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1
1997
Annual Report
[NATIONAL CITY LOGO]
FOLLOW YOUR OWN LEAD.(TM)
2
1997 Annual Report
CORPORATE PROFILE
National City Corporation is a $55 billion A corporate-wide employee
diversified financial services company based in program, Momentum
Cleveland, Ohio. National City operates banks and encompasses everything we do
other financial service subsidiaries principally at National City to enhance
in Ohio, Kentucky, Indiana and Pennsylvania. our sales and marketing
National City subsidiaries provide financial culture,
services that meet a wide range of customer needs, which in turn adds value to our
including commercial and retail banking, trust and stockholders. Our employees
investment services, item processing and mortgage have embraced change -
servicing. change that involves listening
closely to the customer and
On December 1, 1997, National City announced the understanding his or her
signing of a definitive agreement to merge with individual needs. Using this
First of America Bank Corporation, a $21 billion information, we can offer the
bank holding company headquartered in Kalamazoo, products and services that
Michigan. On January 12, 1998, National City help our customers meet
announced the signing of a definitive agreement to their financial goals.
acquire Fort Wayne National Corporation, a $3
billion bank holding company headquartered in Fort
Wayne, Indiana. Both transactions are expected to
close in the second quarter of 1998, subject to
regulatory and stockholder approvals.
National City can be found on the world wide web
at www.national-city.com.
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FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share
Amounts) 1997 1996 Percent Change
- ------------------------------------------------------------------------------------------------
FOR THE YEAR:
Net Income $807,433 $736,630 10%
Preferred Dividend Requirements -- 4,028 --
Net Income Applicable to Common Stock 807,433 732,602 10
Net Income Per Common Share:
Basic 3.73 3.34 12
Diluted 3.66 3.27 12
Dividends Paid Per Common Share 1.67 1.47 14
- ------------------------------------------------------------------------------------------------
Return on Average Common Equity 18.53% 17.69%
Return on Average Assets 1.59 1.51
- ------------------------------------------------------------------------------------------------
Average Shares -- Basic 216,429,836 219,095,248 (1)%
Average Shares -- Diluted 220,689,763 225,353,501 (2)
- ------------------------------------------------------------------------------------------------
AT YEAR END:
Assets $54,683,521 $50,855,835 8%
Loans 39,573,125 35,830,068 10
Securities 8,865,063 8,923,482 (1)
Deposits 36,861,136 35,999,747 2
Stockholders' Equity 4,281,351 4,432,063 (3)
- ------------------------------------------------------------------------------------------------
Equity to Assets Ratio 7.83% 8.71%
Tier 1 Capital Ratio 8.12 9.84
Total Risk-Based Capital Ratio 12.65 14.79
Leverage Ratio 7.01 8.16
- ------------------------------------------------------------------------------------------------
Book Value Per Common Share $20.28 $19.86 2%
Market Value Per Common Share 65.75 44.88 47
- ------------------------------------------------------------------------------------------------
Common Shares Outstanding 211,097,837 223,198,494 (5)%
Common Stockholders of Record 34,108 33,801 1
Full-Time Equivalent Employees 29,841 26,286 14
- ------------------------------------------------------------------------------------------------
Note: All prior-period per share data have been restated as necessary to reflect
Statement of Financial Accounting Standards No. 128, Earnings Per Share.
See Note 13 to the Consolidated Financial Statements.
TOTAL RETURN - NATIONAL CITY VS. S&P 500
(cumulative annual rates - assumes reinvestment of dividends)
20 15 10 15 1
National City Corporation 18.7 25.3 21.6 26.5 51.2
S&P 500 16.6 17.5 18 20.2 33.6
----------------------------------
To Our Stockholders..............2
----------------------------------
Financial Review.................5
----------------------------------
Financial Statements and
Notes.........................22
----------------------------------
Form 10-K.......................44
----------------------------------
Board of Directors/Officers.....48
----------------------------------
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TO OUR STOCKHOLDERS:
[PHOTO]
(Standing, left)
ROBERT G. SIEFERS
Vice Chairman and
Chief Financial Officer
(Standing, right)
VINCENT A. DIGIROLAMO
Vice Chairman
(Seated)
DAVID A. DABERKO
Chairman and Chief
Executive Officer
Nineteen ninety seven was another successful year for National City. Net
income was a record $807.4 million or $3.66 per share, up 11.9% from 1996 - the
sixth consecutive year of double-digit earnings per share growth on an
originally reported basis. Return on equity reached 18.53% on a substantial
capital base, and return on assets was 1.59%, among the best in the industry.
Underlying this superior financial performance was the sound execution of
strategic initiatives in all of the company's major lines of business.
[QUOTEBOX -- Underlying this superior financial performance was the sound
execution of strategic initiatives in all of the company's major lines of
business.]
In retail banking, our largest line of business, we continued to execute the
strategy set forth over the past several years. The primary objective of this
strategy is to capture the maximum value of each customer relationship by
providing the right mix of products and services, appropriately priced, through
each customer's preferred delivery channels. For instance, in 1997 we introduced
a non-prime indirect auto lending product to reach a segment of the market
traditionally served by finance companies. With a large network of automobile
dealer relationships and sophisticated credit scoring techniques, we can be
competitive in a business which offers terrific growth potential.
To gain insight into customer preferences, we continue to make substantial
investments in data warehouse technology to more effectively capture and manage
customer information. This capability has already resulted in more effective
cross-selling and has given us tools to better understand and predict customer
needs and preferences.
We know that customer demand for financial services transcends traditional
time and place limitations. To that end, we initiated a multi-year plan to
reconfigure our branch delivery system -- reducing traditional, full-service
branches while expanding nontraditional alternatives such as in-store locations,
limited-service facilities and off-site ATMs -- which, along with enhanced call
center capability, makes it easier and more convenient for customers to do
business with us.
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In corporate banking, our second largest business, we have worked hard to
retain our position as the number one middle-market lender in our region. Our
markets continue to be economically vibrant as evidenced by low rates of
unemployment and significant growth in small and medium size businesses over the
past several years. Our decentralized system of credit approval permits quick
responsiveness to customer needs, while our product capability is second to
none. For example, we introduced an innovative lending product, Corporate
Select, which utilizes built-in interest rate protection options inside a
conventional loan to help companies manage risk in a seamless, straightforward
manner. Corporate Select offers a competitive advantage in winning and
strengthening customer relationships, since there is no comparable product
currently available in the market. Through initiatives such as these and a
strong team of relationship managers we have been able to maintain or increase
market share in virtually all our markets. We have been particularly successful
in western Pennsylvania, which we entered through the merger with Integra
Financial Corporation in 1996. As we said at the time, one of the most notable
opportunities in that transaction was the chance to increase share in
middle-market corporate banking.
[QUOTEBOX -- For the company as a whole, there is no time to rest on our laurels
from 1997's excellent performance.]
We also took decisive actions during the year with respect to the
Corporation's fee-based businesses. In April, we launched a significant new
initiative, Wealth Management, targeting the affluent and emerging affluent
segments with a client-focused, customer-friendly approach. Combining retail
brokerage, private banking, financial planning and personal trust under one
umbrella, Wealth Management brings together resources from around the company to
effectively meet the needs of these important and growing customer segments.
The other fee-based businesses, Institutional Trust, Mortgage Banking, and
National Processing all made substantial progress in 1997. Within Institutional
Trust, fundamental improvements in investment performance and customer service
have driven improved financial results. In Mortgage Banking, investments in new
origination sources have strengthened an already-efficient servicing operation,
and the business is now growing nicely. Finally, at National Processing, our
88%-owned item processing subsidiary, a new management team has taken steps to
improve efficiency and broaden the customer base and business mix. After some
disappointments early in 1997, National Processing enters 1998 with considerable
momentum.
For the company as a whole, there is no time to rest on our laurels from
1997's excellent performance. We retain a sense of urgency with the knowledge
that National City, like virtually every other regional bank, has derived a
significant percentage of its income over the years from gathering and
maintaining "core" deposits; that is, customer checking, savings and money
market accounts. Due to changing consumer preferences, technology, and
deregulation, the traditional core deposit business is in long-term secular
decline. Our challenge is to manage this decline and to increase the
profitability of the total customer relationship even as core deposit
profitability shrinks. The data warehouse and information management initiatives
mentioned earlier are critical components of the strategy. We are advantaged in
having all of our banking units on the same operating systems, which has also
allowed us to address the "year 2000 problems" ahead of much of the rest of the
competition. Having the right product array is also essential. Equally important
is the fostering of a sales and marketing culture, so that serving customers
truly becomes the focus of everything we do.
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An additional challenge and exciting opportunity we will undertake in 1998
is the proposed merger with First of America Bank Corporation, which was
announced in December 1997, and, subject to shareholder and regulatory
approvals, is expected to be completed in the second quarter of 1998. First of
America, which has $21 billion in assets and is based in Kalamazoo, Michigan,
dramatically enhances the National City franchise through the addition of over
three million customers in markets across Michigan, central Indiana and key
Illinois cities outside Chicago. Although the one-time charges associated with
the merger will temporarily disrupt National City's earnings per share growth
record in 1998, we expect enhanced earnings growth in 1999 and beyond through
the rollout of National City products and services to First of America's markets
and customer base, and the realization of economies of scale. By integrating
First of America quickly and decisively, following the same business model
employed for the Integra acquisition in 1996, we will maintain momentum and
continue the progress in the other critical initiatives underway throughout the
rest of the company.
[QUOTEBOX -- Management, employees and directors continued to increase their
stock ownership during the year, underscoring and reinforcing our collective
dedication to shareholder interests.]
We also announced, on January 12, 1998, an agreement to acquire Fort Wayne
National Corporation, a $3 billion in assets banking company which has the
number one and two market share, respectively, in the attractive northern
Indiana markets of Fort Wayne and South Bend. This franchise will significantly
enhance our Indiana banking presence, and will be integrated on a similar
timetable with the First of America merger.
Some important management changes occurred in 1997. Following the mid-year
retirement of Bill Robertson, who had been president, Bob Siefers was appointed
vice chairman and became a member of the Office of the Chairman in October.
Bob's 26-year career with National City has included a variety of assignments
around the company, most recently as chief financial officer. Bob has been
influential in virtually every major corporate decision at National City over at
least the last 15 years, and this appointment formally recognizes his role in
the management team.
Finally, National City stock again proved to be a superb investment in 1997,
providing stockholders with a total return (price appreciation plus dividends)
of 51.2%, compared to 33.6% for the market as a whole as measured by the S&P
500. The dividend was increased twice during the year, as has been the case for
each of the last five years, with a further boost, to $.46 per share, effective
for the first quarter of 1998. Management, employees and directors continued to
increase their stock ownership during the year, underscoring and reinforcing our
collective dedication to shareholder interests.
/s/ David A. Daberko
David A. Daberko
Chairman and Chief Executive Officer
January 21, 1998
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FINANCIAL REVIEW
EARNINGS SUMMARY
National City Corporation ("National City" or "the Corporation") reported
record net income of $807.4 million in 1997, compared with $736.6 million in
1996 and $591.5 million in 1995. Diluted earnings per share increased 11.9% in
1997 to $3.66, compared with $3.27 in 1996 and $2.64 in 1995.
Return on average common equity was 18.53% in 1997, up from 17.69% in 1996
and 16.18% in 1995 (Chart 2). Return on average assets was 1.59% in 1997 versus
1.51% in 1996 and 1.23% in 1995 (Chart 3).
The 1997 results reflect growth in noninterest income, controlled operating
expenses and stable net interest income. Excluding securities gains, noninterest
income increased 14.2% to $1,292.4 million primarily as a result of growth in
item processing fees, service charges on deposits, card-related fees and
mortgage banking revenue. Excluding merger and restructuring expenses,
noninterest expense increased 2.2% to $1,944.7 million as a result of increased
business activity and acquisitions.
For the full year, merger and restructuring expenses totaled $65.9 million.
Of these expenses, $33.3 million represented costs associated with reorganizing
six Ohio banking subsidiaries under a single statewide charter; $19.3 million
represented costs incurred in connection with the pending First of America
merger (see Note 3 to the Consolidated Financial Statements), and $13.3 million
in severance and reorganization costs at National City's item processing
subsidiary, National Processing, Inc. These charges were offset by securities
gains of $83.5 million, generated primarily from National City's Bank Stock
Fund, an internally managed corporate investment fund.
The following table reconciles the major changes in diluted earnings per
common share:
- ---------------------------------------------------------
1997 1996
vs vs
1996 1995
- ---------------------------------------------------------
DILUTED EARNINGS PER SHARE, PRIOR YEAR $3.27 $2.64
Increase (decrease) from changes in:
Net interest income -- .51
Provision for loan losses .03 (.15)
Fees and other income .72 .57
Securities gains (.11) .22
Noninterest expense (.15) (.27)
Shares outstanding and taxes (.10) (.25)
- ---------------------------------------------------------
DILUTED EARNINGS PER SHARE, CURRENT YEAR $3.66 $3.27
- ---------------------------------------------------------
"Tangible" or "cash" earnings per share were $3.78 in 1997 and $3.43 in 1996.
This calculation adjusts net income for the non-cash impact of intangible
amortization expense. "Return on tangible equity," which excludes the non-cash
impact of intangible amortization from net income and intangibles from average
common equity, was 21.2% in 1997 versus 20.4% in 1996.
UNIT PROFITABILITY
The financial performance of National City is monitored by an internal
profitability measurement system which produces line-of-business results and key
performance measures. National City's major business units include retail
banking, corporate banking and fee-based businesses. The reported results
reflect the underlying economics of the businesses. Expenses for centrally-
provided services are allocated based on estimated usage of those services.
Capital has been allocated among the businesses on a risk-adjusted basis. The
CHART 1: DILUTED NET INCOME AND DIVIDENDS PER COMMON SHARE
(not restated for poolings)
Diluted Net Income Dividends Paid
Per Share Per Share
77 0.81 0.29
78 0.84 0.33
79 0.91 0.37
80 0.89 0.41
81 0.76 0.41
82 0.84 0.41
83 0.95 0.41
84 1.21 0.42
85 1.52 0.44
86 1.72 0.5
87 1.17 0.6
88 1.92 0.72
89 2.18 0.84
90 1.93 0.94
91 1.8 0.94
92 2.06 0.94
93 2.37 1.06
94 2.64 1.18
95 2.95 1.3
96 3.27 1.47
97 3.66 1.67
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FINANCIAL REVIEW (continued)
businesses are match-funded and interest rate risk is centrally managed by the
investment/funding unit within the "Parent and other" line item in the
contribution table below.
The contribution of National City's major units to consolidated results for
the past two years is summarized in the following table:
- ----------------------------------------------------------
1997 1996
--------------- ---------------
RETURN Return
NET ON Net on
(Dollars in Millions) INCOME EQUITY Income Equity
- ----------------------------------------------------------
Corporate banking $200.6 22.72% $178.6 21.09%
Retail banking 499.2 26.26 478.3 24.92
Fee-based businesses 70.4 15.55 59.9 16.34
Parent and other 37.2 -- 19.8 --
- ----------------------------------------------------------
Consolidated total $807.4 18.53% $736.6 17.69%
- ----------------------------------------------------------
CORPORATE BANKING: Corporate banking includes commercial and middle-market
corporate lending, commercial real estate, asset-based lending, commercial
leasing, loan syndications, cash management and related services. The increase
in corporate banking was due to increased loan volume, lower credit costs, and
higher fee income.
RETAIL BANKING: Retail banking includes the deposit gathering branch
franchise, and lending to individuals and small businesses. Lending activities
include residential mortgages, indirect and direct consumer installment loans,
auto leases, home equity loans and credit card loans. Retail banking also
includes the results of the Private Client Group which provides private banking,
investment management, fiduciary and tax services to affluent and high net worth
individuals. The increase in retail banking reflected strong fee income and
lower overhead costs.
FEE-BASED BUSINESSES: The fee-based businesses include item processing,
mortgage banking, institutional trust and brokerage:
- - Item processing is conducted by National City's majority-owned subsidiary,
National Processing, Inc. ("National Processing") (NYSE: NAP), and includes
merchant credit card processing, airline ticket processing, check guarantee
services, and receivables and payables processing services.
- - Mortgage banking includes the origination of mortgages through 108 retail
mortgage origination offices, member bank branches, and wholesale/broker
branches, as well as mortgage loan servicing. The servicing portfolio totaled
$26.1 billion at December 31, 1997 compared to $22.8 billion in 1996.
- - Institutional trust includes employee benefit administration, mutual fund
management, charitable and endowment services, and custodial services. Trust
assets under management totaled $44.0 billion at December 31, 1997, up from
$38.3 billion at December 31, 1996. These assets include National City's
ARMADA(TM) mutual fund family which had 18 funds and $6.3 billion in assets at
December 31, 1997. The increase from $5.1 billion last year is due to new
sales and a strong stock market.
- - Full-service brokerage and investment banking services are conducted by
National City's wholly-owned subsidiary, NatCity Investments, Inc. NatCity
employs over 200 brokers and provides a full array of investment banking
services, including debt and equity underwriting, trading and market making,
and merger and acquisition advisory services.
CHART 2: RETURN ON AVERAGE COMMON EQUITY
(net income after preferred dividends, divided by average common equity)
92 13.63
93 18.75
94 17.31
95 16.18
96 17.96
97 18.53
CHART 3: RETURN ON AVERAGE ASSETS
(net income divided by average assets)
92 0.99
93 1.45
94 1.35
95 1.23
96 1.51
97 1.59
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The increase in net income in the fee-based businesses reflects revenue
growth in all units which is further described in the Noninterest Income
discussion beginning on page 8.
The parent and other category includes general corporate expenses and unusual
income or expense items not allocated to the business units, unallocated
capital, interest expense on corporate debt, net securities gains and the
results of the investment/funding unit. Parent and other net income increased
primarily because of the higher contribution from the investment/funding unit.
NET INTEREST INCOME
On a tax equivalent basis, net interest income was $1,962.2 million in 1997,
compared to $1,963.5 million in 1996, and $1,849.5 million in 1995 (Chart 4).
Flat net interest income in 1997 reflects the increased use of non-deposit
sources to fund loan growth, a change in loan composition as well as narrower
spreads. Loan composition has been affected by National City's strategic
decision to exit the private label credit card business in late 1996 which
resulted in the November 1996 sale of $400 million in private label credit card
outstandings. Although the outstandings sold were small relative to National
City's total loan portfolio, the sale did have an impact on net interest income,
the net interest margin and net loan charge-offs. The table below isolates the
impact of the private label portfolio on the full year of 1996 by presenting pro
forma results excluding the $400 million in outstandings (assumes investment
yield of 7% on reinvested proceeds from the sale):
- ---------------------------------------------------------------
1996
PRO-FORMA
1997 1996 EXCLUDING
(Dollars in Millions) ACTUAL ACTUAL PRIVATE LABEL
- ---------------------------------------------------------------
Net interest income $1,942.8 $1,942.6 $ 1,895.0
Net interest margin 4.25% 4.44% 4.33%
Loan yield 8.63% 8.78% 8.63%
Net charge-offs $ 139.0 $ 146.5 $ 125.5
Net charge-off ratio .37% .42% .36%
- ---------------------------------------------------------------
To compare nontaxable asset yields to taxable yields on a similar basis,
amounts are adjusted to pretax equivalents, based on the marginal corporate tax
rate of 35%. The following table reconciles net interest income as shown in the
financial statements to tax equivalent net interest income:
- --------------------------------------------------------------
(Dollars in Millions) 1997 1996 1995
- --------------------------------------------------------------
Net interest income -
per financial
statements $1,942.8 $1,942.6 $ 1,828.3
Tax equivalent adjustment 19.4 20.9 21.2
- --------------------------------------------------------------
Net interest income -
tax equivalent $1,962.2 $1,963.5 $ 1,849.5
- --------------------------------------------------------------
Average earning assets $ 46,184 $ 44,227 $ 43,844
- --------------------------------------------------------------
Net interest margin 4.25% 4.44% 4.22%
- --------------------------------------------------------------
CHART 4: NET INTEREST INCOME AND NET INTEREST MARGIN
Net Interest Margin Net Interest Margin
92 1714 4.54
93 1790 4.63
94 1811 4.5
95 1849 4.22
96 1963 4.44
97 1962 4.25
Net interest income was flat in 1997 as earning asset growth was
offset by a decline in the margin.
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10
FINANCIAL REVIEW (continued)
The following table summarizes the contribution of derivatives to net interest
income (amounts in brackets represent reductions of the related interest income
or expense line, as applicable):
- -----------------------------------------------------------
(Dollars in Millions) 1997 1996 1995
- -----------------------------------------------------------
INTEREST ADJUSTMENT TO:
Loans $ 9.2 $ 21.9 $(13.1)
Securities (2.5) (1.0) (7.7)
- -----------------------------------------------------------
Earning assets 6.7 20.9 (20.8)
Interest-bearing liabilities (35.5) (21.8) (4.6)
- -----------------------------------------------------------
EFFECT ON NET INTEREST INCOME $ 42.2 $ 42.7 $(16.2)
- -----------------------------------------------------------
The effects of changing interest rates on corporate performance are more
fully discussed in the Market Risk Management discussion starting on page 16.
The following table shows changes in interest income, interest expense and
net interest income due to volume and rate variances for major categories of
assets and liabilities:
- -------------------------------------------------------------------------
1997 VS. 1996 1996 vs. 1995
-------------------------- ---------------------------
DUE TO CHANGE IN Due to Change in
(Dollars in ---------------- NET ----------------- Net
Millions) VOLUME RATE* CHANGE Volume Rate* Change
- -------------------------------------------------------------------------
INCREASE (DECREASE) IN TAX EQUIVALENT INTEREST INCOME --
Loans $197.7 $(53.5) $144.2 $197.1 $ (51.4) $145.7
Securities (16.7) (6.4) (23.1) (102.6) 24.5 (78.1)
Short-term
investments (2.2) .3 (1.9) (12.6) (3.8) (16.4)
- -------------------------------------------------------------------------
TOTAL $178.8 $(59.6) $119.2 $ 81.9 $ (30.7) $ 51.2
- -------------------------------------------------------------------------
(INCREASE) DECREASE IN INTEREST EXPENSE --
NOW and money
market accounts $ (3.8) $(20.5) $(24.3) $(14.1) $ (9.1) $(23.2)
Savings 9.8 5.3 15.1 8.9 4.8 13.7
Time deposits (2.8) 1.2 (1.6) (4.0) 15.7 11.7
Borrowed funds (120.2) 10.5 (109.7) 22.5 38.1 60.6
- -------------------------------------------------------------------------
TOTAL $(117.0) $ (3.5) $(120.5) $ 13.3 $ 49.5 $ 62.8
- -------------------------------------------------------------------------
INCREASE (DECREASE) IN TAX
EQUIVALENT NET INTEREST INCOME $ (1.3) $114.0
- -------------------------------------------------------------------------
* Changes in interest income and interest expense not arising solely from rate
or volume variances are included in rate variances.
- ------------------------------------------------------------
NONINTEREST INCOME
An analysis of noninterest income for the last three years follows:
- ------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------
Item processing revenue $ 393,115 $ 364,512 $ 327,929
Service charges on
deposits 228,986 214,659 196,474
Trust fees 195,815 177,124 167,224
Card-related fees 137,931 123,306 98,806
Mortgage banking revenue 124,538 81,145 66,821
Service fees - other 59,275 54,209 53,693
Brokerage revenue 49,784 47,546 29,502
Real estate owned income 8,712 7,474 5,188
Other 94,266 61,310 58,204
- -------------------------------------------------------------
TOTAL FEES AND OTHER
INCOME $1,292,422 $1,131,285 $1,003,841
- -------------------------------------------------------------
Securities gains 83,514 108,146 42,365
- -------------------------------------------------------------
TOTAL NONINTEREST INCOME $1,375,936 $1,239,431 $1,046,206
- -------------------------------------------------------------
Total fees and other income increased 14.2% in 1997 to $1,292.4 million from
$1,131.3 million in 1996. All categories increased in 1997, with the highest
growth coming from item processing, card-related fees, service charges on
deposits, trust fees and mortgage banking revenue.
