National City and Lehman
Brothers, a terms agreement between National City and Lehman
Brothers, a Senior Indenture between National City and the
Bank of New York, and the computation of ratio of earnings
to fixed charges for National City Corporation.
March 19, 2004 National City issued a news release announcing that
Allegiant shareholders approved the merger of Allegiant
Bancorp, Inc. and National City Corporation (the merger)
pursuant to the Agreement and Plan of Merger. Additionally,
National City announced that it received approval from the
Federal Reserve Board for the merger, and that the
transaction is expected to close on April 9, 2004.
March 23, 2004 National City issued a news release announcing that Robert
J. Ondercik, executive vice president of risk management,
plans to retire. James R. Bell III will succeed Mr. Ondercik
effective April 1, 2004 as executive vice president of risk
management.
April 6, 2004 National City announced that the Compensation and
Organization Committee of the Corporation's Board of
Directors approved an amendment to the Long-Term Cash and
Equity Incentive Plan (the plan), which was previously filed
as Exhibit D in the Corporation's Proxy Statement dated
March 11, 2004. The amended plan was also filed in this Form
8-K as Exhibit 99.1.
April 9, 2004 National City issued a news release announcing the
completion of its acquisition of Allegiant Bancorp, Inc.
April 12, 2004 National City filed an amendment to Form 8-K filed on
February 17, 2004 stating that financial statements of
Provident Financial Inc. are not required to be filed in a
Form 8-K.
April 15, 2004 National City issued a news release announcing its financial
results for the quarterly period ended March 31, 2004 and
the availability of the March 31, 2004 Financial Supplement
on its Web site.
May 6, 2004 National City filed an updated March 31, 2004 Financial
Supplement and announced the posting of the updated
Financial Supplement on its Web site.
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CORPORATE INFORMATION
CORPORATE HEADQUARTERS
National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3484
(216) 222-2000
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
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 NationalCity.com. 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 free of charge on the Corporation's Web site at
National City.com or 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 the 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 83%-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
The National City Corporation Amended and Restated Dividend Reinvestment and
Stock Purchase Plan (the Plan) offers stockholders a convenient way to increase
their investment. 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 at
www.NationalCity.com.
DIRECT DEPOSIT OF DIVIDENDS
The direct deposit program provides for free 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
- -------------------------------------------------------------
74
FORM 10-Q -- MARCH 31, 2004
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 7, 2004
/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
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[NATIONAL CITY LOGO]
National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3484
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