Item processing revenue generated by National Processing increased 7.8% in
1997 to $393.1 million as a result of acquisitions and increases in corporate
outsourcing fee revenue. In 1997, National Processing acquired NTA, Inc. and
Intracon, Inc., both freight processing companies; MRS Jamaica, a healthcare
form processing company; Data Management Services, a data processing company;
and Financial Alliance, an independent sales organization. These acquisitions
added $26.6 million to 1997 revenues.
Deposit service charges increased 6.7% in 1997 and 9.3% in 1996 primarily due
to the implementation of a uniform fee structure across the National City
franchise.
Trust fees increased 10.6% in 1997 and 5.9% in 1996 primarily due to
market-related increases in assets under management.
Card-related fees increased 11.9% to $137.9 million in 1997. The increase
reflects repricing of cardholder fees across the franchise, and higher ATM
interchange fees. The 24.8% increase in 1996 card-related fees is due to the
full year impact of excess servicing fees realized from the September 1995 $440
million credit card receivable securitization.
Mortgage banking revenue increased 53.5% to $124.5 million in 1997. The
increase was due to increased mortgage origination volume and higher mortgage
servicing revenue. Loan originations nearly doubled to $7.0 billion in 1997 from
$3.7 billion in 1996. Increased volume was due to the favorable interest rate
environment and the February 1997 acquisition of Bank United's non-Texas
mortgage origination business. Of the mortgages
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11
originated in 1997, $6.1 billion were sold in the secondary market, compared to
$2.6 billion last year. Gains on the sale of mortgages totaled $56.8 million in
1997, $27.6 million in 1996 and $2.8 million in 1995. The gains for 1997 and
1996 include amounts related to the capitalization of originated servicing
rights under the provisions of Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. See Note 1 to the Consolidated Financial
Statements for further discussion regarding mortgage servicing rights.
In 1997, other income included $13.7 million in gains on the sale of branches
and other assets, and $13.0 million of appreciation resulting from National
City's investment in a private investment partnership. In 1996, other income
included a $6.0 million gain on the sale of the private label credit card
business and $9.2 million of gains on branch sales. In 1995, other income
included a $9.2 million gain on the sale of credit card receivables.
Net realized securities gains and losses are summarized as follows:
- -----------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -----------------------------------------------------------
Net realized gains (losses) --
debt securities $(1,358) $ 5,838 $(8,279)
Tax expense (benefit) (475) 2,043 (2,898)
- -----------------------------------------------------------
After tax $ (883) $ 3,795 $(5,381)
- -----------------------------------------------------------
Net realized gains -- equity
securities $84,872 $102,308 $50,644
Tax expense 29,862 27,544 16,399
- -----------------------------------------------------------
After tax $55,010 $ 74,764 $34,245
- -----------------------------------------------------------
Effect on net income $54,127 $ 78,559 $28,864
- -----------------------------------------------------------
Effect on earnings per share $ .25 $ .35 $ .13
- -----------------------------------------------------------
As shown in the table, equity securities gains represent the majority of
securities gains over the last three years. The primary source of these gains
has been the Corporation's internally-managed Bank Stock Fund, an equity
portfolio consisting primarily of bank and thrift common stock investments. At
December 31, 1997, the market value of Bank Stock Fund equity investments
totaled $612.2 million, including $407.4 million of unrealized gains.
NONINTEREST EXPENSE
The following table provides details of noninterest expense for the last
three years:
-------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- --------------------------------------------------------------
Salaries $ 788,410 $ 736,439 $ 693,952
Benefits and other
personnel 199,286 187,325 184,663
Equipment 144,459 135,139 127,612
Net occupancy 132,725 132,143 125,072
Third party services 125,422 139,928 147,595
Credit card fees 136,446 129,304 115,184
Postage and supplies 90,822 96,946 89,905
FDIC assessments 6,175 5,794 65,978
State and local taxes 39,066 38,561 39,027
Marketing and public
relations 63,427 84,238 60,668
Transportation 34,738 34,377 31,293
Telephone 44,227 39,073 36,877
Other real estate owned 8,345 9,551 6,075
Amortization of
intangibles 29,194 39,637 41,971
Merger and restructuring 65,902 74,745 24,200
Other 101,933 93,883 125,852
- --------------------------------------------------------------
TOTAL $2,010,577 $1,977,083 $1,915,924
- --------------------------------------------------------------
Noninterest expense increased 1.7% to $2,010.6 million in 1997, compared to
$1,977.1 million in 1996. The overall increase was primarily due to increased
operating
CHART 5: OVERHEAD RATIO
92 55.25
93 47.47
94 45.68
95 48.01
96 39.27
97 33.24
The continued improvement in the overhead ratio is due to maintenance of flat
overhead expenses at the banking level and the realization of cost savings in
past acquisitions. The ratio excludes merger and restructuring expenses.
9
12
FINANCIAL REVIEW (continued)
expenses associated with acquisitions and business activity.
Merger and restructuring expenses in 1997 included $33.3 million in costs
associated with reorganizing National City's six Ohio banking subsidiaries under
a single statewide charter, $19.3 million of costs incurred in connection with
the pending First of America merger, and $13.3 million in severance and
reorganization costs at National Processing. Merger and restructuring expenses
of $74.7 million in 1996 and $24.2 million in 1995 were incurred as a result of
the Integra Financial Corporation merger.
Salaries and other personnel increased primarily as a result of acquisitions
in the mortgage banking and item processing subsidiaries.
Third party service fees have decreased over the past two years due to vendor
reductions resulting from the Integra Financial Corporation merger.
Marketing and public relations expenses in 1997 decreased $20.8 million from
1996 due to the 1996 pre-funding of National City's Charitable Foundation.
The overhead performance measures of National City's major business units for
the past two years are summarized in the following table:
- ------------------------------------------------------------
Full-Time Overhead Efficiency
Equivalent Staff Ratio Ratio
- ------------------------------------------------------------
1997
Corporate and retail
banking 15,081 36.73% 51.59%
Fee-based businesses 13,845 -- 83.10
Corporate 915 -- --
- ------------------------------------------------------------
TOTAL 29,841 36.60% 61.78%
- ------------------------------------------------------------
Excluding merger and
restructuring
expenses 33.24% 59.76%
- ------------------------------------------------------------
- ------------------------------------------------------------
Full-Time Overhead Efficiency
Equivalent Staff Ratio Ratio
- ------------------------------------------------------------
1996
Corporate and retail
banking 16,213 39.93% 52.76%
Fee-based businesses 9,148 -- 83.25
Corporate 925 -- --
- ------------------------------------------------------------
TOTAL 26,286 43.08% 63.88%
- ------------------------------------------------------------
Excluding merger and
restructuring
expenses 39.27% 61.47%
- ------------------------------------------------------------
Full-time equivalent staff increased in 1997 primarily due to increased
staffing as a result of acquisitions and business activity in the item
processing and mortgage banking subsidiaries.
The overhead ratio (noninterest expense less fee and other income as a
percentage of tax equivalent net interest income) was 36.6% in 1997, compared
with 43.1% in 1996 and 49.3% in 1995 (Chart 5). Excluding merger and
restructuring expenses, the overhead ratio was 33.2% in 1997, 39.3% in 1996 and
48.0% in 1995.
The efficiency ratio (noninterest expense as a percentage of fee and other
income plus tax equivalent net interest income) was 61.8% in 1997 versus 63.9%
in 1996 and 67.1% in 1995. Excluding merger and restructuring expenses, the
efficiency ratio was 59.8% in 1997, 61.5% in 1996 and 66.3% in 1995.
The fee-based businesses generally have lower gross margins than traditional
banking. Therefore, growth in these businesses penalizes the efficiency ratio;
conversely, strong fee income benefits the overhead ratio.
EARNING ASSETS
Average earning assets for 1997 were $46,184 million, compared with $44,227
million in 1996 and $43,844 million in 1995. The increase in 1997 over 1996 is
primarily due
CHART 6: AVERAGE LOANS
Consumer Residential Revolving
Installment Real Estate Credit
92 5909 4237 1766
93 5906 4997 2106
94 6693 5888 2511
95 7617 7039 3058
96 8739 7486 3125
97 9607 7836 3061
Commercial Commercial
Real Estate
92 10977 2621
93 10543 3129
94 10782 3281
95 11584 3473
96 12261 3368
97 13617 3116
National City's loan portfolio mix is approximately 45% corporate and 55%
consumer loans. Although commercial loans outpaced consumer loan growth in 1997,
over the longer term the consumer loan portfolio, which includes installment,
residential real estate and revolving credit loans, has grown at a faster rate.
10
13
to a 6.4% increase in average loans, offset by the securities portfolio which
decreased 2.9% to an average balance of $8,439 million.
LOANS: At year-end 1997, loans were $39.6 billion, representing an increase
of 10.4% from year-end 1996. Average loans are shown in Chart 6. Ending loan
balances are summarized in the table below:
- -----------------------------------------------------------------
(Dollars in
Millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------
Commercial $ 13,216 $10,935 $11,048 $ 9,888 $ 9,764
Nontaxable 248 283 282 344 343
Real estate
construction 814 775 713 575 686
Commercial lease 633 516 358 297 310
Commercial real
estate 3,021 3,441 3,332 3,195 3,058
Residential real
estate 8,314 7,623 7,501 6,218 5,903
Consumer 10,128 9,252 8,149 7,161 6,325
Home equity 2,040 1,783 1,546 1,327 1,176
Credit card 1,159 1,222 1,537 1,696 1,037
- -----------------------------------------------------------------
TOTAL LOANS $ 39,573 $35,830 $34,466 $30,701 $28,602
- -----------------------------------------------------------------
Commercial: The majority of the commercial loan portfolio consists of loans
made to middle-market customers in National City's four-state market area. The
loan mix is diverse, covering a broad range of borrowers characteristic of the
Midwest economy. As a matter of policy, concentrations within a particular
industry or segment are continually monitored and controlled.
Commercial loans grew at a solid pace throughout 1997 due to increased
business activity in local markets and competitive product offerings. Future
growth should be supplemented by increased emphasis on commercial leasing,
asset-based lending and loan syndications. The commercial portfolio continues to
have small international exposure. International loans totaled $37 million, down
from $63 million in 1996.
An analysis of the maturity and interest rate sensitivity of commercial and
real estate construction loans at the end of 1997 follows:
- --------------------------------------------------------------
(Dollars in One Year One to Over
Millions) or Less Five Years Five Years Total
- --------------------------------------------------------------
Commercial* $6,430 $6,171 $1,496 $14,097
Real estate
construction 210 383 221 814
- --------------------------------------------------------------
TOTAL $6,640 $6,554 $1,717 $14,911
- --------------------------------------------------------------
TOTAL VARIABLE RATE $5,830 $5,187 $1,295 $12,312
TOTAL FIXED RATE 810 1,367 422 2,599
- --------------------------------------------------------------
* Includes commercial, non-taxable and commercial lease.
- --------------------------------------------------------------
Commercial Real Estate: Commercial real estate included $1,990 million of
loans secured by income-producing real estate in 1997, down from $2,451 million
in 1996 and $2,375 million in 1995.
Activities in commercial real estate are based primarily on relationships
with developers who are active in local markets. More than 85% of outstandings
are in National City's primary markets of Ohio, Kentucky, Indiana and
Pennsylvania. The portfolio consists predominantly of relatively small-scale
office, retail and apartment buildings.
Total commercial real estate loans made up 7.6% of the total loan portfolio
at December 31, 1997, compared to 9.6% in 1996. At year-end, there were no
concentrations of real estate loans in any deteriorating economic areas.
The following table shows a breakdown of commercial mortgage loans at
year-end 1997 by state and by project type:
- ----------------------------------------------------------
(Dollars in Millions)
- ----------------------------------------------------------
BY STATE: BY PROJECT:
Ohio $1,672 Retail $ 749
Pennsylvania 363 Land 141
Kentucky 299 Apartments 767
Indiana 267 Office 456
Florida 43 Industrial 156
Michigan 25 Other 611
Other 211
- ----------------------------------------------------------
TOTAL $2,880 TOTAL $2,880
- ----------------------------------------------------------
Consumer: During 1997, consumer installment loans increased 9.5% from
year-end 1996. Approximately 70% of the portfolio is comprised of auto-related
installment loans of which more than 65% are indirect and 75% are at fixed
rates. Following the introduction of a new consumer lease product in 1995, the
lease portfolio grew more than $400 million in 1997 to $979 million at December
31, 1997. Student loans comprise the remainder of the portfolio with $1,951
million in balances at December 31, 1997.
Home Equity: Home equity loans increased 14.4% due to aggressive marketing
and promotion of this product through all marketing channels.
Credit Card: The decline in credit card outstandings in 1997 reflects the
sale of the remaining $94 million of private label credit card outstandings. The
decline in credit card outstandings in 1996 reflects the sale of the $400
million of private label credit card outstandings in November 1996. The decline
in credit card receivables from 1994 to 1995 reflects the securitization of $440
million of credit card receivables in September 1995. The managed card
portfolio, which includes both on-balance sheet receivables and securitized
balances, totaled $1,530 million at December 31, 1997.
11
14
FINANCIAL REVIEW (continued)
SECURITIES: On a cost basis, the securities portfolio decreased from $8.7
billion at December 31, 1996 to $8.4 billion at December 31, 1997. The decrease
was primarily due to the maturity and sale of U.S. Treasury and Federal agency
debentures.
Summary information with respect to the securities portfolio at December 31
follows:
- ---------------------------------------------------------------
1997 1996 1995
(Dollars in AMORTIZED 1997 Amortized Amortized
Millions) COST YIELD* Cost Cost
- ---------------------------------------------------------------
U.S. TREASURY AND FEDERAL AGENCY DEBENTURES:
Under 1 year $ 31 7.40% $ 527 $ 50
1 to 5 years 656 5.95 1,382 1,427
5 to 10 years 554 6.02 321 504
Over 10 years -- -- -- 95
- ---------------------------------------------------------------
TOTAL 1,241 6.02 2,230 2,076
- ---------------------------------------------------------------
MORTGAGE-BACKED SECURITIES:
Under 1 year 388 6.29 122 104
1 to 5 years 3,277 6.87 2,619 2,826
5 to 10 years 1,210 6.81 1,635 811
Over 10 years 15 7.47 14 2,255
- ---------------------------------------------------------------
TOTAL 4,890 6.81 4,390 5,996
- ---------------------------------------------------------------
ASSET-BACKED AND CORPORATE DEBT SECURITIES:
Under 1 year 453 5.79 93 2
1 to 5 years 812 6.86 591 159
5 to 10 years 222 6.06 221 75
Over 10 years 51 6.99 85 581
- ---------------------------------------------------------------
TOTAL 1,538 6.59 990 817
- ---------------------------------------------------------------
STATES AND POLITICAL SUBDIVISIONS:
Under 1 year 29 11.99 58 69
1 to 5 years 63 10.71 91 115
5 to 10 years 88 9.04 89 122
Over 10 years 65 9.12 87 130
- ---------------------------------------------------------------
TOTAL 245 9.84 325 436
- ---------------------------------------------------------------
OTHER SECURITIES:
Under 1 year -- -- 183 25
1 to 5 years -- -- 2 172
5 to 10 years -- -- 3 93
Over 10 years 469 -- 573 401
- ---------------------------------------------------------------
TOTAL 469 -- 761 691
- ---------------------------------------------------------------
TOTAL SECURITIES $ 8,383 6.61% $ 8,696 $10,016
- ---------------------------------------------------------------
* Yield on debt securities only; equity securities excluded.
- ------------------------------------------------------------
Yields on tax-exempt securities are calculated on a tax equivalent basis
using the marginal Federal income tax rate of 35%. Mortgage-backed securities
are assigned to maturity categories based on their estimated average lives.
Equity securities are included in other securities over 10 years.
The portfolio yield at December 31, 1997 was 6.61%, compared to 6.57% at
December 31, 1996. The increase in yield is attributable to an increased
portfolio allocation to higher yielding mortgage and asset-backed securities.
Investments in collateralized mortgage obligations (CMOs) totaled $2.6
billion and $1.6 billion at December 31, 1997 and 1996, respectively. At
December 31, 1997, CMOs with book values of $95 million and market values of $96
million were considered "high risk" under regulatory definitions. These
securities are classified as "high risk" because either their price sensitivity
or average life extension is potentially beyond the limits for CMOs not
classified as "high risk" by regulatory definitions. These securities and all
CMOs are continually monitored and subjected to stress tests for price and
average life sensitivity. The amount of mortgage-backed securities that are
either variable or adjustable rate totaled $1.1 billion at December 31, 1997, or
22% of total mortgage-backed securities.
ASSET QUALITY
Credit quality further improved during 1997. Continuing the trend of the past
several years, nonperforming assets decreased $1.1 million to $166.5 million at
December 31, 1997 versus $167.6 million at December 31, 1996. Net charge-offs as
a percentage of average loans declined to .37% versus .42% in 1996.
NONPERFORMING ASSETS: A summary of nonaccrual and restructured loans and
other nonperforming assets at December 31 follows:
- ----------------------------------------------------------------
(Dollars in Millions) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------
COMMERCIAL:
Nonaccrual $ 80.5 $ 82.7 $108.2 $ 66.1 $102.1
Restructured -- -- .1 2.4 4.1
- ----------------------------------------------------------------
TOTAL COMMERCIAL 80.5 82.7 108.3 68.5 106.2
- ----------------------------------------------------------------
REAL ESTATE RELATED:
Nonaccrual 64.5 57.2 75.0 104.6 156.7
Restructured 2.5 3.2 4.1 4.4 6.5
- ----------------------------------------------------------------
TOTAL REAL ESTATE
RELATED 67.0 60.4 79.1 109.0 163.2
- ----------------------------------------------------------------
TOTAL NONPERFORMING
LOANS 147.5 143.1 187.4 177.5 269.4
Other real estate
owned (OREO) 19.0 24.5 21.4 48.7 114.0
- ----------------------------------------------------------------
TOTAL NONPERFORMING
ASSETS $166.5 $167.6 $208.8 $226.2 $383.4
- ----------------------------------------------------------------
Loans 90 days past
due accruing
interest $110.9 $107.1 $ 64.7 $ 51.3 $ 68.1
- ----------------------------------------------------------------
NONPERFORMING LOANS AND OREO AS A PERCENT OF:
Loans and OREO .4% .5% .6% .7% 1.3%
Assets .3 .3 .4 .5 .8
Equity 3.9 3.8 5.1 6.5 10.1
Loan loss allowance
to nonperforming
loans 473% 493% 377% 398% 254%
- ----------------------------------------------------------------
12
15
All loans considered impaired under SFAS No. 114 are included in
non-performing loans.
Commercial and residential real estate loans and securities are designated as
nonperforming when payments are 90 or more days past due, when credit terms are
renegotiated below market levels, or when individual analysis of a borrower's
creditworthiness indicates that a credit should be placed on nonaccrual status,
unless the loan is adequately collateralized and is in the process of
collection.
Consumer loans are reported as "90 days past due accruing interest" once the
90-day criterion has been met, and are charged off in the month in which the
loan becomes 120 days past due. Generally, when loans are classified as
nonperforming or impaired, unpaid accrued interest is written off and future
income may be recorded only as cash payments are received.
Although loans may be classified as nonperforming, many continue to pay
interest irregularly or at less than original contractual rates. A summary of
actual income booked on nonperforming loans versus their full contractual yields
for each of the past five years follows:
- ---------------------------------------------------------------------
(Dollars in Millions) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------
Income potential based
on original contract $17.3 $20.6 $21.3 $22.6 $27.6
Actual income 5.5 9.0 12.1 10.3 8.6
- ---------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES: The following table presents a reconciliation of
the allowance for loan losses:
- --------------------------------------------------------------
(Dollars in Millions) 1997 1996 1995 1994 1993
- --------------------------------------------------------------
BALANCE AT BEGINNING
OF YEAR $705.9 $705.8 $706.5 $685.3 $622.7
Provision 139.7 146.5 113.5 109.4 143.1
Reserves (sold)
acquired (8.1) .1 11.5 9.7 50.7
CHARGE-OFFS:
Commercial 46.3 58.0 52.3 54.9 84.7
Real estate mortgage 11.3 10.2 27.5 27.3 29.4
Consumer 105.8 95.9 57.1 47.2 50.0
Credit card 58.5 67.9 63.1 49.1 44.8
Home equity 3.9 4.6 2.5 1.7 4.5
- --------------------------------------------------------------
TOTAL CHARGE-OFFS 225.8 236.6 202.5 180.2 213.4
- --------------------------------------------------------------
RECOVERIES:
Commercial 23.7 35.0 25.7 36.1 40.1
Real estate mortgage 4.9 5.7 9.9 5.2 3.9
Consumer 43.9 35.5 27.8 27.9 26.2
Credit card 12.7 12.7 11.7 12.1 8.5
Home equity 1.5 1.2 1.7 1.0 3.5
- --------------------------------------------------------------
TOTAL RECOVERIES 86.7 90.1 76.8 82.3 82.2
- --------------------------------------------------------------
Net charge-offs 139.1 146.5 125.7 97.9 131.2
- --------------------------------------------------------------
BALANCE AT END OF YEAR $698.4 $705.9 $705.8 $706.5 $685.3
- --------------------------------------------------------------
Ratio of ending
allowance to ending
loans 1.76% 1.97% 2.05% 2.30% 2.40%
- --------------------------------------------------------------
The commercial category includes real estate construction net recoveries of
$1.4 million in 1997, $10.4 million in 1996 and $2.4 million in 1995. The real
estate mortgage category includes commercial real estate net charge-offs of $1.3
million in 1997, $.02 million in 1996 and $15.8 million in 1995.
CHART 7: CREDIT QUALITY MEASURES
Nonperforming Assets Allowance for Loan Loss Net Charge-offs as a % of
Average Loans
92 594 623 0.75
93 383 686 0.49
94 226 707 0.34
95 209 706 0.38
96 168 706 0.42
97 167 698 0.37
Nonperforming assets totaled $166.5 million at December 31, 1997, and the
allowance for loan losses represented 1.76% of total loans and 473% of
nonperforming assets. Net charge-offs as a percentage of loans were .37% in
1997, down from .42% in 1996 and .38% in 1995.
13
16
FINANCIAL REVIEW (continued)
Net charge-offs as a percentage of average loans by portfolio type are shown
in the following table:
- ---------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------
Commercial .17% .19% .23% .17% .42%
Real estate mortgage .06 .04 .17 .24 .31
Consumer .64 .69 .38 .29 .40
Credit card 3.99 3.73 3.66 3.32 4.45
Home equity .13 .20 .05 .05 .08
TOTAL NET CHARGE-OFFS
TO AVERAGE LOANS .37% .42% .38% .34% .49%
- ---------------------------------------------------------------
Net charge-offs as a percentage of average loans decreased 5 basis points
from 1996, and 1 basis point from 1995. Consumer and credit card loans are
charged off within industry norms, while commercial loans are evaluated
individually.
The adequacy of the allowance for loan losses is evaluated based on an
assessment of the losses inherent in the loan portfolio. This assessment results
in an allowance consisting of two components, allocated and unallocated.
The allocated component of the allowance for loan losses reflects expected
losses resulting from the analysis of individual loans, developed through
specific credit allocations for individual loans and historical loss experience
for each loan category. The specific credit allocations are based on a regular
analysis of all loans and commitments over a fixed dollar amount where the
internal credit rating is at or below a predetermined classification. The
historical loan loss element represents a projection of future credit problems
and is determined statistically using a loss migration analysis that examines
loss experience and the related internal gradings of loans charged off.
The allocated component of the allowance for loan losses also includes
management's determination of the amounts necessary for concentrations, economic
uncertainties, change in mix of the portfolio and other subjective factors.
Since banking is a cyclical business, National City's allocation methodology
gives consideration to potential losses in the portfolio over a two year period
of time.
An allocation of the ending allowance for loan losses by major loan type
follows:
- -----------------------------------------------------------------
(Dollars in Millions) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------
Commercial and
commercial mortgage $193.2 $205.2 $261.3 $272.5 $311.8
Consumer and
residential mortgage 103.0 100.1 93.5 88.2 82.7
Revolving credit 48.6 48.9 40.9 43.3 22.1
Unallocated 353.6 351.7 310.1 302.5 268.7
- -----------------------------------------------------------------
TOTAL $698.4 $705.9 $705.8 $706.5 $685.3
- -----------------------------------------------------------------
The allocations are made for analytical purposes. The total allowance is
available to absorb losses from any segment of the portfolio.
The following table shows the percentage of loans in each category to total
loans at year-end:
- ---------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------
Commercial and
commercial mortgage 45.3% 44.5% 45.6% 46.6% 49.5%
Consumer and
residential mortgage 46.6 47.1 45.5 44.3 43.5
Revolving credit 8.1 8.4 8.9 9.1 7.0
- ---------------------------------------------------------------
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0%
- ---------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Average balances in interest-bearing transaction accounts, which include
savings, negotiable order of withdrawal (NOW) and money market accounts, totaled
$12,909 million. Average time deposits totaled $14,819 million in 1997.
Borrowed funds include all interest-bearing liabilities that are not core
deposits. Average borrowed funds totaled $11,316 million in 1997.
A maturity distribution of certificates of deposit of $100,000 or more at
year-end follows:
- ----------------------------------------------------------
(Dollars in Millions) 1997 1996
- ----------------------------------------------------------
DUE IN:
3 months or less $1,225 $1,107
3 to 6 months 339 349
6 to 12 months 438 450
Over 1 year 2,092 1,507
- ----------------------------------------------------------
TOTAL $4,094 $3,413
- ----------------------------------------------------------
Details regarding federal funds borrowed and security repurchase agreements
follow:
- ----------------------------------------------------------
(Dollars in Millions) 1997 1996 1995
- ----------------------------------------------------------
Balance at December 31 $4,425 $4,277 $5,300
Maximum outstanding at any
month-end 4,970 4,512 5,300
Daily average amount outstanding 4,079 3,959 4,394
Weighted daily average interest
rate 5.07% 5.40% 5.43%
Weighted daily interest rate for
amounts outstanding at December
31 5.52% 5.89% 4.90%
- ----------------------------------------------------------
CAPITAL
Total stockholders' equity was $4,281 million at December 31, 1997,
representing a 3.4% decrease from $4,432 million at December 31, 1996.
The Corporation has consistently maintained capital ratios at or above the
"well capitalized" standards. For further detail on capital ratios, see Note 11
to the Consolidated Financial Statements.
Total equity was 7.83% of total assets at year-end 1997, compared to 8.71% a
year ago. Tangible equity, which excludes intangible assets and servicing
rights, was 6.75% of tangible assets at December 31, 1997, versus 7.81% at
December 31, 1996.
14
17
Book value per common share at December 31, 1997 was $20.28, compared to
$19.86 at December 31, 1996 (Chart 8). The 1997 book value included $1.49
related to unrealized market appreciation in the securities available for sale
portfolio, compared to $.66 at year-end 1996.
Cash dividend payout is continually reviewed by management and the Board of
Directors. For the past three- and five-year periods, the dividend payout has
averaged 46.61% and 45.23%, respectively.
In December 1997, the Board of Directors declared a first quarter dividend of
$.46 per common share, representing an 8.2% increase from the preceding
quarterly dividend of $.425 per share. The dividend is payable February 1 to
stockholders of record on January 9, 1998. This continues National City's
pattern of increasing the dividend twice per year since 1992.
National City Corporation's common stock trades on the New York Stock
Exchange under the symbol NCC. As of December 31, 1997, there were 34,108 common
stockholders of record. The total market capitalization of the Corporation was
approximately $13.9 billion at December 31, 1997.
Quarterly dividends paid per share and common stock prices follow:
- -----------------------------------------------------------------
NYSE: NCC First Second Third Fourth Year
1997
Dividends paid $ .41 $ .41 $ .425 $ .425 $ 1.67
High 54.63 55.25 64.88 67.56 67.56
Low 42.50 44.63 52.25 54.13 42.50
Close 46.63 52.50 61.56 65.75 65.75
1996
Dividends paid $ .36 $ .36 $ .375 $ .375 $ 1.47
High 35.38 37.75 42.75 47.25 47.25
Low 30.63 33.25 33.75 41.50 30.63
Close 35.13 35.13 42.13 44.88 44.88
- -----------------------------------------------------------------
LIQUIDITY MANAGEMENT
Effective liquidity management ensures that the cash flow requirements of
depositors and borrowers, as well as the operating cash needs of the
Corporation, are met.
Funds are available from a number of sources, including the securities
portfolio, the core deposit base, the ability to acquire large deposits and
issue bank notes in the local and national markets, and the capability to
securitize or package loans for sale.
The parent company has four major sources of funding to meet its liquidity
requirements: dividends from its subsidiaries, the commercial paper market, a
revolving credit agreement and access to the capital markets.
The main source for parent company cash requirements has been dividends from
its subsidiaries. At January 1, 1998, $471.1 million was available within the
bank subsidiaries to pay parent company dividends without prior regulatory
approval, versus $378.0 million at January 1, 1997. During 1997, subsidiary
banks declared $422.0 million in dividends to the parent company.
As discussed in Item 1 of Form 10-K (page 45), subsidiary banks are subject
to regulation and, among other things, may be limited in their ability to pay
dividends or transfer funds to the parent company. Accordingly, consolidated
cash flows as presented in the Consolidated Statements of Cash Flows on page 26
may not represent cash available to National City Corporation's stockholders.
Funds raised in the commercial paper market through the Corporation's
subsidiary, National City Credit Corporation, are primarily used to support the
activities of National City Mortgage Co., the Corporation's mortgage banking
subsidiary, as well as other occasional short-term cash needs. Commercial paper
outstandings at
CHART 8: BOOK VALUE AND STOCK PRICE HISTORY
(adjusted for stock splits; not restated for poolings)
Book High Low Year-end
Value Stock Stock Stock
Price Price Price
77 5.31 6.67 6.08 6.13
78 5.81 7.19 5.71 5.95
79 6.34 6.82 5.89 6.39
80 6.83 6.41 4.41 5.08
81 7.18 5.56 4.26 4.52
82 7.69 5.41 3.45 4.78
83 8.24 6.89 4.49 6.89
84 8.65 8.61 5.78 8.47
85 8.74 11.28 8.39 10.97
86 10.40 16.46 10.95 15.29
87 10.58 19.13 11.94 14.56
88 10.92 16.82 13.88 16.44
89 12.43 20.75 15.38 19.56
90 13.39 19.94 11.32 15.63
91 14.24 21.13 14.07 18.63
92 14.54 24.82 17.94 24.81
93 16.15 28.06 23.13 24.50
94 16.36 29.00 23.75 25.88
95 18.8 33.75 25.25 33.13
96 19.86 47.25 30.63 44.88
97 20.28 67.563 42.5 65.75
National City's common stock price at December 31, 1997 was $65.75. Over the
past 20 years, the total return on an annualized basis of an investment in
National City common stock, assuming reinvestment of dividends, was 18.7%,
compared to 16.6% for the S&P 500.
15
18
FINANCIAL REVIEW (continued)
December 31, 1997 were $795.9 million, compared to $556.1 million at year-end
1996.
National City Corporation has a $350 million revolving credit agreement with
a group of unaffiliated banks which serves as a back-up liquidity facility. The
agreement expires February 1, 2001, with a provision to extend the expiration
date under certain circumstances. No borrowings have occurred under this
facility.
The parent company also has in place a $250 million shelf registration with
the Securities and Exchange Commission permitting ready access to the public
debt and preferred stock markets.
On June 2, 1997, National City issued $500 million in Reset Asset Capital
Securities which are classified as subordinated debt. The Reset Asset Capital
Securities represent an economical source of funding, with the added benefit of
qualifying as Tier 1 capital following optional redemption on June 1, 1999.
FORWARD-LOOKING STATEMENTS
The sections that follow, MARKET RISK MANAGEMENT and OTHER, contain certain
forward-looking statements (as defined in the Private Securities Litigation
Reform Act of 1995). These forward-looking statements may involve significant
risks and uncertainties. Although National City believes that the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially from the results discussed in these forward-looking
statements.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange rates
and equity prices. National City's market risk is composed primarily of interest
rate risk. The Corporation's Asset/Liability Committee (ALCO) is responsible for
reviewing the interest rate sensitivity position of the Corporation and
establishing policies to monitor and limit exposure to interest rate risk. The
guidelines established by ALCO are reviewed by the Investment Committee of the
Corporation's Board of Directors.
ASSET/LIABILITY MANAGEMENT: The primary goals of asset/liability management
are to maximize net interest income and the net value of the Corporation's
future cash flows within the interest rate risk limits set by ALCO.
Interest Rate Risk Measurement: Interest rate risk is monitored through the
use of three complementary measures: static gap analysis, earnings simulation
modeling and net present value estimation. While each of the interest rate risk
measurements has limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk in the Corporation,
the distribution of risk along the yield curve, the level of risk through time,
and the amount of exposure to changes in certain interest rate relationships.
Static Gap: Gap analysis measures the amount of repricing risk embedded in
the balance sheet at a point in time. It does so by comparing the differences in
the repricing characteristics of assets and liabilities. A gap is defined as the
difference between the principal amount of assets and liabilities, adjusted for
off-balance sheet instruments, which reprice within a specified time period. The
cumulative one-year gap, at year-end, was (8.8%) of total earning assets
adjusted for off-balance sheet investment surrogates. The policy limit for the
one-year gap is plus or minus 15% of adjusted total earning assets.
Core deposits and loans with noncontractual maturities are included in the
gap repricing distributions based upon historical patterns of balance attrition
and pricing behavior which are reviewed at least annually.
The gap repricing distributions include principal cash flows from residential
mortgage loans and mortgage-backed securities in the timeframes in which they
are expected to be received. Mortgage prepayments are estimated by applying
industry median projections of prepayment speeds to portfolio segments based on
coupon range and loan age.
Earnings Simulation: The earnings simulation model forecasts one- and
two-year net income under a variety of scenarios that incorporate changes in the
absolute level of interest rates, changes in the shape of the yield curve and
changes in interest rate relationships. Management evaluates the effects on
income of alternative interest rate scenarios against earnings in a stable
interest rate environment. This type of analysis is also most useful in
determining the short-run earnings exposures to changes in customer behavior
involving loan payments and deposit additions and withdrawals.
The most recent earnings simulation model projects net income would increase
by approximately 1.7% of stable-rate net income if rates fall gradually by two
percentage points over the next year. It projects a decrease of approximately
1.8% if the rates rise gradually by two percentage points, well within the
(5.0%) policy
16
19
limit. Management believes this reflects a slight liability-sensitive rate risk
position for the one-year horizon. Within a two-year horizon and assuming an
additional 200 basis point move in rates, the model forecasts that net income
would fall below that earned in a stable rate environment by 2.7% in a falling
rate scenario and fall by 7.2% in a rising rate scenario. Both of these
forecasts are within the two-year policy guideline of (15.0%).
Net income is projected to fall below the level associated with stable rates
if the yield curve flattens. If short-term rates are assumed to be stable, while
two-year rates fall by 50 basis points and ten-year rates fall by 100 basis
points over the next year, then net income is projected to fall short of that
earned in the stable case by .9%. Alternatively, if short-term rates are assumed
to increase by 200 basis points over the next year, with two-year rates rising
by 150 basis points and ten-year rates increasing by 100 basis points, then net
income is expected to fall by 2.2% relative to stable-rate income.
Earnings are also affected by changes in spread relationships. For example, a
50 basis point contraction in the relationship between the prime rate and the
Federal funds rate is projected to cause a 2.6% reduction in net income over a
12-month period.
This dynamic simulation model includes assumptions about how the balance
sheet is likely to evolve through time, in different interest rate environments.
Loan and deposit growth rate assumptions are derived from historical analysis
and management's outlook, as are the assumptions used to project yields and
rates for new loans and deposits. All maturities, calls and prepayments in the
securities portfolio are assumed to be reinvested in two-year assets, as are the
portion of derivatives used as off-balance sheet investment alternatives.
Mortgage loan prepayment assumptions are developed from industry median
estimates of prepayment speeds for portfolios with similar coupon ranges and
seasoning. Noncontractual deposit growth rates and pricing are assumed to follow
historical patterns. The sensitivities of key assumptions are analyzed at least
annually and reviewed by ALCO.
Net Present Value: The Net Present Value (NPV) of the balance sheet, at a
point in time, is defined as the discounted present value of asset cash flows
and derivative cash flows minus the discounted value of liability cash flows.
Interest rate risk analysis using NPV involves changing the interest rates used
in determining the cash flows and in discounting the cash flows. The resulting
percentage change in NPV is an indication of the longer term repricing risk and
options risk embedded in the balance sheet.
At year-end, a 150 basis point immediate increase in rates is estimated to
reduce NPV by 3.9%. Additionally, NPV is projected to decrease by 3.5% if rates
fall by 150 basis points. Policy limits restrict this amount to (10.0%) of NPV.
Analysis of the average quarterly change in the Treasury yield curve over the
past ten years indicates that a parallel curve shift of 150 basis points or more
is an event that has less than a .1% chance of occurrence.
As with gap analysis and earnings simulation modeling, assumptions about the
timing and variability of balance sheet cash flows are critical in NPV analysis.
Particularly important are the assumptions driving mortgage prepayments and the
assumptions about expected attrition of the core deposit portfolios. These
assumptions are applied consistently across the different rate risk measures.
Summary information about each of the three interest-rate risk measures is
presented below:
- --------------------------------------------------------------------------------------------------------------------------
Year-end Average Minimum Maximum Year-end ALCO
1997 1997 1997 1997 1996 Guidelines
- --------------------------------------------------------------------------------------------------------------------------
Static 1-Year Cumulative Gap -8.8% -6.6% -3.7% -8.8% -4.7% -15.0%
1-Year Net Income Simulation Projection
-200 bp Ramp vs. Stable Rate 1.7% 1.1% 0.5% 1.8% 1.1% -5.0%
+200 bp Ramp vs. Stable Rate -1.8% -1.2% -0.5% -1.8% -1.2% -5.0%
2-Year Net Income Simulation Projection
-200 bp Ramp vs. Stable Rate -2.7% -2.8% -0.6% -4.8% -4.8% -15.0%
+200 bp Ramp vs. Stable Rate -7.2% -6.0% -3.1% -9.4% -3.9% -15.0%
Static Net Present Value Change
-150 bp Shock vs. Stable Rate -3.5% -4.2% -2.8% -5.8% -4.3% -10.0%
+150 bp Shock vs. Stable Rate -3.9% -4.2% -3.0% -5.2% -4.2% -10.0%
- -----------------------------------------------------------------------------------------------------------
17
20
FINANCIAL REVIEW (continued)
Interest Rate Risk Management: A variety of financial instruments are used to
manage interest rate sensitivity. These include the securities in the investment
portfolio, interest rate swaps, interest rate caps and floors, and, to a lesser
extent, exchange-traded futures and options contracts. Frequently called
interest rate derivatives, interest rate swaps, caps and floors have
characteristics similar to securities but possess the advantages of
customization of the risk-reward profile of the instrument, minimization of
balance sheet leverage and improvement of the liquidity position. See Notes 1
and 19 to the Consolidated Financial Statements for further discussion on
derivative financial instruments.
Due to borrowers' preferences for floating-rate loans and depositors'
preferences for fixed-rate deposits, National City's balance sheet tends to move
toward less liability sensitivity with the passage of time. The earnings
simulation model indicates that if all prepayments, calls and maturities of the
securities and derivatives portfolios expected over the next year were to remain
uninvested, then the current liability sensitivity position would be lessened.
The simulation model projects that in a 200 basis point rising interest rate
environment, with no reinvestment, the resulting net income would be .9% less
than that earned in a stable rate environment. Purchases of fixed-rate
securities or interest rate derivative instruments have been made to offset the
natural tendency toward a less liability sensitive interest rate risk position.
Management expects interest rates to be relatively stable during 1998 and
believes that the current modest level of liability sensitivity is appropriate.
TRADING RISK MANAGEMENT: The Corporation maintains a trading account
primarily to provide investment products and risk management services to its
customers as well as to take proprietary risk positions. Trading risk is
monitored on a regular basis through the use of the value-at-risk methodology
(VAR). VAR is defined as the potential overnight dollar loss from adverse market
movements, with 97.5% confidence, based on historical prices and market rates.
During 1997, the maximum month-end measured VAR was $.5 million, well within the
limit established by ALCO of $2.6 million. Month-end VAR estimates are reported
monthly to ALCO. Trading income for 1997 totaled $7.9 million.
OTHER
YEAR 2000: National City initiated the process of preparing its computer
systems and applications for the Year 2000 in January 1995. This process
involves modifying or replacing certain hardware and software maintained by the
Corporation as well as communicating with external service providers to ensure
that they are taking the appropriate action to remedy their Year 2000 issues.
Management expects to have substantially all of the system and application
changes completed by the end of 1998 and believes that its level of preparedness
is appropriate.
National City estimates that the total cumulative cost of the project will be
approximately $40 million, which includes both internal and external personnel
costs related to modifying the systems as well as the cost of purchasing or
leasing certain hardware and software. Purchased hardware and software will be
capitalized in accordance with normal policy. Personnel and all other costs
related to the project are being expensed as incurred.
The costs of the project and the expected completion dates are based on
management's best estimates.
18
21
STATISTICAL DATA
CONSOLIDATED SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
For the Calendar Year
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions
Except Per
Share Amounts and
Ratios) 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 3,205 $ 3,059 $ 2,910 $ 2,386 $ 2,195 $ 2,249 $ 2,651 $ 2,922 $ 2,868 $ 2,444 $ 2,104
Securities 544 567 648 582 640 720 721 699 619 553 508
Other interest
income 27 29 46 35 33 72 131 122 142 117 114
- ------------------------------------------------------------------------------------------------------------------------------
Total interest
income 3,776 3,655 3,604 3,003 2,868 3,041 3,503 3,743 3,629 3,114 2,726
INTEREST EXPENSE
Deposits 1,252 1,216 1,250 911 887 1,153 1,631 1,821 1,748 1,426 1,197
Other interest
expense 581 497 526 326 238 228 308 395 400 323 305
- ------------------------------------------------------------------------------------------------------------------------------
Total interest
expense 1,833 1,713 1,776 1,237 1,125 1,381 1,939 2,216 2,148 1,749 1,502
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 1,943 1,942 1,828 1,766 1,743 1,660 1,564 1,527 1,481 1,365 1,224
PROVISION FOR LOAN
LOSSES 140 146 113 110 143 226 323 439 254 231 318
- ------------------------------------------------------------------------------------------------------------------------------
Net interest
income after
provision for
loan losses 1,803 1,796 1,715 1,656 1,600 1,434 1,241 1,088 1,227 1,134 906
FEES AND OTHER
INCOME 1,292 1,131 1,004 976 911 840 748 700 607 596 500
SECURITIES GAINS 84 108 42 30 42 85 49 6 13 19 22
- ------------------------------------------------------------------------------------------------------------------------------
Total
noninterest
income 1,376 1,239 1,046 1,006 953 925 797 706 620 615 522
NONINTEREST EXPENSE 2,011 1,977 1,916 1,803 1,761 1,787 1,643 1,575 1,376 1,270 1,171
- ------------------------------------------------------------------------------------------------------------------------------
Income before
income taxes and
cumulative effect
of accounting
changes 1,168 1,058 845 859 792 572 395 219 471 479 257
INCOME TAXES 361 321 254 261 235 164 96 84 108 110 34
- ------------------------------------------------------------------------------------------------------------------------------
Income before
cumulative effect
of accounting
changes 807 737 591 598 557 408 299 135 363 369 223
Cumulative effect
of accounting
changes, net -- -- -- -- 60 -- -- -- -- -- --
NET INCOME $ 807 $ 737 $ 591 $ 598 $ 617 $ 408 $ 299 $ 135 $ 363 $ 369 $ 223
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE MEASURES
Diluted net income
per common share $ 3.66 $ 3.27 $ 2.64 $ 2.60 $ 2.59 $ 1.76 $ 1.39 $ .65 $ 1.74 $ 1.77 $ 1.06
Average common
shares -- diluted 220.69 225.35 223.94 229.76 238.25 231.61 214.48 207.70 208.45 208.47 210.29
Dividends paid per
common share 1.67 1.47 1.30 1.18 1.06 .94 .94 .94 .84 .72 .60
FINANCIAL RATIOS
Return on average
common equity 18.53% 17.69% 16.18% 17.31% 18.75% 13.63% 11.02% 5.14% 14.60% 16.19% 10.59%
Return on average
assets 1.59 1.51 1.23 1.35 1.46 .99 .73 .34 .99 1.08 .70
Average equity to
average assets 8.57 8.61 7.80 8.05 8.11 7.47 6.78 6.76 6.91 6.70 6.76
Dividends paid to
net income 45.63 44.95 49.24 45.38 40.93 53.41 67.63 144.62 48.28 40.68 56.60
Net interest
margin 4.25 4.44 4.22 4.50 4.63 4.54 4.39 4.50 4.71 4.69 4.68
AT YEAR-END
Assets $54,684 $50,856 $50,542 $45,869 $45,165 $42,322 $41,973 $40,627 $39,126 $37,162 $33,984
Loans 39,573 35,830 34,466 30,701 28,602 25,952 25,495 26,264 25,510 23,717 21,634
Securities 8,865 8,923 10,345 9,637 11,323 10,898 10,066 8,228 7,618 7,507 6,728
Deposits 36,861 36,000 35,581 34,555 33,144 33,192 32,887 32,521 30,412 29,363 26,686
Long-term debt 4,810 2,994 3,025 2,012 1,261 1,010 520 395 397 382 414
Common equity 4,281 4,432 3,878 3,272 3,597 3,008 2,654 2,505 2,602 2,343 2,129
Total equity 4,281 4,432 4,064 3,460 3,795 3,245 2,891 2,543 2,639 2,380 2,171
Common shares
outstanding 211.10 223.20 211.57 213.21 225.69 224.08 207.96 209.70 211.62 208.00 209.16
- ------------------------------------------------------------------------------------------------------------------------------
19
22
STATISTICAL DATA (continued)
DAILY AVERAGE BALANCE SHEETS/NET INTEREST INCOME/RATES
Daily Average Balance
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Earning assets:
Loans:
Commercial $13,618 $12,261 $11,584 $10,782 $10,543
Real estate mortgage 10,952 10,854 10,512 9,169 8,126
Consumer 9,601 8,739 7,617 6,693 5,906
Revolving credit 3,060 3,125 3,058 2,511 2,106
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 37,231 34,979 32,771 29,155 26,681
Securities:
Taxable 8,155 8,323 9,788 9,544 10,358
Tax-exempt 284 367 515 633 757
- ---------------------------------------------------------------------------------------------------------------------------
Total securities 8,439 8,690 10,303 10,177 11,115
Federal funds sold 63 135 87 79 90
Security resale agreements 281 285 404 470 274
Other short-term investments 170 138 279 316 480
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets/ 46,184 44,227 43,844 40,197 38,640
Total interest income/rates
Allowance for loan losses (713) (708) (720) (706) (651)
Market value appreciation of securities available for sale 300 165 31 23 --
Cash and demand balances due from banks 2,344 2,434 2,385 2,420 2,352
Properties and equipment 637 592 582 553 521
Customers' acceptance liability 72 65 91 69 51
Accrued income and other assets 2,010 1,955 1,867 1,655 1,482
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $50,834 $48,730 $48,080 $44,211 $42,395
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
NOW and money market accounts $ 9,169 $ 9,031 $ 8,507 $ 9,054 $ 9,365
Savings accounts 3,740 4,118 4,446 4,977 4,562
Time deposits of individuals 13,906 13,856 13,786 11,066 11,125
Other time deposits 913 645 521 493 564
Deposits in overseas offices 1,053 859 1,365 1,026 263
Federal funds borrowed 1,341 1,011 1,404 1,398 1,501
Security repurchase agreements 2,738 2,948 2,990 2,003 2,336
Borrowed funds 2,116 1,510 1,916 1,853 1,325
Long-term debt 4,068 3,166 2,435 1,892 1,332
- ---------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/ 39,044 37,144 37,370 33,762 32,373
Total interest expense/rates
Noninterest bearing deposits 6,449 6,398 6,090 6,216 5,971
Acceptances outstanding 72 65 91 69 51
Accrued expenses and other liabilities 911 925 780 603 563
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 46,476 44,532 44,331 40,650 38,958
Preferred stock -- 56 186 191 200
Common stock 4,358 4,142 3,563 3,370 3,237
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 4,358 4,198 3,749 3,561 3,437
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50,834 $48,730 $48,080 $44,211 $42,395
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income
- ---------------------------------------------------------------------------------------------------------------------------
Interest spread
Contribution of noninterest bearing sources of funds
- ---------------------------------------------------------------------------------------------------------------------------
Net interest margin
- ---------------------------------------------------------------------------------------------------------------------------
Tax equivalent basis computed using a 35% marginal tax rate.
Average loan balances include nonperforming loans.
20
23
Interest Daily Average Rate
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
$1,150.7 $1,034.9 $1,000.9 $ 841.4 $ 777.9 8.45% 8.44% 8.64% 7.80% 7.38%
885.3 895.6 868.5 712.0 651.1 8.08 8.25 8.26 7.77 8.01
846.9 764.1 697.0 554.2 532.1 8.82 8.74 9.15 8.28 9.01
330.9 375.0 357.6 287.9 243.5 10.81 12.00 11.69 11.47 11.56
- --------------------------------------------------------------------------------------------------------------
3,213.8 3,069.6 2,924.0 2,395.5 2,204.6 8.63 8.78 8.92 8.22 8.26
526.9 540.4 608.4 558.9 604.9 6.46 6.49 6.22 5.86 5.84
27.5 37.1 47.2 58.7 72.5 9.68 10.11 9.17 9.27 9.58
- --------------------------------------------------------------------------------------------------------------
554.4 577.5 655.6 617.6 677.4 6.57 6.65 6.36 6.07 6.09
3.6 7.4 5.3 3.4 4.9 5.71 5.48 6.09 4.30 5.44
15.6 15.4 23.9 20.0 8.8 5.55 5.40 5.92 4.26 3.21
8.1 6.4 16.4 11.5 19.7 4.76 4.64 5.88 3.64 4.10
- --------------------------------------------------------------------------------------------------------------
$3,795.5 $3,676.3 $3,625.2 $3,048.0 $2,915.4 8.22% 8.31% 8.27% 7.58% 7.55%
$ 276.9 $ 252.6 $ 229.4 $ 199.3 $ 210.9 3.02% 2.80% 2.70% 2.20% 2.25%
92.3 107.4 121.1 130.6 126.7 2.47 2.61 2.72 2.62 2.78
781.5 779.9 791.6 518.2 522.9 5.62 5.63 5.74 4.68 4.70
46.8 31.6 28.3 18.6 20.1 5.13 4.90 5.43 3.77 3.56
54.9 44.6 79.2 44.1 6.9 5.21 5.19 5.80 4.30 2.62
75.5 65.9 87.2 59.3 47.4 5.63 6.52 6.21 4.24 3.16
131.2 147.7 151.3 110.7 65.7 4.79 5.01 5.06 5.53 2.81
116.7 85.8 127.3 44.7 47.7 5.52 5.68 6.64 2.41 3.60
257.5 197.3 160.3 111.5 77.3 6.33 6.23 6.58 5.89 5.80
- --------------------------------------------------------------------------------------------------------------
$1,833.3 $1,712.8 $1,775.7 $1,237.0 $1,125.6 4.70% 4.61% 4.75% 3.66% 3.48%
==============================================================================================================
==============================================================================================================
$1,962.2 $1,963.5 $1,849.5 $1,811.0 $1,789.8
- --------------------------------------------------------------------------------------------------------------
3.52% 3.70% 3.52% 3.92% 4.07%
.73 .74 .70 .58 .56
- --------------------------------------------------------------------------------------------------------------
4.25% 4.44% 4.22% 4.50% 4.63%
- --------------------------------------------------------------------------------------------------------------
21
24
REPORT OF MANAGEMENT
The management of National City Corporation has prepared the accompanying
financial statements and is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and necessarily include amounts that are based on management's best
estimates and judgments. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
financial statements.
National City Corporation maintains a system of internal control over
financial reporting designed to produce reliable financial statements. The
system contains self-monitoring mechanisms, and compliance is tested and
evaluated through an extensive program of internal audits. Actions are taken to
correct potential deficiencies as they are identified. Any internal control
system has inherent limitations, including the possibility that controls can be
circumvented or overridden. Further, because of changes in conditions, internal
control system effectiveness may vary over time.
The Audit Committee, consisting entirely of outside directors, meets
regularly with management, internal auditors and independent auditors, and
reviews audit plans and results as well as management's actions taken in
discharging responsibilities for accounting, financial reporting, and internal
controls. Ernst & Young LLP, independent auditors, and the internal auditors
have direct and confidential access to the Audit Committee at all times to
discuss the results of their examinations.
National City Corporation assessed its internal control system as of December
31, 1997 in relation to criteria for effective internal control over financial
reporting described in "Internal Control -- Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 1997, its system of
internal control met those criteria.
Cleveland, Ohio
January 21, 1998
/s/ David A. Daberko /s/ Robert G. Siefers
DAVID A. DABERKO ROBERT G. SIEFERS
Chairman and Chief Vice Chairman and
Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Stockholders
National City Corporation
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of National City
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of National City's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National City
Corporation and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Cleveland, Ohio
January 21, 1998 /s/ Ernst & Young LLP
22
25
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
December 31
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Commercial $13,464,069 $11,217,815
Real estate construction 782,972 774,991
Lease financing 632,949 515,576
Commercial real estate 3,020,668 3,440,696
Residential real estate 7,214,385 7,288,677
Mortgage loans held for sale 1,130,899 334,742
Consumer 10,127,696 9,251,982
Credit card 1,159,777 1,222,129
Home equity 2,039,710 1,783,460
- ------------------------------------------------------------------------------------------------------------------------
Total loans 39,573,125 35,830,068
Allowance for loan losses (698,405) (705,893)
- ------------------------------------------------------------------------------------------------------------------------
Net loans 38,874,720 35,124,175
Securities available for sale, at market 8,865,063 8,923,482
Federal funds sold and security resale agreements 535,576 493,733
Trading account assets 15,060 102,493
Other short-term investments 48,914 281,563
Cash and demand balances due from banks 2,967,181 2,935,282
Properties and equipment 660,057 616,426
Customers' acceptance liability 45,243 66,767
Accrued income and other assets 2,671,707 2,311,914
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $54,683,521 $50,855,835
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits (noninterest bearing) $ 7,378,009 $ 7,436,403
NOW and money market accounts 9,443,638 9,162,353
Savings accounts 3,469,598 3,896,234
Time deposits of individuals 13,754,972 13,896,667
Other time deposits 1,078,500 721,647
Deposits in overseas offices 1,736,419 886,443
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 36,861,136 35,999,747
Federal funds borrowed and security repurchase agreements 4,425,346 4,276,722
Borrowed funds 3,096,042 1,994,009
Long-term debt 4,810,417 2,994,418
Acceptances outstanding 45,243 66,767
Accrued expenses and other liabilities 1,163,986 1,092,109
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $50,402,170 $46,423,772
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock -- --
Common stock, par value $4 per share, authorized 700,000,000 shares,
outstanding 211,097,837 shares in 1997 and 223,198,494 shares in 1996 844,391 892,794
Capital surplus 618,841 622,543
Retained earnings 2,818,119 2,916,726
- ------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 4,281,351 4,432,063
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,683,521 $50,855,835
- ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
23
26
CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF INCOME
For the Calendar Year
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $3,204,969 $3,059,041 $2,910,070
Securities:
Taxable 524,761 543,006 617,635
Exempt from Federal income taxes 19,187 24,114 30,675
Federal funds sold and security resale agreements 19,201 22,831 30,228
Other short-term investments 8,022 6,343 15,423
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 3,776,140 3,655,335 3,604,031
INTEREST EXPENSE
Deposits 1,252,467 1,216,089 1,249,698
Federal funds borrowed and security repurchase agreements 206,711 213,554 238,484
Borrowed funds 116,744 85,781 127,250
Long-term debt 257,390 197,335 160,254
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,833,312 1,712,759 1,775,686
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 1,942,828 1,942,576 1,828,345
PROVISION FOR LOAN LOSSES 139,660 146,480 113,482
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,803,168 1,796,096 1,714,863
NONINTEREST INCOME
Item processing revenue 393,115 364,512 327,929
Service charges on deposit accounts 228,986 214,659 196,474
Trust fees 195,815 177,124 167,224
Card-related fees 137,931 123,306 98,806
Mortgage banking revenue 124,538 81,145 66,821
Brokerage revenue 49,784 47,546 29,502
Other 162,253 122,993 117,085
- --------------------------------------------------------------------------------------------------------------------------
Total fees and other income 1,292,422 1,131,285 1,003,841
Securities gains 83,514 108,146 42,365
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,375,936 1,239,431 1,046,206
NONINTEREST EXPENSE
Salaries and other personnel 987,696 923,764 878,615
Equipment 144,459 135,139 127,612
Net occupancy 132,725 132,143 125,072
Assessments and taxes 45,241 44,355 105,005
Merger and restructuring 65,902 74,745 24,200
Other 634,554 666,937 655,420
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,010,577 1,977,083 1,915,924
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,168,527 1,058,444 845,145
Income tax expense 361,094 321,814 253,685
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 807,433 $ 736,630 $ 591,460
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 807,433 $ 732,602 $ 576,630
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $3.73 $3.34 $2.71
Diluted 3.66 3.27 2.64
AVERAGE COMMON SHARES OUTSTANDING
Basic 216,429,836 219,095,248 212,392,355
Diluted 220,689,763 225,353,501 223,936,996
- --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
24
27
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Unallocated
Preferred Common Capital Retained Shares Held by
(Dollars in Thousands Except Per Share Amounts) Stock Stock Surplus Earnings ESOP Trust Total
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 1995 $187,540 $852,835 $291,091 $2,137,202 $ (9,018) $3,459,650
Net income 591,460 591,460
Common dividends declared, National City, $1.30
per share (191,907) (191,907)
Common dividends declared of pooled company,
prior to merger (64,006) (64,006)
Preferred dividends, $4.00 per depositary share (14,910) (14,910)
Issuance of 2,279,422 common shares under
corporate stock and dividend reinvestment
plans 9,116 37,015 (1,246) 44,885
Purchase of 8,215,284 common shares and 30,000
depositary shares of preferred stock (1,500) (32,860) (22,479) (184,414) (241,253)
Issuance of 4,267,760 common shares pursuant to
acquisitions 17,071 93,668 110,739
Conversion of 12,800 depositary shares of
preferred stock to 30,515 common shares (640) 122 518 --
Shares distributed by ESOP trust and tax
benefit on dividends 544 6,277 6,821
Change in unrealized market value adjustment on
securities available for sale, net of tax 362,367 362,367
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 $185,400 $846,284 $399,813 $2,635,090 $ (2,741) $4,063,846
Net income 736,630 736,630
Common dividends declared, National City, $1.88
per share (363,999) (363,999)
Common dividends declared of pooled company,
prior to merger (36,009) (36,009)
Preferred dividends, $2.00 per depositary share (6,458) (6,458)
Issuance of 2,787,765 common shares under
corporate stock and dividend reinvestment
plans 11,151 47,612 58,763
Issuance of common stock by subsidiary 25,077 25,077
Conversion of 3,708,000 depositary shares
of preferred stock to 8,839,650 common shares (185,400) 35,359 150,041 --
Shares distributed by ESOP trust and tax
benefit on dividends 189 2,741 2,930
Change in unrealized market value adjustment on
securities available for sale, net of tax (48,717) (48,717)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $ -- $892,794 $622,543 $2,916,726 $ -- $4,432,063
Net income 807,433 807,433
Common dividends declared, $1.72 per share (369,370) (369,370)
Issuance of 3,154,343 common shares under
corporate stock and dividend reinvestment
plans 12,617 67,761 80,378
Purchase of 15,255,000 common shares (61,020) (71,463) (702,585) (835,068)
Change in unrealized market value adjustment on
securities available for sale, net of tax 165,915 165,915
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $ -- $844,391 $618,841 $2,818,119 $ -- $4,281,351
- ------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
25
28
CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Calendar Year
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 807,433 $ 736,630 $ 591,460
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 139,660 146,480 113,482
Depreciation and amortization 105,319 92,710 87,355
Amortization of intangibles and servicing rights 54,985 61,838 65,232
Amortization of securities discount and premium 1,092 3,502 18,728
Securities gains (83,514) (108,146) (42,365)
Other gains, net (80,861) (40,146) (23,271)
Net decrease (increase) in trading account assets 87,433 (78,778) (6,671)
Originations and purchases of mortgage loans held for sale (5,827,672) (2,610,000) (2,075,968)
Proceeds from sales of mortgage loans held for sale 5,064,963 2,421,252 1,878,381
Deferred income taxes 114,700 (16,801) 2,672
Increase in interest receivable (4,146) (40,479) (89,851)
(Decrease) increase in interest payable (18,808) 4,837 156,582
Net change in other assets/liabilities (379,318) (322,864) (105,767)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities (18,734) 250,035 569,999
LENDING AND INVESTING ACTIVITIES
Net (increase) decrease in short-term investments 190,806 65,261 (20,553)
Purchases of securities (3,952,924) (3,439,159) (7,269,362)
Proceeds from sales of securities 3,202,047 3,416,044 5,589,865
Proceeds from maturities and prepayments of securities 1,122,804 1,401,079 1,932,384
Net increase in loans (3,206,753) (1,696,785) (3,043,087)
Proceeds from sales of loans 136,057 400,558 61,225
Net increase in properties and equipment (140,841) (115,630) (101,676)
Acquisitions (108,643) -- (16,498)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by lending and investing activities (2,757,447) 31,368 (2,867,702)
DEPOSIT AND FINANCING ACTIVITIES
Net increase (decrease) in Federal funds borrowed and security
repurchase agreements 148,624 (1,022,844) 1,457,409
Net increase in borrowed funds 1,102,033 431,505 278,464
Net increase (decrease) in demand, savings, NOW, money market
accounts, and deposits in overseas offices 646,231 436,612 (1,530,940)
Net increase (decrease) in time deposits 215,158 (17,832) 1,668,121
Repayment of long-term debt (353,407) (528,261) (72,935)
Proceeds from issuance of long-term debt, net 2,167,916 497,086 1,123,360
Dividends paid, net of tax benefit of ESOP shares (363,785) (314,762) (270,279)
Issuance of common stock 80,378 58,763 44,885
Repurchase of common and preferred stock (835,068) -- (241,253)
Proceeds from issuance of common stock by subsidiary -- 114,966 --
ESOP trust repayment -- 2,741 6,277
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by deposit and financing activities 2,808,080 (342,026) 2,463,109
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and demand balances due from banks 31,899 (60,623) 165,406
Cash and demand balances due from banks, January 1 2,935,282 2,995,905 2,830,499
- --------------------------------------------------------------------------------------------------------------------------
Cash and demand balances due from banks, December 31 $2,967,181 $ 2,935,282 $ 2,995,905
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Interest paid $1,852,120 $ 1,707,922 $ 1,619,204
Income taxes paid 171,814 392,247 238,400
Common stock issued in purchase acquisitions -- -- 110,739
- --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
26
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
National City Corporation ("National City" or "the Corporation") is a
multi-bank holding company headquartered in Cleveland, Ohio. The Corporation's
principal banking subsidiaries are located in Ohio, Indiana, Kentucky and
Pennsylvania. In addition to retail and commercial banking, the Corporation and
its subsidiaries are engaged in trust and investment management, mortgage
banking, investment banking, leasing, item processing, venture capital,
insurance and other financial-related businesses.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of National City conform with generally
accepted accounting principles and prevailing industry practices. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. A description of the
significant accounting policies is presented below:
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated
financial statements include the accounts of the Corporation and its
subsidiaries. All material intercompany transactions and balances have been
eliminated. Certain prior year amounts have been reclassified to conform with
the current year presentation.
BUSINESS COMBINATIONS: Business combinations which have been accounted for
under the purchase method of accounting include the results of operations of the
acquired businesses from the date of acquisition. Net assets of the companies
acquired were recorded at their estimated fair value as of the date of
acquisition.
Other business combinations have been accounted for under the
pooling-of-interests method of accounting which requires the assets, liabilities
and shareholders' equity of the merged entity to be retroactively combined with
the Corporation's respective accounts at recorded value. Prior period financial
statements have been restated to give effect to business combinations accounted
for under this method.
CASH FLOWS: Cash and cash equivalents are defined as those amounts included
in the balance sheet caption "Cash and demand balances due from banks."
LOANS: Loans are generally reported at the principal amount outstanding, net
of unearned income. Loans held for sale are valued at the lower of cost or
market, as calculated on an aggregate basis.
Loan origination fees and certain direct costs are amortized into interest or
other income using a method which approximates the interest method over the
estimated life of the related loan.
Loans are classified as nonaccrual or restructured based on management's
judgment and requirements established by bank regulatory agencies. Subsequent
receipts on nonaccrual loans, including those considered impaired under the
provisions of Statement of Financial Accounting Standards No. 114, are recorded
as a reduction of principal, and interest income is recorded once principal
recovery is reasonably assured.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is that amount
believed adequate to absorb estimated credit losses in the portfolio based on
management's evaluation of various factors including overall growth in the
portfolio, an analysis of individual credits, adverse situations that could
affect a borrower's ability to repay (including the timing of future payments),
prior and current loss experience, and current and anticipated economic
conditions. A provision for loan losses is charged to operations based on
management's periodic evaluation of these and other pertinent factors.
Certain loans are accounted for under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures. These standards
require an allowance to be established as a component of the allowance for loan
losses for certain loans when it is probable that all amounts due pursuant to
the contractual terms of the loan will not be collected and the recorded
investment in the loan exceeds the fair value. Fair value is measured using
either the present value of expected future cash flows based on the initial
effective interest rate on the loan, the observable market price of the loan or
the fair value of the collateral if the loan is collateral dependent.
SECURITIES AND TRADING ACCOUNT ASSETS: Trading account assets are held for
resale in anticipation of short-term market movements and are carried at market
value. Gains and losses, both realized and unrealized, are included in other
income.
Securities are classified as held to maturity when management has the intent
and ability to hold the securities to maturity. Securities held to maturity,
when present, are carried at amortized cost.
Securities not classified as held to maturity or trading are classified as
available for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately through retained earnings, net
of tax.
Interest and dividends on securities, including amortization of premiums and
accretion of discounts, is included in interest income. Realized gains and
losses are recorded as net securities gains (losses). The adjusted cost of
specific securities sold is used to compute gains or losses on sales.
EQUITY-RELATED INVESTMENTS: Equity investments of the Corporation's venture
capital and small business invest-
27
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ment subsidiaries are included in other assets. These investments are carried at
fair value with changes in fair value recognized in other noninterest income.
The fair values of publicly traded investments are determined using quoted
market prices adjusted for sales restrictions or market illiquidity. Investments
that are not publicly traded are carried at cost together with any other-than-
temporary valuation adjustments determined appropriate by management. This
adjusted cost basis approximates fair value.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE: Securities purchased under agreements to resell and
securities sold under agreements to repurchase are generally treated as
collateralized financing transactions and are recorded at the amount at which
the securities were acquired or sold plus accrued interest. It is the
Corporation's policy to take possession of securities purchased under resale
agreements, which are primarily U.S. Government and Federal agency securities.
The market value of the collateral is monitored and additional collateral
obtained when deemed appropriate. The Corporation also monitors its exposure
with respect to securities borrowed transactions and requests the return of
excess collateral as required.
INTANGIBLES: The excess of the purchase price over net identifiable tangible
and intangible assets acquired in a purchase business combination (goodwill) is
included in other assets. Goodwill related to bank acquisitions is amortized
over varying periods not exceeding 25 years. Goodwill related to nonbank
acquisitions is amortized over varying periods not exceeding 40 years, based on
industry practice within the respective nonbank industry. Other identified
intangibles are amortized over periods ranging from 4 to 15 years.
MORTGAGE SERVICING RIGHTS: Mortgage servicing rights are accounted for under
the provisions of SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, which became effective
January 1, 1997. SFAS No. 125 superseded SFAS No. 122, Accounting for Mortgage
Servicing Rights, but did not significantly change the methodology used to
account for servicing rights. The Corporation had adopted SFAS No. 122 as of
January 1, 1996 and at that time began capitalizing originated servicing rights.
The adoption did not have a material impact on financial position or results of
operations. Prior to 1996, capitalization was limited to purchased servicing.
The total cost of loans originated or purchased is allocated between loans and
servicing rights based on the relative fair values of each. The servicing rights
capitalized are amortized in proportion to and over the period of estimated
servicing income. Management stratifies servicing rights based on origination
period and interest rate and evaluates the recoverability in relation to the
impact of actual and anticipated loan portfolio prepayment, foreclosure and
delinquency experience. The Corporation did not have a valuation allowance
associated with the mortgage servicing rights portfolio as of December 31, 1997.
The Corporation hedges its exposure to the prepayment risk associated with the
servicing rights by using off-balance sheet derivative financial instruments.
Further discussion regarding this activity is provided in Note 19.
DEPRECIABLE ASSETS: Properties and equipment are stated at cost less
accumulated depreciation and amortization. Buildings and equipment are
depreciated on a straight-line basis over their useful lives. Leasehold
improvements are amortized over the lives of the leases. Maintenance and repairs
are charged to expense as incurred, while improvements which extend the useful
life are capitalized and depreciated over the remaining life.
Long-lived assets to be held and those to be disposed of and certain
intangibles are evaluated for impairment using the guidance provided by SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. The provisions of this statement establish when an
impairment loss should be recognized and how it should be measured.
DERIVATIVE FINANCIAL INSTRUMENTS:
Interest Rate Risk Management: As part of managing the Corporation's interest
rate risk, a variety of derivative financial instruments are used to hedge
market values and to alter the cash flow characteristics of certain on-balance
sheet instruments. The derivative financial instruments used primarily consist
of interest rate swaps and interest rate caps and floors, and, to a lesser
extent, interest rate futures, forwards and options. The derivative instruments
used to manage interest rate risk are linked with a specific asset or liability
or a group of related assets or liabilities at the inception of the derivative
contract and have a high degree of correlation with the associated balance sheet
item during the hedge period. Net interest income or expense on derivative
contracts used for interest rate risk management is accrued. Realized gains and
losses on contracts, either settled or terminated, are deferred and are recorded
as either an adjustment to the carrying value of the related on-balance sheet
asset or liability or in other assets or other liabilities. Deferred amounts are
amortized into interest income or expense over either the remaining original
life of the derivative instrument or the expected life of the associated asset
or liability. Unrealized gains or losses on these contracts are not recognized
on the balance sheet, except for those contracts linked to available-for-sale
securities, which are carried at fair value with changes in market value, net of
interest accruals, recorded as a component of stockholders' equity, net of tax.
Mortgage Servicing Rights Risk Management: The market value of the
Corporation's mortgage servicing rights portfolio is adversely affected when
mortgage interest rates decline and mortgage loan prepayments
28
31
increase. To hedge the market value of the servicing rights portfolio the
Corporation uses interest rate swaps, principal-only swaps and interest rate
caps and floors. Net cash flows related to these contracts are recognized as
adjustments to the carrying value of the mortgage servicing rights and are
amortized over the life of the derivative instrument. This adjusted carrying
value is the basis used for evaluating the recoverability of the servicing
rights as described in the Mortgage Servicing Rights accounting policy.
Unrealized gains and losses are not recognized on the balance sheet but are
considered when evaluating the recoverability of the servicing rights.
Trading: The Corporation also enters into derivative financial agreements for
trading purposes. These transactions are executed primarily with the
Corporation's customers to facilitate their interest rate and foreign currency
risk management strategies. Derivative instruments used for trading include
interest rate swaps, interest rate caps and floors, and interest rate and
foreign exchange futures, forwards and options. Changes in market value (both
realized and unrealized) are recorded in other income.
STOCK-BASED COMPENSATION: The Corporation's stock-based compensation plans
are accounted for under the provisions of Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. SFAS No. 123, Stock-Based Compensation, issued in 1995, allows
a company to recognize stock-based compensation using a fair-value based method
of accounting if it so elects. The Corporation has elected not to adopt the
recognition provisions of SFAS No. 123.
INCOME TAXES: Deferred income taxes reflect the temporary tax consequences on
future years of differences between the tax bases and financial statement
amounts of assets and liabilities at each year-end.
TREASURY STOCK: Acquisitions of treasury stock are recorded on the par value
method, which requires the cash paid to be allocated to common or preferred
stock, surplus and retained earnings.
2. RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES: In June 1996, the Financial Accounting Standards
Board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities which provides standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. The statement also extends the treatment of mortgage
servicing rights to all servicing assets. The provisions of SFAS No. 125 were
adopted by the Corporation prospectively as of January 1, 1997 for the following
types of transactions: securitizations, recognition of servicing assets and
liabilities, transfers of receivables with recourse, loan participations, and
extinguishments of liabilities.
Certain provisions of SFAS No. 125, relating to repurchase agreements,
securities lending and other similar transactions, and pledged collateral, were
deferred for one year by SFAS No. 127, and were adopted prospectively as of
January 1, 1998. The adoption of these statements did not have a material impact
on financial position or results of operations.
REPORTING COMPREHENSIVE INCOME: In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, Reporting Comprehensive Income. This
statement establishes standards for reporting the components of comprehensive
income and requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be included in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
stockholders' equity and bypass net income. The provisions of this statement are
effective beginning with 1998 interim reporting. These disclosure requirements
will have no impact on financial position or results of operations.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION: In June
1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The provisions of this
statement require disclosure of financial and descriptive information about an
enterprise's operating segments in annual and interim financial reports issued
to shareholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for which
discrete financial information is available. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement is effective for fiscal years beginning after December
15, 1997, however, it is not required to be applied for interim reporting in the
initial year of application. The Corporation is currently evaluating the impact
of this statement on the disclosures included in its annual and interim period
financial statements.
3. MERGERS AND ACQUISITIONS
On December 1, 1997, National City announced the signing of a definitive merger
agreement with First of America Bank Corporation, a $21.1 billion asset bank
holding company headquartered in Kalamazoo, Michigan. The merger agreement calls
for an exchange of 1.2 shares of National City common stock for each outstanding
share of First of America common stock.
29
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Based on the number of shares of First of America common stock outstanding as of
December 31, 1997, National City expects to issue approximately 105 million
common shares to effect the merger. The transaction will be accounted for as a
pooling-of-interests and is anticipated to close in the second quarter of 1998,
subject to regulatory and stockholder approvals. In connection with their
approval of this transaction, the boards of directors of both companies have
rescinded prior authorizations to repurchase common shares.
On January 12, 1998, National City agreed to acquire Fort Wayne National
Corporation, a $3.3 billion asset bank holding company headquartered in Fort
Wayne, Indiana. Under the terms of the agreement, shareholders of Fort Wayne
National will receive .75 shares of National City common stock for each share of
Fort Wayne National common stock outstanding. Based on the number of shares of
Fort Wayne National common stock outstanding as of December 31, 1997, National
City expects to issue approximately 13 million common shares in connection with
the acquisition. The acquisition will be accounted for as a purchase and is
expected to close in the second quarter of 1998, subject to regulatory and
stockholder approvals.
In January 1997, the Corporation's mortgage banking subsidiary, National City
Mortgage Company, acquired certain assets of the mortgage loan origination
business owned by Bank United, a federal bank and its subsidiaries doing
business principally under the name Commonwealth United Mortgage. The purchase
price of the assets acquired was not material to the Corporation.
During 1997, the Corporation's item-processing subsidiary, National
Processing, Inc., acquired several processing services companies. The combined
purchase price of these acquisitions totaled $128 million. Goodwill generated as
a result of these purchases totaled $104 million.
The pro forma effects of the 1997 acquisitions were deemed not material to
historical results of operations or financial condition.
On May 3, 1996, National City merged with Integra Financial Corporation, a
$14 billion asset bank holding company headquartered in Pittsburgh,
Pennsylvania, in a transaction accounted for as a pooling-of-interests. National
City issued 66.6 million shares of common stock to effect the merger.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Total loans outstanding were recorded net of unearned income of $435.9 million
in 1997 and $325.6 million in 1996.
The following table summarizes the activity in the allowance for loan losses:
For the Calendar Year
- ------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- ------------------------------------------------------------
BALANCE AT BEGINNING OF
YEAR $ 705,893 $ 705,846 $ 706,452
Reserves (sold) acquired (8,133) 94 11,643
Provision 139,660 146,480 113,482
Charge-offs (225,703) (236,615) (202,547)
Recoveries 86,688 90,088 76,816
- ------------------------------------------------------------
Net charge-offs (139,015) (146,527) (125,731)
- ------------------------------------------------------------
BALANCE AT END OF YEAR $ 698,405 $ 705,893 $ 705,846
- ------------------------------------------------------------
The financial review section provides detail regarding nonperforming loans.
At December 31, 1997, and December 31, 1996, loans that were considered to be
impaired under SFAS No. 114 totaled $10.4 million and $13.9 million,
respectively. All impaired loans are included in nonperforming assets.
Management does not individually evaluate certain smaller-balance loans for
impairment. These loans are evaluated on an aggregate basis using a
formula-based approach in accordance with the Corporation's policy. The majority
of the loans deemed impaired were evaluated using the fair value of the
collateral as the measurement method. The related allowance allocated to
impaired loans for 1997 and 1996 was $4.2 million and $9.6 million,
respectively. The contractual interest due and actual interest recognized on
impaired loans, as well as on total nonperforming assets, for the twelve months
ended December 31, 1997, was $17.3 million and $5.5 million, compared to $20.6
million and $9.0 million, respectively, for the twelve months ended December 31,
1996.
At December 31, 1997, nonaccrual and restructured loans were $147.5 million
and other real estate owned was $19.0 million. At December 31, 1996, the
corresponding amounts were $143.1 million and $24.5 million, respectively.
5. SECURITIES
The following is a summary of securities available for sale:
DECEMBER 31, 1997
- ------------------------------------------------------------
(Dollars in AMORTIZED UNREALIZED UNREALIZED MARKET
Thousands) COST GAINS LOSSES VALUE
- ------------------------------------------------------------
U.S. Treas. and
Fed. agency
debentures $1,240,779 $ 4,040 $ (4,691) $1,240,128
Mortgage-backed
securities 4,889,618 68,405 (15,978) 4,942,045
Asset-backed and
corporate debt
securities 1,538,165 7,207 (1,894) 1,543,478
States and
political
subdivisions 244,909 12,116 (276) 256,749
Other 469,035 413,743 (115) 882,663
- ------------------------------------------------------------
TOTAL SECURITIES $8,382,506 $505,511 $(22,954) $8,865,063
- ------------------------------------------------------------
30
33
December 31, 1996
- ------------------------------------------------------------
(Dollars in Amortized Unrealized Unrealized Market
Thousands) Cost Gains Losses Value
- ------------------------------------------------------------
U.S. Treas. and
Fed. agency
debentures $2,230,328 $ 5,330 $(22,903) $2,212,755
Mortgage-backed
securities 4,390,066 32,417 (30,968) 4,391,515
Asset-backed and
corporate debt
securities 990,014 6,171 (2,453) 993,732
States and
political
subdivisions 324,520 13,351 (915) 336,956
Other 761,169 230,555 (3,200) 988,524
- ------------------------------------------------------------
TOTAL SECURITIES $8,696,097 $287,824 $(60,439) $8,923,482
- ------------------------------------------------------------
At December 31, 1997, the unrealized appreciation of securities available for
sale included in retained earnings totaled $313.7 million, net of tax, compared
to unrealized appreciation of $147.8 million, net of tax, at December 31, 1996.
The Corporation's securities portfolio consists mainly of financial
instruments that pay back par value upon maturity. Market value fluctuations
occur over the lives of the instruments due to changes in market interest rates.
Management has concluded that current declines in value are temporary and
accordingly, no valuation adjustments have been included as a charge to income.
The following table shows the amortized cost and market value (carrying
value) of securities at December 31, 1997 by maturity:
- ----------------------------------------------------------
Available for Sale
------------------------------
(Dollars in Thousands) Amortized Cost Market Value
- ----------------------------------------------------------
Due in 1 year or less $ 900,230 $ 901,063
Due in 1 to 5 years 4,807,651 4,843,179
Due in 5 to 10 years 2,075,185 2,104,593
Due after 10 years 599,440 1,016,228
TOTAL $ 8,382,506 $8,865,063
- ----------------------------------------------------------
Mortgage-backed securities and other securities which have prepayment
provisions are assigned to maturity categories based on estimated average lives.
Equity securities are included in the Due after 10 years category.
At December 31, 1997, the carrying value of securities pledged to secure
public and trust deposits, trading account liabilities, U.S. Treasury demand
notes and security repurchase agreements totaled $6.2 billion.
At December 31, 1997, there were no securities of a single issuer, other than
U.S. Treasury and other U.S. government agency securities, which exceeded 10% of
stockholders' equity.
The following table represents the segregation of cash flows between
securities available for sale and securities held to maturity:
- ------------------------------------------------------------
Available Held to
(Dollars in Thousands) for Sale Maturity Total
- ------------------------------------------------------------
1997:
Purchases of
securities $ 3,952,924 -- $ 3,952,924
Proceeds from sales
of securities 3,202,047 -- 3,202,047
Proceeds from
maturities and
prepayments of
securities 1,122,804 -- 1,122,804
1996:
Purchases of
securities $ 3,439,159 -- $ 3,439,159
Proceeds from sales
of securities 3,416,044 -- 3,416,044
Proceeds from
maturities and
prepayments of
securities 1,401,079 -- 1,401,079
1995:
Purchases of
securities $ 6,058,386 $ 1,210,976 $ 7,269,362
Proceeds from sales
of securities 5,589,865 -- 5,589,865
Proceeds from
maturities and
prepayments of
securities 916,138 1,016,246 1,932,384
- ------------------------------------------------------------
On November 15, 1995, the FASB staff issued a special report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with provisions in that special report,
management chose to reclassify all securities classified as held to maturity to
available for sale. At December 1, 1995, the date of the transfer, the amortized
cost of those securities was $3.0 billion.
In 1997, 1996, and 1995, gross gains of $94.1 million, $122.3 million, and
$71.4 million and gross losses of $10.6 million, $14.2 million, and $29.0
million were realized, respectively.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value disclosures of financial instruments are made to comply with the
requirements of SFAS No. 107, Disclosures About Fair Value of Financial
Instruments. The market value of securities is primarily based upon quoted
market prices. For substantially all other financial instruments, the fair
values are management's estimates of the values at which the instruments could
be exchanged in a transaction between willing parties. Fair values are based on
estimates using present value and other valuation techniques in instances where
quoted market prices are not available. These techniques are significantly
affected by the assumptions used, including discount rates and estimates of
future cash flows. As such, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, further, may not be
realizable in an immediate settlement of the instruments.
31
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SFAS No. 107 also excludes certain items from its disclosure requirements.
These items include non-financial assets, intangibles, and future business
growth, as well as certain liabilities such as pension and other post-retirement
benefits, deferred compensation arrangements, and leases. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Corporation.
Portions of the unrealized gains and losses inherent in the valuation are a
result of management's program to manage overall interest rate risk and
represent a point in time valuation. It is not management's intention to
immediately dispose of a significant portion of its financial instruments and,
thus, the unrealized gains or losses should not be interpreted as a forecast of
future earnings and cash flows.
The following table presents the estimates of fair value of financial
instruments at December 31, 1997 and 1996. Bracketed amounts in the carrying
value columns represent either reduction of asset accounts, liabilities, or
commitments representing potential cash outflows. Bracketed amounts in the fair
value columns represent estimated cash outflows required to settle the
obligations at current market rates.
- ------------------------------------------------------------
1997 1996
------------------ ------------------
CARRYING FAIR Carrying Fair
(Dollars in Millions) VALUE VALUE Value Value
- ------------------------------------------------------------
ASSETS:
Cash and cash
equivalents $ 4,142 $ 4,142 $ 4,318 $ 4,318
Loans held for sale 1,131 1,131 335 335
Loans receivable 38,442 39,020 35,495 35,578
Allowance for loan
losses (698) -- (706) --
Securities 8,865 8,865 8,923 8,923
Trading account
assets 15 15 102 102
Other assets 105 105 74 74
- ------------------------------------------------------------
LIABILITIES:
Demand deposits $(7,378) $ (7,378) $(7,436) $ (7,436)
Savings and time
deposits (29,483) (29,821) (28,563) (28,763)
Short-term borrowings (7,521) (7,521) (6,271) (6,271)
Long-term debt (4,810) (5,044) (2,994) (3,231)
Other liabilities (434) (434) (475) (475)
- ------------------------------------------------------------
OFF-BALANCE SHEET INSTRUMENTS:
Interest rate swaps $ (2) $ 75 $ (4) $ 15
Interest rate caps,
floors, corridors
and futures 18 4 21 24
Commitments to
extend credit (13) (13) (12) (12)
Standby letters of
credit (2) (2) (2) (2)
- ------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values. For
purposes of this disclosure only, cash equivalents include Federal funds sold,
security resale agreements, Eurodollar time deposits, customers' acceptance
liability, accrued interest receivable, and other short-term investments.
LOANS RECEIVABLE AND LOANS HELD FOR SALE: For performing variable rate loans
that reprice frequently and loans held for sale, estimated fair values are based
on carrying values. The fair values for all other loans are estimated using a
discounted cash flow calculation that applies interest rates used to price new,
similar loans to a schedule of aggregated expected monthly maturities, adjusted
for market and credit risks.
SECURITIES: The market values of securities are based upon quoted market
prices, where available, and on quoted market prices of comparable instruments
when specific quoted prices are not available.
DEPOSIT LIABILITIES: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings, and certain types of money
market accounts) are, by definition, equal to the amounts payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values for fixed rate certificates
of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
SHORT-TERM BORROWINGS: The carrying amounts of Federal funds purchased,
borrowings under repurchase agreements, commercial paper, and other short-term
borrowings approximate their fair values.
LONG-TERM DEBT: The fair values of long-term borrowings (other than deposits)
are based on quoted market prices, where available, or are estimated using
discounted cash flow analyses based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
OFF-BALANCE SHEET INSTRUMENTS: The amounts shown under carrying value
represent accruals or deferred income (fees) arising from the related
off-balance sheet financial instruments. Fair values for off-balance sheet
instruments (futures, swaps, forwards, options, guarantees, and lending
commitments) are based on quoted market prices (futures); current settlement
values (financial forwards); quoted market prices of comparable instruments;
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing
(guarantees, loan commitments); or, if there are no relevant comparables, on
pricing models or formulas using current assumptions (interest rate swaps and
options).
32
35
7. CASH AND DEMAND BALANCES DUE FROM BANKS
The Corporation's subsidiary banks are required to maintain noninterest bearing
reserve balances with the Federal Reserve Bank. The consolidated average reserve
balance was $239.8 million for 1997.
8. PROPERTIES AND EQUIPMENT
A summary of properties and equipment follows:
December 31
- ------------------------------------------------------------
(Dollars in Thousands) 1997 1996
- ------------------------------------------------------------
Land $ 84,019 $ 87,060
Buildings and leasehold
improvements 552,243 585,838
Equipment 816,778 701,477
- ------------------------------------------------------------
1,453,040 1,374,375
Less accumulated depreciation
and amortization 792,983 757,949
- ------------------------------------------------------------
NET PROPERTIES AND EQUIPMENT $ 660,057 $ 616,426
- ------------------------------------------------------------
The Corporation and certain of its subsidiary banks occupy their respective
headquarters offices under long-term operating leases and, in addition, lease
certain data processing equipment. The aggregate minimum annual rental
commitments under these leases total approximately $59.4 million in 1998, $53.2
million in 1999, $49.3 million in 2000, $45.2 million in 2001, $42.5 million in
2002, and $240.8 million thereafter.
Total expense recorded under all operating leases in 1997, 1996 and 1995 was
$82.0 million, $79.8 million and $73.3 million, respectively.
9. OTHER BORROWINGS
The composition of other borrowings follows:
December 31
- -----------------------------------------------------------
(Dollars in Thousands) 1997 1996
- -----------------------------------------------------------
U.S. Treasury demand notes and
Federal funds borrowed-term $1,861,090 $1,056,499
Notes payable to Student Loan
Marketing Association 300,000 300,000
Other 138,763 79,648
- -----------------------------------------------------------
Total bank subsidiaries 2,299,853 1,436,147
Commercial paper 795,895 556,100
Other 294 1,762
- -----------------------------------------------------------
Total parent company and
other subsidiaries 796,189 557,862
- -----------------------------------------------------------
TOTAL $3,096,042 $1,994,009
- -----------------------------------------------------------
U.S. Treasury demand notes represent secured borrowings from the U.S.
Treasury. These borrowings are collateralized with securities or 1-4 family
residential mortgage loans. The funds are placed with the banks at the
discretion of the U.S. Treasury and may be called at any time.
The $300 million floating rate note payable to Student Loan Marketing
Association is secured by and provides funding for student loan receivables.
10. LONG-TERM DEBT
The composition of long-term debt, net of unamortized discount, if applicable,
follows:
December 31
- -----------------------------------------------------------
(Dollars in Thousands) 1997 1996
- -----------------------------------------------------------
Floating Rate Subordinated Notes
due 1997 $ -- $ 74,998
Floating Rate Notes due 1997 -- 49,983
9 7/8% Subordinated Notes due
1999 64,918 64,872
6.50% Subordinated Notes due
2000 99,881 99,820
8.50% Subordinated Notes due
2002 99,896 99,881
6 5/8% Subordinated Notes due
2004 249,201 249,072
7.20% Subordinated Notes due
2005 249,785 249,756
Other 939 1,794
- -----------------------------------------------------------
TOTAL PARENT COMPANY 764,620 890,176
6.50% Subordinated Notes due
2003 199,600 199,525
7.25% Subordinated Notes due
2010 222,944 222,779
6.30% Subordinated Notes due
2011 200,000 200,000
7.25% Subordinated Notes due
2011 197,278 197,080
Other 3,133 2,103
- -----------------------------------------------------------
TOTAL SUBSIDIARY SUBORDINATED
NOTES 822,955 821,487
- -----------------------------------------------------------
TOTAL LONG-TERM DEBT QUALIFYING
FOR TIER II CAPITAL 1,587,575 1,711,663
Senior Bank Notes 2,019,229 754,582
Federal Home Loan Bank Advances 703,721 528,173
Reset Asset Capital Securities
of National City Capital Trust
I 499,892 --
- -----------------------------------------------------------
TOTAL OTHER LONG-TERM DEBT 3,222,842 1,282,755
- -----------------------------------------------------------
TOTAL $4,810,417 $2,994,418
- -----------------------------------------------------------
All of the subordinated notes of the parent and bank subsidiaries pay
interest semi-annually and may not be redeemed prior to maturity.
In June 1997, National City Capital Trust I (the Trust), a Delaware statutory
business trust of which 100% of the common equity is owned by the Corporation,
issued $500 million of Reset Asset Capital Securities (Capital Securities). In
connection with this issuance, the Trust invested the proceeds in 6.75% Junior
Subordinated Debt Securities of the Corporation. The Junior Subordinated Debt
Securities are the sole assets of the Trust and have a stated maturity of June
1, 2029. Distributions on the Capital Securities are payable semiannually at a
rate per annum equal to the interest rate being earned by the Trust on the
Junior Subordinated Debt Securities and are recorded as interest expense by the
Corporation. The Capital Securities are subject to mandatory redemption, in
whole or in part, upon repayment of the Junior Subordinated Debt Securities. The
Junior Subordinated Debt Securities are first redeemable on June 1, 1999. If the
Junior Subordinated Debt Securities are not redeemed on June 1, 1999, the
interest rate per annum will be reset based on current market rates at that
time. The Capital Securities currently do not qualify for Tier I Capital of the
Corporation.
Long-term advances from the Federal Home Loan Bank (FHLB) are at fixed and
variable rates ranging up to
33
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8.40% and mature at various dates through 2023. Advances from the FHLB are
collateralized by qualifying securities and loans.
The Senior Bank Notes are at fixed and variable rates and mature at various
dates through 2012. The weighted average interest rate of the notes as of
December 31, 1997 and 1996 was 6.14% and 6.07%, respectively.
The majority of the Corporation's fixed rate debt has been effectively
converted to variable rate debt through the use of off-balance sheet
derivatives. Information regarding derivative contracts is included in Note 19.
A credit agreement dated March 14, 1997, with a group of unaffiliated banks,
allows the Corporation to borrow up to $350 million until February 1, 2001, with
a provision to extend the expiration date under certain circumstances. The
Corporation pays an annual facility fee of 10 basis points on the amount of the
line. There were no borrowings outstanding under this agreement at December 31,
1997.
Long-term debt maturities for the next five years are as follows: $402.1
million in 1998; $229.7 million in 1999; $677.5 million in 2000; $126.8 million
in 2001; and $501.7 million in 2002.
11. CAPITAL RATIOS
The following table reflects various measures of capital at year-end:
1997 1996
(Dollars in ------------------ ------------------
Millions) AMOUNT RATIO Amount Ratio
- ------------------------------------------------------------
Total equity(1) $4,281.4 7.83% $4,432.1 8.71%
Tangible
equity(2) 3,651.5 6.75 3,932.7 7.81
Tier 1 capital(3) 3,609.8 8.12 3,976.5 9.84
Total risk-based
capital(4) 5,622.5 12.65 5,980.6 14.79
Leverage(5) 3,609.8 7.01 3,976.5 8.16
- ------------------------------------------------------------
(1) Computed in accordance with generally accepted accounting principles,
including unrealized market value adjustment of securities available for
sale.
(2) Stockholders' equity less all intangible assets and servicing rights;
computed as a ratio to total assets less intangible assets and servicing
rights.
(3) Stockholders' equity less certain intangibles and the unrealized market
value adjustment of securities available for sale; computed as a ratio to
risk-adjusted assets, as defined.
(4) Tier 1 capital plus qualifying loan loss allowance and subordinated debt;
computed as a ratio to risk-adjusted assets, as defined.
(5) Tier 1 capital; computed as a ratio to average total assets less certain
intangibles.
- ------------------------------------------------------------
National City's Tier 1, total risk-based capital and leverage ratios are well
above the required minimum levels of 4.00%, 8.00%, and 4.00%, respectively.
The capital levels at all of National City's subsidiary banks are maintained
at or above the well-capitalized minimums of 6.00%, 10.00% and 5.00% for the
Tier I capital, total risk-based capital and leverage ratios, respectively.
Intangible asset and mortgage servicing right totals used in the capital
ratio calculations are summarized below:
December 31
- ----------------------------------------------------------
(Dollars in Millions) 1997 1996
- ----------------------------------------------------------
Goodwill $394.9 $307.8
Other intangibles 18.1 50.4
------ ------
Total intangibles $413.0 $358.2
Mortgage servicing rights $218.2 $141.2
- ----------------------------------------------------------
12. OTHER CAPITAL TRANSACTIONS
The Corporation is authorized to issue 5,000,000 shares of no par value
preferred stock. At December 31, 1995, the Corporation had 741,600 shares of 8%
Cumulative Convertible Preferred Stock outstanding in the form of 3,708,000
depositary shares. The depositary shares had a stated value of $50.00 per share
and each share represented a one-fifth interest in a preferred share. The
preferred shares were convertible at the option of the holder into 2.384 common
shares per depositary share. On March 5, 1996, the Corporation called the
preferred stock for redemption, effective May 1, 1996, at the fixed redemption
price of $52.00 per depositary share. Prior to the redemption date, all of the
outstanding depositary shares were converted into common stock.
The final 613,429 shares in the Employee Stock Ownership Plan (ESOP) were
allocated to benefit plan participants during 1996. The ESOP, which was part of
the National City Savings and Investment Plan, earned dividends on company
shares of $.4 million and $1.4 million in 1996 and 1995, respectively. Company
contributions of $2.8 million and $6.8 million in 1996 and 1995, respectively,
were used with dividends to service the loan which was fully paid during 1996.
In August 1996, National Processing, Inc. (NPI), a subsidiary of National
City, issued 7,475,000 shares of common stock in an underwritten public
offering. Subsequent to the issuance, National City continued to own 85.2% of
NPI. In 1997, National City increased its investment in NPI by approximately
2.5% through the purchase of 1.3 million shares of NPI's common stock on the
open market. Amounts related to the minority shareholders' interest in the
equity of NPI are not material to the consolidated financial statements.
13. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share, which became effective for the Corporation for reporting
periods ending after December 15, 1997. Under the provisions of SFAS No. 128,
primary and fully-diluted earnings per share were replaced with basic and
diluted earnings per share in an effort to simplify the computation of these
measures and align them more closely with
34
37
the methodology used internationally. Basic earnings per share is arrived at by
dividing net income available to common stockholders by the weighted-average
number of common shares outstanding and does not include the impact of any
potentially dilutive common stock equivalents. The diluted earnings per share
calculation method is similar to, but slightly different from, the previously
required fully-diluted earnings per share method and is arrived at by dividing
net income by the weighted-average number of shares outstanding, adjusted for
the dilutive effect of outstanding stock options and the conversion impact of
convertible equity securities. Diluted earnings per share for 1997 equates to
what would have been reported as fully-diluted earnings per share. For purposes
of comparability, all prior-period earnings per share data has been restated.
The calculation of net income per common share follows:
For the Calendar Year
- ---------------------------------------------------------------
(Dollars in Thousands
Except
Per Share Amounts) 1997 1996 1995
- ---------------------------------------------------------------
BASIC:
Net income $807,433 $736,630 $591,460
Less preferred
dividends -- 4,028 14,830
- ---------------------------------------------------------------
Net income applicable
to common stock $807,433 $732,602 $576,630
- ---------------------------------------------------------------
Average common shares
outstanding 216,429,836 219,095,248 212,392,355
- ---------------------------------------------------------------
Net income per common
share -- basic $3.73 $3.34 $2.71
- ---------------------------------------------------------------
DILUTED:
Net income $807,433 $736,630 $591,460
- ---------------------------------------------------------------
Average common shares
outstanding 216,429,836 219,095,248 212,392,355
Stock option
adjustment 4,259,927 3,579,078 2,704,769
Preferred stock
adjustment -- 2,679,175 8,839,872
- ---------------------------------------------------------------
Average common shares
outstanding -- diluted 220,689,763 225,353,501 223,936,996
- ---------------------------------------------------------------
Net income per common
share -- diluted $3.66 $3.27 $2.64
- ---------------------------------------------------------------
14. PARENT COMPANY AND REGULATORY RESTRICTIONS
At December 31, 1997, retained earnings of the parent company included $2,360.8
million of equity in undistributed earnings of subsidiaries.
Dividends paid by the Corporation's subsidiary banks are subject to various
legal and regulatory restrictions. In 1997, subsidiary banks declared $422.0
million in dividends to the parent company. The subsidiary banks can
initiate dividend payments in 1998, without prior regulatory approval, of $471.1
million, plus an additional amount equal to their net profits for 1998, as
defined by statute, up to the date of any such dividend declaration.
Under Section 23A of the Federal Reserve Act, as amended, loans from
subsidiary banks to nonbank affiliates, including the parent company, are
required to be collateralized.
Commercial paper borrowings of a subsidiary ($795.9 million outstanding at
December 31, 1997) are guaranteed by the parent company.
Condensed parent company financial statements, which include transactions
with subsidiaries, follow:
BALANCE SHEETS
December 31
- ----------------------------------------------------------
(Dollars in Thousands) 1997 1996
- ----------------------------------------------------------
ASSETS
Cash and demand balances
due from banks $ 84,497 $ 14,355
Loans to and accounts receivable
from subsidiaries 732,664 1,014,375
Securities 1,010,956 747,644
Investments in:
Subsidiary banks 3,385,638 3,149,276
Nonbank subsidiaries 498,220 442,711
Goodwill, net of accumulated
amortization of $37,318 and
$34,897, respectively 49,292 47,793
Other assets 66,110 184,015
- ----------------------------------------------------------
TOTAL ASSETS $5,827,377 $5,600,169
- ----------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Corporate long-term debt $1,264,512 $ 890,176
Accrued expenses and other
liabilities 281,514 277,930
- ----------------------------------------------------------
Total liabilities 1,546,026 1,168,106
Stockholders' equity 4,281,351 4,432,063
- ----------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,827,377 $5,600,169
- ----------------------------------------------------------
STATEMENTS OF INCOME
For the Calendar Year
- -----------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -----------------------------------------------------------
INCOME
Dividends from:
Subsidiary banks $422,000 $579,500 $329,751
Nonbank subsidiaries 4,318 10,420 12,676
Interest on loans to
subsidiaries 23,153 10,810 11,686
Interest and dividends
on securities 22,959 21,997 9,268
Securities gains 65,929 93,720 19,764
Other income 25,031 2,851 1,046
- -----------------------------------------------------------
TOTAL INCOME 563,390 719,298 384,191
- -----------------------------------------------------------
35
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Calendar Year
- -------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------
EXPENSE
Interest on debt and
other borrowings 76,851 67,280 68,578
Goodwill amortization 2,329 2,588 2,360
Other expense 110,887 153,487 118,909
- -------------------------------------------------------------
TOTAL EXPENSE 190,067 223,355 189,847
- -------------------------------------------------------------
Income before taxes and
equity in undistributed
income of subsidiaries 373,323 495,943 194,344
Income tax (benefit) (46,988) (81,357) (79,474)
- -------------------------------------------------------------
Income before equity in
undistributed net income
of subsidiaries 420,311 577,300 273,818
Equity in undistributed
net income of subsidiaries 387,122 159,330 317,642
- -------------------------------------------------------------
NET INCOME $807,433 $736,630 $591,460
- -------------------------------------------------------------
STATEMENTS OF CASH FLOWS
For the Calendar Year
- -----------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -----------------------------------------------------------
OPERATING ACTIVITIES
Net income $807,433 $736,630 $591,460
Adjustments to reconcile
net income to net cash
provided
by operating activities:
Equity in undistributed net
income of subsidiaries (387,122) (159,330) (317,642)
Amortization of goodwill 2,329 2,588 2,360
Depreciation of premises
and equipment 1,596 5,447 4,339
Decrease (increase) in
dividends receivable from
subsidiaries 223,820 (114,820) (89,500)
Securities gains (65,929) (93,720) (19,764)
Other, net 44,830 (114,604) (79,879)
- -----------------------------------------------------------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 626,957 262,191 91,374
- -----------------------------------------------------------
INVESTING ACTIVITIES
Net change in short-term
money market investments (155,861) 29,065 (35,613)
Purchases of securities (161,758) (260,765) (144,259)
Sales and maturities of
securities 139,251 199,324 93,129
Net sales of premises and
equipment -- 11,513 19,266
Principal collected on
loans to subsidiaries 594,820 8,524 7,800
Loans to subsidiaries (737,049) (49,167) (24,975)
Investment in subsidiaries 9,948 -- (72,961)
Return of investment
from subsidiaries 495,000 198,000 286,000
- -----------------------------------------------------------
NET CASH PROVIDED
BY INVESTING ACTIVITIES 184,351 136,494 128,387
- -------------------------------------------------------------
For the Calendar Year
- -------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of corporate
long-term debt (125,885) (100,000) (556)
Proceeds from issuance
of long-term debt 500,000 -- 249,710
Increase (decrease) in
other borrowings 3,194 (43,730) (7,115)
Common and preferred
dividends (363,785) (314,762) (270,279)
Issuance of common stock 80,378 58,763 44,885
Repurchase of stock (835,068) -- (241,253)
Shares distributed by ESOP -- 2,741 6,277
- -------------------------------------------------------------
NET CASH (USED)
BY FINANCING ACTIVITIES (741,166) (396,988) (218,331)
- -------------------------------------------------------------
Increase in cash and demand
balances due from banks 70,142 1,697 1,430
Cash and demand balances
due from banks, January 1 14,355 12,658 11,228
- -------------------------------------------------------------
Cash and demand balances
due from banks, December 31 $ 84,497 $ 14,355 $ 12,658
- -------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 76,212 $ 64,764 $ 65,106
Securities transferred to
(from) subsidiaries -- (248,234) 89,400
Shares issued in purchase
acquisitions and
additional investment in
subsidiaries -- -- 110,739
- -------------------------------------------------------------
15. STOCK OPTIONS AND AWARDS
National City maintains various incentive and non-qualified stock-based
compensation plans that allow for the granting of restricted shares, stock
options or other stock-based awards to eligible employees and directors.
STOCK OPTION PLANS: The stock option plans for officers and key employees
authorize the issuance of up to 15,000,000 options to purchase shares of common
stock at the market price of the shares at the date of grant. These options
generally become exercisable to the extent of either 25% or 50% annually
beginning one year from the date of grant and expire not later than ten years
from the date of grant. In addition, stock options may be granted that include
the right to receive additional options not exceeding the number of options
exercised under the original grant if certain criteria are met. The exercise
price of an additional option is equal to the market price of the common stock
on the date the additional option is granted. Additional options vest six months
from the date of grant and have a contractual term equal to the remaining term
of the original option.
In 1995, the Corporation was authorized to grant up to 3,500,000 options to
purchase common stock to virtually all employees in commemoration of National
City's 150th anniversary. One-third of these options become exercisable in each
of the years 1998, 1999, and 2000.
36
39
RESTRICTED STOCK PLAN: The restricted stock plan provides for the issuance of
up to 1,500,000 shares of common stock to officers, key employees and outside
directors. In general, restrictions on outside directors' shares expire after
nine months and restrictions on shares granted to key employees and officers
expire over a four-year period. The Corporation generally recognizes
compensation expense over the restricted period. Compensation expense recognized
in 1997, 1996 and 1995 totaled $3.2 million, $2.0 million and $1.9 million,
respectively, related to shares issued under this plan.
OPTION AND RESTRICTED STOCK AWARD ACTIVITY: A summary of stock option and
restricted stock award activity follows:
-------------------------------------------------------------
Shares
-----------------------------------
Available Weighted-
for Grant Average
----------- Outstanding Option
Awards & --------------------- Price Per
Options Awards Options Share
-------------------------------------------------------------
January 1, 1995 8,893,415 327,800 10,079,579 $ 22.84
Authorized 3,500,000
Cancelled 95,577 (8,950) (793,767) 29.12
Acquired 88,418
Exercised (139,250) (1,822,509) 20.40
Granted (5,849,640) 111,090 5,738,550 30.10
- ---------------------------------------------------------------
December 31,
1995 6,639,352 290,690 13,290,271 25.86
Cancelled 125,368 (11,300) (820,718) 29.35
Exercised (49,532) (2,999,388) 19.83
Granted (3,649,117) 162,977 4,105,003 35.20
- ---------------------------------------------------------------
December 31,
1996 3,115,603 392,835 13,575,168 29.89
Authorized 16,500,000
Cancelled 116,615 (23,059) (139,199) 36.43
Exercised (77,803) (2,821,205) 23.04
Granted (2,895,679) 215,579 3,132,668 56.98
- ---------------------------------------------------------------
DECEMBER 31,
1997 16,836,539 507,552 13,747,432 $ 35.05
- ---------------------------------------------------------------
At December 31, 1997, 1996 and 1995, options exercisable under National City
option plans totaled 6,623,140, 6,975,620, and 6,160,826 shares, respectively,
and had a weighted average option price per share of $26.88, $22.45, and $20.71,
respectively. For options outstanding at December 31, 1997, the option price per
share ranged from $5.31 to $67.00 and the weighted-average remaining contractual
life of the options was 7.2 years.
PRO FORMA DISCLOSURES: For purposes of providing the pro forma disclosures
required under SFAS No. 123, the fair value of stock options granted in 1995,
1996 and 1997 was estimated at the date of grant using a Black-Scholes option
pricing model. The Black-Scholes option pricing model was originally developed
for use in estimating the fair value of traded options which have different
characteristics from the Corporation's employee stock options. The model is also
sensitive to changes in the subjective assumptions which can materially affect
the fair value estimate. As a result, management believes that the Black-Scholes
model may not necessarily provide a reliable single measure of the fair value of
employee stock options.
The following weighted-average assumptions were used in the option pricing
model: a risk-free interest rate of 5.69%, 6.04% and 5.64% for 1997, 1996 and
1995, respectively; an expected life of the option of 3.9 years, 4.2 years and
5.4 years for 1997, 1996 and 1995, respectively; an expected dividend yield of
3.50% for 1997 and 3.80% for 1996 and 1995; and a volatility factor of .194 for
1997 and .206 for 1996 and 1995. The weighted-average grant-date fair value of
options granted during 1997, 1996 and 1995 was $9.46, $6.08 and $5.24,
respectively. For purposes of the pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.
Had compensation cost for the Corporation's stock-based compensation plans
been determined consistent with SFAS No. 123, net income and earnings per share
would have been as summarized below:
- ------------------------------------------------------------
(In Thousands,
Except Per Share Amounts) 1997 1996 1995
- ------------------------------------------------------------
Pro forma net income $791,261 $725,726 $588,122
Pro forma earnings per share:
Basic $3.66 $3.29 $2.70
Diluted 3.59 3.22 2.63
- ------------------------------------------------------------
Due to the inclusion of only 1995, 1996 and 1997 option grants, the effects
of applying SFAS No. 123 to the years presented above may not be representative
of the pro forma impact in future years.
16. PENSION PLANS
National City has a noncontributory, defined benefit retirement plan covering
substantially all employees. Retirement benefits are based upon the employees'
length of service and salary levels. Actuarially determined pension costs are
charged to current operations. The funding policy is to pay at least the minimum
amount required by the Employee Retirement Income Security Act of 1974.
37
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The defined benefit pension plan's funded status (at its year-end September
30) follows:
- ---------------------------------------------------------
(Dollars in Thousands) 1997 1996
- ---------------------------------------------------------
Projected benefit obligation:
Vested benefits $452,958 $422,876
Nonvested benefits 21,888 21,121
- ---------------------------------------------------------
Accumulated benefit obligation 474,846 443,997
Effect of projected future
compensation levels 69,928 84,875
- ---------------------------------------------------------
Projected benefit obligation 544,774 528,872
Plan's assets at fair value,
primarily stocks and bonds,
including $33.5 million and
$22.7 million in the common
stock of the Corporation for
1997 and 1996, respectively 697,571 561,133
- ---------------------------------------------------------
Funded status - plan assets in
excess of projected benefit
obligation $152,797 $ 32,261
- ---------------------------------------------------------
Comprised of:
Unrecognized net gains (losses) $148,832 $ 31,626
Unrecognized net assets being
recognized over 15 years 16,013 20,787
Less accrued pension liability
on balance sheet 12,048 20,152
- ---------------------------------------------------------
$152,797 $ 32,261
- ---------------------------------------------------------
Assumptions used in the valuation of the defined benefit pension plan at its
year-end (September 30) follow:
- -------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------
Weighted average discount
rate 7.25% 7.50% 7.50%
Average assumed rate of
compensation increase 2.75-7.50 5.00 4.75-5.00
Long-term rate of return on
assets 10.00 10.00 10.00
- -------------------------------------------------------------
The Corporation adopted an age-graded rate of compensation increase
assumption in 1997. This change did not have a material impact on the projected
benefit obligation.
Net defined benefit pension plan costs include the following components:
For the Calendar Year
- --------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- --------------------------------------------------------------
Service cost - benefits
earned during year $ 24,333 $ 20,306 $ 19,871
Interest cost on projected
benefit obligation 40,480 36,033 36,324
Actual return on plan assets (176,344) (78,548) (74,411)
Net amortization and deferral 120,427 30,577 29,732
- --------------------------------------------------------------
Net periodic pension cost $ 8,896 $ 8,368 $ 11,516
- --------------------------------------------------------------
The Corporation also maintains nonqualified supplemental retirement plans for
certain key employees. All benefits provided under these plans are unfunded and
any payments to plan participants are made by the Corporation. At December 31,
1997 and 1996 approximately $28.5 million and $32.6 million, respectively, were
included in accrued expenses and other liabilities for these plans. For the
years ended December 31, 1997, 1996 and 1995, expense related to these plans was
$6.7 million, $17.6 million, and $5.6 million, respectively. The expense for
1996 includes a $11.4 million charge relating to the curtailment of a
supplemental executive retirement plan for former key employees of Integra.
Substantially all employees with one or more years of service are eligible to
contribute a portion of their pre-tax salary to a defined contribution plan. The
Corporation may make contributions to the plan in varying amounts depending on
the level of employee contributions. For the years ended 1997, 1996 and 1995,
the expense related to this plan was $35.2 million, $10.7 million, and $17.8
million, respectively. Contributions made in the form of Company shares by an
ESOP served to reduce expense in 1996 and prior.
17. OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation has a benefit plan which offers postretirement medical and life
insurance benefits to all employees who have attained the age of 55 and have at
least 10 years of service (five years of service if age 65 or older). The
medical portion is contributory and the life insurance coverage is
noncontributory to the participants. For any employee who retired on or after
April 1, 1989, the Corporation's medical contribution is fixed, based on years
of service and age at retirement. The accounting for the medical portion
anticipates contributions for retirees prior to April 1, 1989, to continue to
increase as a proportion of the total costs of the plan. The Corporation
reserves the right to terminate or make plan changes at any time.
The Corporation has no plan assets attributable to the plan and funds the
benefits as the claims arise. Postretirement benefit costs are recognized during
the periods in which employees provide service for such benefits. The following
table presents the Plan's status at
38
41
December 31, reconciled with amounts recognized in the consolidated balance
sheet:
- -----------------------------------------------------------
(Dollars in Thousands) 1997 1996
- -----------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $ 43,586 $ 40,704
Fully eligible active plan
participants 11,108 10,826
Other active plan participants 16,709 15,573
- -----------------------------------------------------------
Accumulated postretirement benefit
obligation 71,403 67,103
Unrecognized net (loss) (10,651) (9,585)
Unrecognized transition obligation (25,286) (27,210)
- -----------------------------------------------------------
Accrued postretirement benefit cost $ 35,466 $ 30,308
- -----------------------------------------------------------
Net periodic postretirement benefit costs include the following components:
- ------------------------------------------------------------
For the Calendar Year
(Dollars in Thousands) 1997 1996 1995
- ------------------------------------------------------------
Service cost $1,581 $1,270 $ 983
Interest cost 5,169 4,805 4,406
Net amortization and deferral 2,378 2,231 1,822
- ------------------------------------------------------------
Net periodic postretirement
benefit cost $9,128 $8,306 $7,211
- ------------------------------------------------------------
Assumptions used in the valuation of the accumulated postretirement benefit
obligation at December 31 follow:
- ----------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------
Weighted average discount rate 7.50% 7.75% 7.75%
Average salary scale 5.00 5.00 5.00
- ----------------------------------------------------------
The health care trend rate assumption only affects those participants retired
under the plan prior to April 1, 1989. The 1997 health care trend rate is
projected to be 10 percent for participants under 65 and 7 percent for
participants over 65. These rates are assumed to decrease incrementally by .5
percentage point per year until they reach 5 percent and remain at that level
thereafter. The health care trend rate assumption does not have a significant
effect on the medical plan, therefore, a 1 percentage point change in the trend
rate is not material in the determination of the accumulated postretirement
benefit obligation or the ongoing expense.
18. INCOME TAXES
The composition of income tax expense (benefit) follows:
- -------------------------------------------------------------
For the Calendar Year
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------
Current:
Federal $245,889 $320,696 $234,809
State 505 17,919 16,204
- -------------------------------------------------------------
Total current 246,394 338,615 251,013
Deferred:
Federal 108,804 (15,682) 1,733
State 5,896 (1,119) 939
- -------------------------------------------------------------
Total deferred 114,700 (16,801) 2,672
- -------------------------------------------------------------
Tax expense $361,094 $321,814 $253,685
- -------------------------------------------------------------
Tax expense applicable to
securities transactions $ 29,387 $ 29,587 $ 13,501
- -------------------------------------------------------------
The effective tax rate differs from the statutory rate applicable to
corporations as a result of permanent differences between accounting and taxable
income as shown below:
- ---------------------------------------------------------
For the Calendar
Year
1997 1996 1995
- ---------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
Life insurance (1.7) (2.2) (3.0)
Tax-exempt income (1.2) (1.5) (2.3)
Other (1.2) (.9) .3
- ---------------------------------------------------------
EFFECTIVE TAX RATE 30.9% 30.4% 30.0%
- ---------------------------------------------------------
Significant components of deferred tax liabilities and assets as of December
31 are as follows:
- -----------------------------------------------------------
(Dollars in Thousands) 1997 1996
- -----------------------------------------------------------
Deferred tax liabilities:
Lease accounting $ 214,901 $ 98,707
Depreciation 21,036 23,210
Mark to market adjustments 164,479 83,452
Other - net 115,713 77,925
- -----------------------------------------------------------
Total deferred tax liabilities 516,129 283,294
Deferred tax assets:
Provision for losses 247,910 248,462
Employee benefits 27,070 33,308
Other - net 105,516 76,553
- -----------------------------------------------------------
Total deferred tax assets 380,496 358,323
- -----------------------------------------------------------
Net deferred tax (liability) asset $ (135,633) $ 75,029
- -----------------------------------------------------------
39
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. OFF-BALANCE SHEET FINANCIAL AGREEMENTS
The Corporation uses a variety of off-balance sheet financial instruments such
as interest rate swaps, futures, options, forwards, and cap and floor contracts.
These financial agreements, frequently called interest rate derivatives, enable
the Corporation to efficiently manage its exposure to changes in interest rates.
As with any financial instrument, derivatives have inherent risks. Market risk
includes the risk of gains and losses that result from changes in interest
rates. These gains and losses may be offset by other on- or off-balance sheet
transactions. Credit risk is the risk that a counterparty to a derivative
contract with an unrealized gain fails to perform according to the terms of the
agreement. Credit risk can be measured as the cost of acquiring a new derivative
agreement with cash flows identical to those of a defaulted agreement in the
current interest rate environment. The credit exposure to counterparties is
managed by limiting the aggregate amount of net unrealized gains in agreements
outstanding, monitoring the size and the maturity structure of the derivative
portfolio, applying uniform credit standards maintained for all activities with
credit risk and by collateralizing unrealized gains. The Corporation has
established bilateral collateral agreements with its major off-balance sheet
counterparties that provide for exchanges of marketable securities to
collateralize either party's unrealized gains. On December 31, 1997, these
collateral agreements covered 93% of the notional amount of the derivative
portfolio, and the Corporation was holding net U.S. government and agency
securities with a market value of $41 million from various counterparties to
collateralize unrealized gains. The Corporation has never experienced a credit
loss associated with any interest rate derivative.
INTEREST RATE RISK MANAGEMENT: On December 31, 1997, the total notional
amount of the interest rate swap portfolio used to manage interest rate
sensitivity was $8.4 billion, which is an increase of $383 million from December
31, 1996. The Corporation uses receive fixed interest rate swaps, receive fixed
cancelable interest rate swaps and receive fixed indexed amortizing interest
rate swaps to convert variable rate loans and securities into synthetic fixed
rate instruments and to convert fixed rate funding sources into synthetic
variable rate funding instruments. The Corporation increased its use of
cancelable interest rate swaps during the year to facilitate its interest rate
risk management process and its wholesale funding activities. During 1997, the
Corporation entered into $527 million of receive fixed cancelable interest rate
swaps to hedge the issuance of fixed rate callable funding products and $3.1
billion of receive fixed cancelable interest rate swaps to convert portions of
its variable rate loan portfolios into synthetic fixed rate loans. During 1997,
$486 million of receive fixed interest rate swaps matured or amortized, $1.3
billion of indexed amortizing receive fixed interest rate swaps matured or
amortized and $2.3 billion of indexed amortizing or cancelable interest rate
swaps were terminated prior to maturity. These terminations generated pre-tax
net losses of $.6 million, recognized as an adjustment to the carrying value of
the loan portfolio.
The Corporation uses pay fixed interest rate swaps to convert fixed rate
loans and securities into synthetic variable rate instruments and to convert
variable rate funding sources into synthetic fixed rate funding instruments.
During 1997, the Corporation entered into $869 million of pay fixed interest
rate swaps, primarily to hedge fixed rate commercial loans and investment
securities. During 1997, $555 million of pay fixed interest rate swaps matured
or amortized and $294 million of pay fixed interest rate swaps were terminated
prior to maturity. These terminations generated pre-tax net losses of $.2
million, recognized as an adjustment to the carrying value of the securities
portfolio.
The Corporation uses interest rate cap and floor contracts to help protect
its interest margin in periods of extremely high or low interest rates. During
1997, the Corporation purchased $500 million three-month Eurodollar caps with
maturities of 3 years and an average strike rate of 7.5%.
The Corporation uses interest rate corridors to help protect its net interest
margin in various interest rate environments. These interest rate corridors pay
1.0% of the notional amount per annum over their lives only when the three-month
Eurodollar rate is between the corridor strike rates. There are no payments due
to the Corporation when three-month Eurodollar rates are outside of the corridor
strike rates.
On December 31, 1997, the Corporation had $8.2 million of net deferred gains
on terminated derivative contracts and had no material derivative contracts
outstanding that were hedging anticipated transactions.
Summary information with respect to the interest rate derivative portfolio
used for risk management purposes follows:
40
43
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1997
---------------------------------------------------------------------------------
Weighted Average
----------------------------------------- December 31, 1996
Notional Unrealized Unrealized Receive Pay Strike Life -----------------
(Dollars in Thousands) Amount Gains Losses Rate Rate Rate (Years) Notional Amount
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS:
Receive fixed indexed
amortizing swaps $ 1,034,493 $ 479 $ (4,916) 5.91% 5.77% -- 1.3 $ 3,107,448
Receive fixed callable
swaps 2,842,000 21,296 (3,816) 6.72 5.87 -- 1.8 905,000
Receive fixed swaps 3,241,000 58,076 (3,800) 6.47 5.85 -- 3.5 3,047,370
Pay fixed callable swaps 53,588 551 (1,909) 5.97 6.35 -- 8.4 --
Pay fixed swaps 895,754 52 (11,605) 4.93 6.45 -- 5.6 874,145
Basis swaps 325,000 447 (543) 5.91 5.88 -- 2.5 75,000
- ------------------------------------------------------------------------------------------------------------------------------
Total interest rate
swaps 8,391,835 80,901 (26,589) 8,008,963
INTEREST RATE CAPS AND FLOORS:
Three-month Eurodollar
floors purchased 1,400,000 12,826 (10,821) -- -- 5.71% 2.9 1,400,000
One-month Eurodollar caps
purchased 3,971 -- (1,498) -- -- 9.0 14.2 --
Three-month Eurodollar
caps purchased 500,000 352 -- -- -- 7.50 2.1 100,000
Other 182,000
- ------------------------------------------------------------------------------------------------------------------------------
Total interest rate
caps and floors 1,903,971 13,178 (12,319) 1,682,000
INTEREST RATE CORRIDORS
PURCHASED:
1% Payout corridors 500,000 62 (531) -- -- 6.5%-7.5% .7 1,250,000
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE FUTURES:
Futures purchased 212,000 12 -- -- -- -- -- --
Futures sold 749,000 1 (288) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total interest rate
futures 961,000 13 (288) --
- ------------------------------------------------------------------------------------------------------------------------------
Total interest rate
swaps, caps,
floors, corridors &
futures $11,756,806 $ 94,154 $(39,727) $10,940,963
- ------------------------------------------------------------------------------------------------------------------------------
The variable rates in the interest rate swap contracts are primarily based on
the three-month Eurodollar rate. The average variable rates included in the
table above are those in effect in the specific contracts at December 31, 1997.
The following table details the expected notional maturities of off-balance
sheet instruments used for interest-rate risk management at December 31, 1997:
- ------------------------------------------------------------------------------------------------------------------------------
Greater
Less than 1 to 3 3 to 5 5 to 10 than 10
(Dollars in Thousands) 1 Year Years Years Years Years
- ------------------------------------------------------------------------------------------------------------------------------
Receive fixed swaps $2,848,948 $2,605,545 $ 828,000 $ 385,000 $450,000
Pay fixed swaps -- 258,644 249,709 409,279 31,710
Basis swaps 100,000 50,000 175,000 -- --
Floors purchased 435,000 300,000 300,000 365,000 --
Caps purchased -- 500,000 -- -- 3,971
Interest rate corridors 500,000 -- -- -- --
Futures purchased -- 212,000 -- -- --
Futures sold 139,000 39,000 223,000 348,000 --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $4,022,948 $3,965,189 $1,775,709 $1,507,279 $485,681
- ------------------------------------------------------------------------------------------------------------------------------
Indexed amortizing interest rate swaps are contracts where the notional
amount amortizes after a predetermined lock-out period. The rate of amortization
is determined by formula and is based upon movements of short-term interest
rates, usually three-month Eurodollar rates. The indexed amortizing interest
rate swap portfolio contains no imbedded options that have multiplicative
impacts affecting valuations or expected notional maturities. The table at the
right shows the estimated impact on valuation, average life, and the expected
notional amortization schedule of the indexed amortizing swap portfolio if
interest rates immediately increase or decrease 100 basis points from
December 31, 1997 levels:
- -------------------------------------------------------------------------
(unaudited) Expected Notional
Net Amortization
Unrealized Average Less than 1 to 2 2 to 5
(Dollars in Millions) Gain/(Loss) Life(Years) 1 Year Years Years
- -------------------------------------------------------------------------
Interest rates at
year end $ (5) 1.3 $ 429 $167 $438
Interest rates +100bp (20) 1.5 334 13 687
Interest rates -100bp 1 1.0 526 395 114
- -------------------------------------------------------------------------
41
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MORTGAGE SERVICING RISK MANAGEMENT: The Corporation uses off-balance sheet
derivative contracts to hedge the market value of a portion of its mortgage
servicing portfolio. The market value of the mortgage servicing portfolio is
adversely affected when mortgage interest rates decline and mortgage loan
prepayments increase. To hedge this exposure, the Corporation enters into
receive fixed interest rate swaps, purchased and sold interest rate floors (net
purchased options) and purchased interest rate caps. The Corporation also enters
into interest rate swaps where the Corporation receives the periodic total
return of principal only mortgage-backed securities and pays a variable rate
based on one-month Eurodollar rates.
Information with respect to the interest rate derivative portfolio used for
hedging mortgage servicing assets is summarized in the table below:
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1997
--------------------------------------------------------------------------------
Weighted Average
----------------------------------------- December 31, 1996
Notional Unrealized Unrealized Receive Pay Strike Life -----------------
(Dollars in Thousands) Amount Gains Losses Rate Rate Rate (Years) Notional Amount
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS:
Receive fixed swaps $ 708,000 $ 3,677 $ (3,776) 5.97% 5.84% -- 3.0 $ 630,000
Principal only swaps 141,715 14,792 (114) -- 6.15 -- 2.4 34,251
- ------------------------------------------------------------------------------------------------------------------------------
Total interest rate
swaps 849,715 18,469 (3,890) 664,251
INTEREST RATE CAPS AND
FLOORS:
Ten-year U.S. Treasury
caps purchased 225,000 402 -- -- -- 8.66% 4.0 85,000
Ten-year U.S. Treasury
floors purchased 1,015,662 3,362 -- -- -- 5.45 2.2 1,015,662
Ten-year U.S. Treasury
floors sold -- -- -- -- -- -- -- 400,000
- ------------------------------------------------------------------------------------------------------------------------------
Total interest rate
caps and floors 1,240,662 3,764 -- 1,500,662
- ------------------------------------------------------------------------------------------------------------------------------
Total interest rate
swaps,
caps and floors $2,090,377 $ 22,233 $ (3,890) $ 2,164,913
- ------------------------------------------------------------------------------------------------------------------------------
TRADING ACTIVITIES: The Corporation also enters into off-balance sheet
financial instruments for its trading account. These transactions are executed
primarily with customers to facilitate their interest rate and foreign currency
risk management strategies. The trading portfolio consists of derivative
contracts with the Corporation's customers and offsetting derivative
instruments, futures, forwards, option contracts and cash securities which
effectively reduce the risk of market value fluctuations in the portfolio caused
by changes in market conditions.
At December 31, 1997, the total notional amount of interest rate derivative
contracts held for trading was $3.2 billion with a net market value of $5.5
million compared to $2.9 billion in notional and a net market value of $3.2
million at December 31, 1996. Trading revenue from derivatives totaled $2.4
million and $3.4 million in 1997 and 1996, respectively. Trading activity in
1995 was not significant.
All off-balance sheet contracts in the preceding tables are valued using cash
flow projection models either acquired from third parties or developed in-house.
Pricing models used for valuing derivative instruments are regularly validated
by testing through comparison with other third parties. Valuations and notional
maturities presented above are based on yield curves, forward yield curves, and
implied volatilities that were observable in the cash and derivatives markets on
December 31, 1997.
OTHER OFF-BALANCE SHEET COMMITMENTS: The Corporation also enters into forward
contracts related to its mortgage banking business. At December 31, 1997 and
1996, the Corporation had commitments to sell mortgages and mortgage-backed
securities totaling $1.6 billion and $613 million, respectively. These contracts
mature in less than one year.
In the normal course of business, the Corporation makes various commitments
to extend credit which are not reflected in the balance sheet. A summary of
these commitments follows:
December 31
- ---------------------------------------------------------
(Dollars in Millions) 1997 1996
- ---------------------------------------------------------
Commitments to extend credit $12,058 $11,160
Standby letters of credit 1,965 1,781
- ---------------------------------------------------------
The credit risk associated with loan commitments and standby letters of
credit is essentially the same as that involved in extending loans to customers
and is subject to normal credit policies. Collateral is obtained based on
management's credit assessment of the customer.
42
45
QUARTERLY DATA
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 1997 was $209.0 million, or $.96 per
diluted common share, up from $191.1 million, or $.85 per diluted common share
for the same period in 1996. The increase in earnings was primarily due to
higher noninterest income, well controlled operating expenses and a lower
provision for loan losses.
Annualized return on average common equity for the fourth quarter of 1997 was
19.11%, compared to 17.53% for the fourth quarter of 1996. Annualized return on
average assets for the fourth quarter was 1.58% in 1997 versus 1.55% in 1996.
Net overhead decreased 5.2% from the fourth quarter of 1996 as a result of
higher fee-based business revenues and relatively flat noninterest expense.
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly results of operations for
the years 1997, 1996 and 1995:
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Amounts) First Second Third Fourth Full Year
- ------------------------------------------------------------------------------------------------------------------------------
1997
Interest income $ 900,290 $ 942,902 $ 958,208 $ 974,740 $ 3,776,140
Interest expense 427,244 452,979 466,875 486,214 1,833,312
Net interest income 473,046 489,923 491,333 488,526 1,942,828
Provision for loan losses 35,881 36,164 36,370 31,245 139,660
Securities gains 15,964 31,189 2,112 34,249 83,514
Net overhead 162,328 197,010 160,133 198,684 718,155
Income before income taxes 290,801 287,938 296,942 292,846 1,168,527
Net income 196,142 198,276 204,009 209,006 807,433
Basic net income per common share .88 .92 .95 .98 3.73
Diluted net income per common share .87 .90 .93 .96 3.66
Dividends paid per common share .41 .41 .425 .425 1.67
- ------------------------------------------------------------------------------------------------------------------------------
1996
Interest income $ 914,284 $ 919,421 $ 910,414 $ 911,216 $ 3,655,335
Interest expense 439,062 429,563 420,475 423,659 1,712,759
Net interest income 475,222 489,858 489,939 487,557 1,942,576
Provision for loan losses 32,039 37,353 38,608 38,480 146,480
Securities gains 12,735 68,617 (114) 26,908 108,146
Net overhead 196,749 258,092 181,358 209,599 845,798
Income before income taxes 259,169 263,030 269,859 266,386 1,058,444
Net income 176,864 182,832 185,822 191,112 736,630
Net income applicable to common stock 173,375 182,293 185,822 191,112 732,602
Basic net income per common share .82 .83 .83 .86 3.34
Diluted net income per common share .79 .81 .82 .85 3.27
Dividends paid per common share .36 .36 .375 .375 1.47
- ------------------------------------------------------------------------------------------------------------------------------
1995
Net income $ 150,925 $ 152,522 $ 158,884 $ 129,129 $ 591,460
Basic net income per common share .69 .70 .73 .59 2.71
Diluted net income per common share .67 .69 .71 .57 2.64
Dividends paid per common share .32 .32 .33 .33 1.30
- ------------------------------------------------------------------------------------------------------------------------------
43
46
FORM 10-K
The Annual Report includes the materials required in Form 10-K filed with the
Securities and Exchange Commission. The integration of the two documents gives
stockholders and other interested parties timely, efficient and comprehensive
information on 1997 results. Portions of the Annual Report are not required by
the Form 10-K report and are not filed as part of the Corporation's Form 10-K.
Only those portions of the Annual Report referenced in the cross-reference index
are incorporated in the Form 10-K. The report has not been approved or
disapproved by the Securities and Exchange Commission, nor has the Commission
passed upon its accuracy or adequacy.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended December 31, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required].
For the transition period from ______ to ______ .
Commission File Number 1-10074.
NATIONAL CITY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
---------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
34-1111088
---------------------------------------------------------
(I.R.S. Employer Identification No.)
1900 East Ninth Street, Cleveland, Ohio
---------------------------------------------------------
(Address of principal executive offices)
44114-3484
---------------------------------------------------------
(Zip Code)
Registrant's telephone number, including area code, 216-575-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of each exchange on which registered:
Securities registered pursuant to Section 12(g) of the Act:
National City Corporation Common Stock, $4.00 Per Share
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stocks held by nonaffiliates of the
registrant as of December 31, 1997 - $13,642,576,777
The number of shares outstanding of each of the registrant's classes of common
stock, as of December 31, 1997.
Common Stock, $4.00 Per Share -- 211,097,837
Documents Incorporated By Reference:
Portions of the registrant's Proxy Statement (to be dated approximately February
23, 1998) are incorporated by reference into Item 10. Directors and Executive
Officers of the Registrant; Item 11. Executive Compensation; Item 12. Security
Ownership of Certain Beneficial Owners and Management; and Item 13. Certain
Relationships and Related Transactions, of Part III.
44
47
FORM 10-K CROSS REFERENCE INDEX
Pages
- --------------------------------------------------------------
PART I
Item 1 -- Business
Description of Business 45
Average Balance Sheets/Interest/Rates 20-21
Volume and Rate Variance Analysis 8
Securities 12
Loans 11
Risk Elements of Loan Portfolio 12-14
Loan Loss Experience 12-14
Allocation of Allowance for Loan Losses 12-14
Deposits 14, 20-21
Financial Ratios 19
Short-Term Borrowings 14, 33
Item 2 -- Properties 46
Item 3 -- Legal Proceedings 46
Item 4 -- Submission of Matters to a Vote of
Security Holders - None
- --------------------------------------------------------------
PART II
Item 5 -- Market for the Registrant's Common
Equity and Related Stockholder
Matters 14-15
Item 6 -- Selected Financial Data 19
Item 7 -- Management's Discussion and
Analysis of Financial Condition
and Results of Operations 5-17
Item 7A -- Quantitative and Qualitative
Disclosures About Market Risk 16-17, 28
Item 8 -- Financial Statements and
Supplementary Data 22-43
Item 9 -- Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure - None
- --------------------------------------------------------------
PART III
Item 10 -- Directors and Executive Officers of
the Registrant - Note (1)
Executive Officers 46
Compliance with Section 16(a) of
the Securities Exchange Act -
Note (1)
Item 11 -- Executive Compensation - Note (1)
Item 12 -- Security Ownership of Certain
Beneficial Owners and Management
- Note (1)
Item 13 -- Certain Relationships and Related
Transactions - Note (1)
- --------------------------------------------------------------
PART IV
Item 14 -- Exhibits, Financial Statement
Schedules and Reports on Form 8-K
Report of Ernst & Young LLP,
Independent Auditors 22
Financial Statements:
Consolidated Balance Sheets -
December 31, 1997 and 1996 23
Consolidated Statements of Income -
Calendar Years 1997, 1996 and
1995 24
Consolidated Statements of Changes
in Stockholders' Equity -
Calendar Years 1997, 1996, and
1995 25
Consolidated Statements of Cash
Flows - Calendar Years 1997, 1996
and 1995 26
Notes to Financial Statements 27-42
Signatures 47
Reports on Form 8-K filed in the fourth quarter of 1997: Form 8-K, dated
November 24, 1997, announced that National City's Board of Directors had
authorized the purchase of up to 20 million shares of the Corporation's issued
and outstanding common stock subject to a total purchase limit of $1.4
billion.
Form 8-K, dated December 9, 1997, announced that on December 1, 1997 National
City had issued a press release stating that the Corporation had entered into
a definitive Agreement and Plan of Merger with First of America Bank
Corporation. The release also stated that the boards of directors of both
companies had rescinded their respective stock repurchase authorizations.
Exhibits -- The index of exhibits has been filed as separate pages of the 1997
Form 10-K and is available to stockholders on request from the Secretary of
the Corporation at the principal executive offices. Copies of exhibits may be
obtained at a cost of 30 cents per page.
Financial Statement Schedules -- Omitted due to inapplicability or because
required information is shown in the Financial Statements or the Notes
thereto.
- --------------------------------------------------------------
Note (1) -- Incorporated by reference from the Corporation's Proxy Statement to
be dated approximately February 23, 1998.
- --------------------------------------------------------------
BUSINESS
At December 31, 1997, National City Corporation ("National City" or "the
Corporation") was the third largest bank holding company headquartered in the
State of Ohio and approximately the 20th largest in the United States on the
basis of total assets. National City owns and operates 8 commercial banks with a
total of 833 banking offices in Ohio, Kentucky, Indiana and Pennsylvania. The
five largest subsidiary banks (and only significant subsidiaries) are National
City Bank of Pennsylvania; National City Bank (Cleveland), National City Bank of
Columbus; National City Bank of Indiana; and National City Bank of Kentucky. The
banks and other subsidiaries and divisions are engaged in a variety of financial
services businesses. In addition to a general commercial banking business,
National City or its subsidiaries are engaged in trust and investment
management, mortgage banking, investment banking, leasing, item processing,
venture capital, insurance, and other financial-related businesses. National
City and its subsidiaries had 29,841 full-time equivalent employees at December
31, 1997.
COMPETITION
The banking business is highly competitive. The banking subsidiaries of National
City compete actively with national and state banks, savings and loan
associations, securities dealers, mortgage bankers, finance companies, insurance
companies and other financial service entities.
45
48
FORM 10-K (continued)
SUPERVISION AND REGULATION
National City is subject to regulation under the Bank Holding Company Act of
1956, as amended (the "Act"). The Act requires the prior approval of the Federal
Reserve Board for a bank holding company to acquire or hold more than a 5%
voting interest in any bank, and restricts interstate banking activities. On
September 29, 1994, the Act was amended by The Interstate Banking and Branch
Efficiency Act of 1994 which authorizes interstate bank acquisitions anywhere in
the country, effective one year after the date of enactment and interstate
branching by acquisition and consolidation, effective June 1, 1997 in those
states that have not opted out by that date.
The Act restricts National City's nonbanking activities to those which are
determined by the Federal Reserve Board to be closely related to banking and a
proper incident thereto. The Act does not place territorial restrictions on the
activities of nonbank subsidiaries of bank holding companies. National City's
banking subsidiaries are subject to limitations with respect to transactions
with affiliates.
A substantial portion of National City's cash revenue is derived from
dividends paid by its subsidiary banks. These dividends are subject to various
legal and regulatory restrictions as summarized in Note 14.
The subsidiary banks are subject to the provisions of the National Bank Act
or the banking laws of their respective states, are under the supervision of,
and are subject to periodic examination by, the Comptroller of the Currency (the
"OCC") or the respective state banking departments, and are subject to the rules
and regulations of the OCC, Board of Governors of the Federal Reserve System and
the Federal Deposit Insurance Corporation (FDIC).
National City's subsidiary banks are also subject to certain state laws of
each state in which such bank is located. Such state laws may restrict branching
of banks within the state and acquisition or merger involving banks and bank
holding companies located in other states. Ohio, Kentucky, Indiana and
Pennsylvania have all adopted nationwide reciprocal interstate banking.
The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides
that a holding company's controlled insured depository institutions are liable
for any loss incurred by the FDIC in connection with the default of or any
FDIC-assisted transaction involving an affiliated insured bank or savings
association.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC
Improvement Act") covers a wide expanse of banking regulatory issues. The FDIC
Improvement Act deals with the recapitalization of the
Bank Insurance Fund, with deposit insurance reform, including requiring the FDIC
to establish a risk-based premium assessment system, and with a number of other
regulatory and supervisory matters.
The monetary policies of regulatory authorities, including the Federal
Reserve Board, have a significant effect on the operating results of banks and
bank holding companies. The nature of future monetary policies and the effect of
such policies on the future business and earnings of National City and its
subsidiary banks cannot be predicted.
PROPERTIES
National City and its significant subsidiaries occupy their headquarter offices
under long-term leases. The Corporation also owns freestanding operations
centers in Columbus and Cleveland and leases an operations center in Pittsburgh.
Branch office locations are variously owned or leased.
LEGAL PROCEEDINGS
National City and its subsidiaries are parties (either as plaintiff or
defendant) to a number of lawsuits incidental to their businesses and, in
certain lawsuits, claims or counterclaims have been asserted. Although
litigation is subject to many uncertainties and the ultimate exposure with
respect to many of these matters cannot be ascertained, management does not
believe the ultimate outcome of these matters will have a material adverse
effect on the financial condition or the liquidity of the Corporation.
EXECUTIVE OFFICERS
The Executive Officers of National City (as of January 21, 1998) are as follows:
Name Age Position
- ---------------------------------------------------------------
David A. Daberko 52 Chairman and Chief
Executive Officer
Vincent A. DiGirolamo 60 Vice Chairman
Robert G. Siefers 52 Vice Chairman and
Chief Financial Officer
James R. Bell III 41 Executive Vice President
Gary A. Glaser 53 Executive Vice President
Thomas W. Golonski 55 Executive Vice President
Jon L. Gorney 47 Executive Vice President
Christopher Graffeo 50 Executive Vice President
Jeffrey D. Kelly 44 Executive Vice President
William E. MacDonald III 51 Executive Vice President
Herbert R. Martens, Jr. 45 Executive Vice President
Robert J. Ondercik 51 Executive Vice President
Harold B. Todd, Jr. 56 Executive Vice President
James P. Gulick 39 Senior Vice President
and General Auditor
Thomas A. Richlovsky 46 Senior Vice President
and Treasurer
David L. Zoeller 48 Senior Vice President,
General Counsel
and Secretary
46
49
The term of office for executive officers is one year.
There is no family relationship between any of the executive officers.
Except as noted below, each of the officers listed on the previous page has
been an executive officer of the Corporation or one of its subsidiaries during
the past five years.
Mr. Martens was promoted to Executive Vice President in 1997. Prior to that
time he was chairman of NatCity Investments, Inc. since 1995 and president and
chief executive officer of Raffensperger, Hughes & Co. from 1993 to 1995 and
president of Reserve Capital Group from 1990 to 1993.
Mr. Bell was elected president and chief executive officer of National City
Bank of Kentucky in 1996. Prior to that time he was an executive vice president
since 1994 and a senior vice president of National City Bank in Cleveland from
1990 to 1993.
Mr. Golonski was elected executive vice president in 1996. Prior to that time
he was the president of Integra Bank since 1995, chairman and director of
Altegra Credit Company and Integra Mortgage Company from 1994 to 1995, executive
vice president of Integra Bank from 1994 to 1995, and chairman and chief
executive officer of Integra Bank/North from 1991 to 1993.
Mr. Graffeo was appointed an executive vice president in 1995. Prior to that
time he was president and chief executive officer of National City Bank,
Northeast since 1992 and an executive vice president of that Bank from 1991 to
1992.
Mr. Gulick was appointed a senior vice president in 1995. Prior to that time
he was a vice president since 1992 and an audit manager with Coopers & Lybrand
LLP from 1987 to 1992.
Mr. Kelly was appointed an executive vice president in 1994. Prior to that
time he was a senior vice president since 1990 and a senior vice president of
National City Bank in Cleveland from 1987 to 1990.
Mr. Ondercik was appointed an executive vice president in 1994. Prior to that
time he was a senior vice president since 1991 and a senior vice president of
National City Bank in Cleveland from 1989 to 1991.
Mr. Gorney was appointed an executive vice president in 1993. Prior to that
time he was a senior vice president since 1991 and senior vice president of
National City Bank in Cleveland from 1988 to 1991.
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 21, 1998.
National City Corporation
/s/ David A. Daberko
- ---------------------------------------
David A. Daberko
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, on January 21, 1998.
/s/ David A. Daberko
- ---------------------------------------
David A. Daberko
Chairman and Chief Executive Officer
/s/ Vincent A. DiGirolamo /s/ Robert G. Siefers
- ---------------------------- --------------------------
Vincent A. DiGirolamo Robert G. Siefers
Vice Chairman Vice Chairman
and Chief Financial
Officer
/s/ Thomas A. Richlovsky
- ----------------------------
Thomas A. Richlovsky
Senior Vice President
and Treasurer
The Directors of National City Corporation (listed below) executed a power of
attorney appointing
David L. Zoeller their attorney-in-fact, empowering him to sign this report on
their behalf.
Sandra H. Austin Bernadine P. Healy, M.D.
Charles H. Bowman Joseph H. Lemieux
Edward B. Brandon W. Bruce Lunsford
John G. Breen Robert A. Paul
James S. Broadhurst William R. Robertson
Duane E. Collins William F. Roemer
David A. Daberko Michael A. Schuler
Daniel E. Evans Stephen A. Stitle
Otto N. Frenzel III Morry Weiss
/s/ David L. Zoeller
------------------------------------------------------------
By David L. Zoeller
Attorney-in-fact
47
50
BOARD OF DIRECTORS/OFFICERS
BOARD OF
DIRECTORS
DAVID A. DABERKO (2,3,4)
Chairman & CEO
National City Corporation
SANDRA H. AUSTIN (3,7)
President & CEO
Sedona Health Care Group, Inc.
CHARLES H. BOWMAN (1,3,6,7)
Head, Petroleum Engineering Department
Texas A&M University
EDWARD B. BRANDON (2,3,4)
Retired Chairman
National City Corporation
JOHN G. BREEN (3,4,5)
Chairman & CEO
The Sherwin-Williams Company
JAMES S. BROADHURST (1,5)
Chairman & CEO
Eat'n Park Restaurants
DUANE E. COLLINS (2,5)
President & CEO
Parker Hannifin Corporation
DANIEL E. EVANS (1,5)
Chairman & CEO
Bob Evans Farms, Inc.
OTTO N. FRENZEL III (3,4)
Retired Chairman
National City Bank of Indiana
BERNADINE P. HEALY, M.D. (6,7)
Dean, College of Medicine
The Ohio State University
JOSEPH H. LEMIEUX (2,3,5)
Chairman & CEO
Owens-Illinois, Inc.
W. BRUCE LUNSFORD (1,3,6)
Chairman, President & CEO
Vencor, Inc.
ROBERT A. PAUL (2,3,7)
President & CEO
Ampco-Pittsburgh Corporation
WILLIAM R. ROBERTSON (6,7)
Managing Partner
Kirtland Capital Partners
WILLIAM F. ROEMER (3,4)
Chairman
National City Bank of Pennsylvania
MICHAEL A. SCHULER (1,6)
Chairman, President & CEO
Zippo Manufacturing Company
STEPHEN A. STITLE (4,6,7)
Chairman
National City Bank of Indiana
MORRY WEISS (1,3,4)
Chairman & CEO
American Greetings Corporation
HONORARY DIRECTORS
CLAUDE M. BLAIR
Retired Chairman
National City Corporation
JULIEN L. MCCALL
Retired Chairman
National City Corporation
COMMITTEES:
(1) Audit Committee
(2) Dividend Committee
(3) Executive Committee
(4) Nominating Committee
(5) Compensation & Organization Committee
(6) Public Policy Committee
(7) Investment Committee
- --------------------------------------------------------------------------------
OFFICERS
Office of the Chairman
DAVID A. DABERKO
Chairman & CEO
VINCENT A. DIGIROLAMO
Vice Chairman
ROBERT G. SIEFERS
Vice Chairman & CFO
Executive Vice Presidents
JAMES R. BELL III
Kentucky Banking
GARY A. GLASER
Ohio Banking
THOMAS W. GOLONSKI
Pennsylvania Banking
JON L. GORNEY
Information Services & Operations
CHRISTOPHER GRAFFEO
Indiana Banking
JEFFREY D. KELLY
Investments
WILLIAM E. MACDONALD III
Ohio Banking
HERBERT R. MARTENS, JR.
Wealth Management
ROBERT J. ONDERCIK
Credit Administration
HAROLD B. TODD, JR.
Institutional Trust & Investment Services
Senior Vice Presidents
W. DOUGLAS BANNERMAN
Corporate Banking
JEFFREY M. BIGGAR
Private Client Group
J. ANDREW DUNHAM
Investments
MARY H. GRIFFITH
Marketing Communications
JAMES P. GULICK
General Auditor
JOSEPH J. HERR
Loan Review
JAMES A. HUGHES
Information Services & Operations
J. MICHAEL KEARNEY
Strategic Sourcing
JANIS E. LYONS
Corporate Accounting
GARY P. OBERS
Corporate Services
A. JOSEPH PARKER
Retail Business Line Management
J. ARMANDO RAMIREZ
Strategic Planning and Mergers & Acquisitions
EDWARD B. REILLY
Corporate Business Line Management
THOMAS A. RICHLOVSKY
Treasurer
WILLIAM H. SCHECTER
Merchant Banking
THOMAS H. SCHROTH
Corporate Operations
SHELLEY J. SEIFERT
Human Resources
THEODORE H. TUNG
Economist
ALLEN C. WADDLE
Public Affairs
DAVID L. ZOELLER
General Counsel & Secretary
48
51
INVESTOR INFORMATION
COMMON STOCK LISTING
National City Corporation common stock is traded
on the New York Stock Exchange under the symbol
"NCC." The stock is abbreviated in financial
publications as "NtlCity."
National City's item processing subsidiary,
National Processing, Inc., is traded on the New
York Stock Exchange under the symbol "NAP." The
stock is abbreviated in financial publications as
"NtlProc."
ANNUAL MEETING
The Annual Meeting of Stockholders will be on
Monday, March 30, 1998 at
10:30 a.m. Eastern Standard Time.
National City Bank of Pennsylvania
Pittsburgh Hilton and Towers
Gateway Center
600 Commonwealth Place
Pittsburgh, Pennsylvania 15222
DIVIDEND REINVESTMENT
AND STOCK PURCHASE
PLAN
Common stockholders participating in the Plan
receive a three percent discount from market price
when they reinvest their National City dividends
in additional shares. Participants may also make
optional cash purchases of common stock at a three
percent discount from market price and pay no
brokerage commissions. To obtain our Plan
prospectus and authorization card, call
1-800-622-6757.
DIRECT DEPOSIT OF
DIVIDENDS
The direct deposit program, which is offered at no
charge, provides for automatic deposit of
quarterly dividends directly to a checking or
savings account. For information regarding this
program, call 1-800-622-6757.
NAIC
National City is a corporate sponsor of the
National Association of Investors Corporation
(NAIC) and participates in its Low-Cost Investment
Plan. To receive more information on NAIC, call
(248) 583-NAIC.
INTERNET
Information about National City Corporation is
available on the Internet at
www.national-city.com.
DEBT RATINGS
- --------------------------------------------------------------------------------------
Moody's Standard Duff Thomson
Investors Service & Poor's & Phelps BankWatch
- --------------------------------------------------------------------------------------
National City Corporation A/B
Commercial paper (short-term debt) P-1 A-1 D-1+ TBW1
Senior debt A1 A AA-
Subordinated debt A2 A- A+ A
- --------------------------------------------------------------------------------------
Bank Subsidiaries
Certificates of deposit Aa3 A+ AA
Subordinated bank notes A1 A AA- A+
CORPORATE
HEADQUARTERS
National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3484
(216) 575-2000
TRANSFER AGENT
AND REGISTRAR
National City Bank
Corporate Trust Operations
Department 5352
P.O. Box 92301
Cleveland, Ohio 44193-0900
1-800-622-6757
INVESTOR
INFORMATION
Julie I. Sabroff, Vice President
Investor Relations
Department 2145
P.O. Box 5756
Cleveland, Ohio 44101-0756
1-800-622-4204
52
[NATIONAL CITY LOGO] --------------
FOLLOW YOUR OWN LEAD (TM) Bulk Rate
U.S. Postage
PAID
1900 East Ninth Street National City
Cleveland, Ohio 44114-3484 Corporation
--------------
[PHOTO]
53
NATIONAL CITY CORPORATION
PART IV, ITEM 14:
EXHIBIT INDEX
PAGE NUMBER IN
EXHIBIT SEQUENTIALLY NUMBERED
NUMBER EXHIBIT DESCRIPTION COPY
- ----- ------------------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of August 27, 1995 by and between
National City Corporation and Integra Financial Corporation (filed as
Exhibit 2.1 to Form 8-K dated August 30, 1995, and incorporated herein by
reference).
2.2 Agreement and Plan of Merger dated as of January 12, 1998 by and between
National City Corporation and Fort Wayne National Corporation (filed as
Exhibit 2.2).
2.3 Agreement and Plan of Merger dated as of November 30, 1997 by and between
National City Corporation and First of America Bank Corporation (filed as
Exhibit 2.1 to Form 8-K dated December 9, 1997 and incorporated herein by
reference).
3.1 Restated Certificate of Incorporation of NCC, as amended (filed as Exhibit
3.1).
3.2 National City Corporation First Restatement of By-laws adopted April 27,
1987 (As Amended through October 24, 1994) (filed as Exhibit 3.2 to
Registrant's Form S-4 Registration Statement No. 33-56539 dated November
18, 1994 and incorporated herein by reference).
4.1 Instruments defining the rights of holders of certain long-term debt of NCC
and its consolidated subsidiaries are not filed as exhibits because the
amount of debt under such instruments is less than 10% of the total
consolidated assets of NCC. NCC undertakes to file these instruments with
the Commission upon request.
4.2 Credit Agreement dated as of February 2, 1996, by and between NCC and the
banks named therein (filed as Exhibit 4.2 to Registrants' Proxy Statement
Form 14A #001-10074 dated February 6, 1996 and incorporated herein by
reference).
4.3 Certificate of Stock Designation dated April 18, 1991, designating NCC's 8%
Cumulative Convertible Preferred Stock, without par value, and fixing the
powers, preferences rights, and qualifications, limitations and
restrictions thereof in addition to those set forth in NCC's Restated
Certificate of Incorporation, as amended (incorporated herein by reference
to Exhibit 4.4 to NCC's Annual Report on Form 10-K for the year ended
December 31, 1991).
10.1 National City Corporation Short Term Incentive Compensation Plan for Senior
Officers As Amended and Restated Effective January 1, 1995 (filed as
Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference).
10.2 National City Corporation Long Term Incentive Compensation Plan for Senior
Officers as Amended and Restated Effective January 1, 1995 (filed as
Exhibit 10.2 to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference).
10.3 National City Corporation Annual Corporate Performance Incentive Plan
Effective January 1, 1995 (filed as Exhibit 10.21 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference).
10.4 National City Savings and Investment Plan, As Amended and Restated
Effective July 1, 1992 (filed as Exhibit 10.24 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference).
10.5 The National City Savings and Investment Plan No. 2, As Amended and
Restated Effective January 1, 1992 (filed as Exhibit 10.25 to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference.
10.6 National City Corporation's Amended and Restated 1973 Stock Option Plan, as
amended (filed as Exhibit 10.4 to Registration Statement No. 2-91434) and
amended 1984 Stock Option Plan (filed as Exhibit 10.2 to NCC's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987); both
incorporated herein by reference.
49
54
PAGE NUMBER IN
EXHIBIT SEQUENTIALLY NUMBERED
NUMBER EXHIBIT DESCRIPTION COPY
- ----- ------------------------------------------------------------------------------------------------
10.7 National City Corporation 1989 Stock Option Plan (filed as Exhibit 10.7 to
NCC's Annual Report on Form 10-K for the fiscal year ended December 31,
1989, and incorporated herein by reference).
10.8 National City Corporation's 1993 Stock Option Plan as Amended and Restated
(filed as Appendix F to Registration Statement No. 333-01697 and
incorporated herein by reference).
10.9 National City Corporation 150th Anniversary Stock Option Plan (filed as
Exhibit 10.9 to Registration Statement No. 33-59487 and incorporated herein
by reference).
10.10 National City Corporation Plan for Deferred Payment of Directors' Fees, as
amended (filed as Exhibit 10.5 to Registration Statement No. 2-914334 and
incorporated herein by reference).
10.11 National City Corporation Supplemental Executive Retirement Plan, as
Amended and Restated effective January 1, 1995 (filed as Exhibit 10.5 to
NCC's Annual Report on Form 10-K for the fiscal year ended December 31,
1994, and incorporated herein by reference).
10.12 National City Corporation Executive Savings Plan As Amended and Restated
Effective January 1, 1995 (filed as Exhibit 10.9 to NCC's Annual Report on
Form 10-K for its fiscal year ended December 31, 1994, and incorporated
herein by reference).
10.13 National City Corporation Amended and Second Restated 1991 Restricted Stock
Plan (filed as Exhibit 10.9 to Registration Statement No. 33-49823 and
incorporated herein by reference).
10.14 First Kentucky National Corporation 1985 Stock Option Plan (filed as
Exhibit 10.2 to First Kentucky National Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1987, and incorporated herein
by reference).
10.15 First Kentucky National Corporation 1982 Stock Option Plan (filed as
Exhibit 10.3 to First Kentucky National Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1987, and incorporated herein
by reference).
10.16 Form of grant made under National City Corporation 1991 Restricted Stock
Plan made in connection with National City Corporation Supplemental
Executive Retirement Plan as amended (filed as Exhibit 10.10 to NCC's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and
incorporated herein by reference).
10.17 Amended Employment Agreement dated July 21, 1989 by and between Merchants
National Corporation or a subsidiary and Otto N. Frenzel, III (filed as
Exhibit 10(21) to Merchants National Corporation Annual Report of Form 10-K
for the fiscal year ended December 31, 1987 and incorporated herein by
reference).
10.18 Split Dollar Insurance Agreement dated January 4, 1988 between Merchants
National Corporation and Otto N. Frenzel, III Irrevocable Trust II (filed
as Exhibit 10(26) to Merchants National Corporation Annual Report on Form
10-K for the fiscal year ended December 31, 1989 and incorporated herein by
reference).
10.19 Merchants National Corporation Director's Deferred Compensation Plan, as
amended and restated August 16, 1983 (filed as Exhibit 10(3) to Merchants
National Corporation Registration Statement as Form S-2 filed June 28,
1985, incorporated herein by reference).
10.20 Merchants National Corporation Supplemental Pension Plan dated November 20,
1984; First Amendment to the Supplemental Pension Plans dated January 21,
1986; Second Amendment to the Supplemental Pension Plans dated July 3,
1989; and Third Amendment to the Supplemental Pension Plans dated November
21, 1990 (filed respectively as exhibit 10(n) to Merchants National
Corporation Annual Report on Form 10-K for the year ended December 31,
1984; as Exhibit 10(q) to the Merchants National Corporation Annual Report
on Form 10-K for the year ended December 31, 1985; as Exhibit 10(49) to
Merchants National Corporation Annual Report on Form 10-K for the year
ended December 31, 1990; and as Exhibit 10(50) to the Merchants National
Corporation Annual Report on Form 10-K for the year ended December 31,
1990; all incorporated herein by reference).
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55
PAGE NUMBER IN
EXHIBIT SEQUENTIALLY NUMBERED
NUMBER EXHIBIT DESCRIPTION COPY
- ----- ------------------------------------------------------------------------------------------------
10.21 Merchants National Corporation Employee Benefit Trust Agreement, effective
July 1, 1987 (filed as Exhibit 10(27) to Merchants National Corporation
Annual Report on Form 10-K for the year ended December 31, 1987,
incorporated herein by reference).
10.22 Merchants National Corporation Non-qualified Stock Option Plan effective
January 20, 1987, and the First Amendment to that Merchants National
Non-qualified Stock Option Plan, effective October 16, 1990 (filed
respectively as Exhibit 10(23) to Merchants National Corporation Annual
Report on Form 10-K by the year ended December 31, 1986, and as Exhibit
10(55) to Merchants National Corporation Annual Report on Form 10-K for the
year ended December 31, 1990, both of which are incorporated herein by
reference).
10.23 Merchants National Corporation 1987 Non-qualified Stock Option Plan,
effective November 17, 1987, and the First Amendment to Merchants National
Corporation 1987 Non-qualified Stock Option Plan, effective October 16,
1990, (filed respectively as Exhibit 10(30) to Merchants National
Corporation Annual Report on Form 10-K by the year ended December 31, 1987,
and as Exhibit 10(61) to Merchants National Corporation Annual Report on
Form 10-K for the year ended December 31, 1990, both of which are
incorporated herein by reference).
10.24 Merchants National Corporation Directors Non-qualified Stock Option Plan
and the First Amendment to Merchants National Corporation Directors
Non-qualified Stock Option Plan effective October 16, 1990 (filed
respectively as Exhibit 10(44) to Merchants National Corporation Annual
Report on Form 10-K for the year ended December 31, 1988, and as Exhibit
10(68) to Merchants National Corporation Annual Report on Form 10-K for the
year ended December 31, 1990, both of which are incorporated herein by
reference).
10.25 Central Indiana Bancorp Option Plan effective March 15, 1991 (filed as
Exhibit 10.26 to Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference).
10.26 Central Indiana Bancorp 1993 Option Plan effective October 12, 1993 (filed
as Exhibit
10.27 to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference).
10.27 Forms of contracts with David A. Daberko, Vincent A. DiGirolamo, William E.
MacDonald III, Jon L. Gorney, Harold B. Todd, Jr., Robert G. Siefers,
Robert J. Ondercik, Jeffrey D. Kelly, David L. Zoeller, Thomas A.
Richlovsky, James P. Gulick, Gary A. Glaser, J. Christopher Graffeo,
Herbert R. Martens, Jr, Robert E. Showalter, Thomas W. Golonski and James
R. Bell (filed as Exhibit 10.22 to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 and incorporated herein by
reference).
10.28 Split Dollar Insurance Agreement effective January 1, 1994 between National
City Corporation and those individuals listed in Exhibit 10.27 and other
key employees (filed as exhibit 10.28 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994 and incorporated herein by
reference).
10.29 National City Corporation Short-Term Incentive Compensation Plan for Senior
Officers--Corporate Results As Amended and Restated Effective January 1,
1996 (filed as Exhibit 10.31 to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 and incorporated herein by
reference).
10.30 Consulting Agreement dated as of August 27, 1995 by and between Integra
Financial Corporation and William F. Roemer, (filed as Exhibit 10.30 to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996 and incorporated herein by reference).
21.1 Subsidiaries (filed as Exhibit 21.1).
23.1 Consent of Ernst & Young LLP, Independent Auditors for NCC (filed as
Exhibit 23.1).
24.1 Powers of Attorney (filed as Exhibit 24.1).
27.1 Financial Data Schedule (filed as Exhibit 27.1).
51