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1998 ANNUAL REPORT
[NATIONAL CITY LOGO]
2
CORPORATE PROFILE
Headquartered in Cleveland, Ohio, National City is an $88 billion-asset company
providing banking and financial services primarily in Ohio, Michigan,
Pennsylvania, Kentucky, Indiana and Illinois.
BANKING BUSINESS LINES
RETAIL SALES AND DISTRIBUTION encompasses branch-based financial services
including 1,300 offices as well as 2,000 ATMs, three call centers and online
banking channels. Utilizing National City's data warehouse capabilities, Retail
Sales and Distribution leverages information technology to better target
prospects and cross-sell the right products to the right customer. Offered are
consumer loans and lines of credit, checking, savings and money market accounts,
debit cards, small business services, mortgage loans, and insurance products.
CONSUMER FINANCE offers numerous financing alternatives directly to customers
throughout the bank's six-state footprint and indirectly through brokers and
dealers on a regional and national basis. Included are indirect installment
loans (automobile, marine/RV, heavy equipment and property improvement), dealer
floor plan financing, federally guaranteed and non-federally guaranteed student
loans, non-conforming consumer loans, and credit cards.
CORPORATE BANKING emphasizes long-term relationships and local credit decisions.
It provides a single source for a broad range of integrated financial products
and services to meet the needs of our clients. Included are business financing,
treasury management and international products and services, specialized
business services and investment banking.
FEE-BASED BUSINESS LINES
WEALTH MANAGEMENT provides comprehensive financial and investment assistance
through two business units. Services of Private Client Group encompass
investment management, personal trust administration and private banking through
a single point of contact. NatCity Investments, Inc. is a full-service
broker/dealer offering investment banking and brokerage products.
INSTITUTIONAL TRUST is comprised of charitable and endowment services,
retirement plan services, corporate trust and stock transfer services, and the
SEC-registered investment advisor, the Investment Management Company, which
manages institutional accounts and the ARMADA and PARKSTONE mutual fund
families.
NATIONAL CITY MORTGAGE services, sells and originates mortgages through a
network of 154 retail mortgage offices and wholesale/ broker branches in 35
states and National City member banks within the six-state footprint.
NATIONAL PROCESSING INC. is a leading provider of transaction processing
services and customized processing solutions. The corporation is 88% owned by
National City and its stock trades separately on the New York Stock Exchange
under the symbol NAP.
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FINANCIAL HIGHLIGHTS
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(Dollars in Thousands Except Per Share Amounts) 1998 1997 Percent Change
- ------------------------------------------------------------------------------------------------
FOR THE YEAR:
Net Income $1,070,681 $1,122,194 (5)%
Net Income Before Merger and Restructuring
Expenses(1) 1,332,608 1,157,082 15
Net Income Per Common Share:
Basic 3.28 3.48 (6)
Diluted 3.22 3.42 (6)
Diluted -- Adjusted(1) 4.00 3.53 13
Dividends Paid Per Common Share 1.88 1.67 13
- ------------------------------------------------------------------------------------------------
Return on Average Common Equity(1) 19.18% 18.77%
Return on Average Assets(1) 1.66 1.61
- ------------------------------------------------------------------------------------------------
Average Shares -- Diluted 332,860,165 327,732,584 2%
- ------------------------------------------------------------------------------------------------
AT YEAR END:
Assets $88,245,632 $75,779,081 16%
Loans 58,011,166 51,994,419 12
Securities 16,119,370 13,797,566 17
Deposits 58,246,909 52,617,354 11
Common Stockholders' Equity 6,976,810 6,158,260 13
- ------------------------------------------------------------------------------------------------
Equity to Assets Ratio 7.95% 8.13%
Tier 1 Capital Ratio 7.74 8.93
Total Risk-Based Capital Ratio 11.61 13.16
Leverage Ratio 6.69 7.58
- ------------------------------------------------------------------------------------------------
Book Value Per Common Share $21.38 $19.51 10%
Market Value Per Common Share 72.50 65.75 10
- ------------------------------------------------------------------------------------------------
Common Shares Outstanding 326,327,360 315,697,488 3%
Common Stockholders of Record 71,592 63,249 13
Full-Time Equivalent Employees 41,218 40,630 1
- ------------------------------------------------------------------------------------------------
Note: All prior period amounts, except for dividends paid per share, have been
restated to reflect the pooling-of-interests transaction with First of
America Bank Corporation which closed March 31, 1998.
(1) Excluding after-tax merger and restructuring expenses of $261.9 million in
1998 and $34.9 million in 1997.
CONTENTS
To Our Stockholders 2
Financial Review 5
Financial Statements and Notes 20
Form 10-K 44
Board of Directors/Officers 48
[TOTAL RETURN TO INVESTORS: NATIONAL CITY VS. S&P 500]
(Cumulative annual rates - includes price appreciation
and reinvestment of dividends)
NCC S&P 500
20 19.3 17.6
15 22.3 17.8
10 21.1 19.1
5 29 24
1 13.4 28.6
Years ending December 31, 1998
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[PICTURE]
(Left to Right)
DAVID A. DABERKO, Chairman & CEO
ROBERT G. SIEFERS, Vice Chairman & CFO
VINCENT A. DIGIROLAMO, Vice Chairman
To Our Stockholders:
It's a pleasure to report that net income (excluding merger and restructuring
expenses) was a record $1.33 billion, or $4.00 per share, for the year 1998, up
15% from $1.16 billion, or $3.53 per share for the preceding year. On this
basis, return on average assets was 1.66% and return on average common
equity was 19.18%, compared to 1997 returns of 1.61% and 18.77%, respectively.
Merger and restructuring expenses were $262 million after-tax or $.78 per share
in 1998, and $35 million after-tax or $.11 per share in 1997.
This financial performance is noteworthy in that it was achieved during a
period in which we closed and integrated two large acquisitions, completed a
functional reorganization of our largest business, and maintained the pace of
critical initiatives across all business lines.
MERGER INTEGRATION
The rapid closing and integration of the First of America Bank Corporation and
Fort Wayne National Corporation acquisitions enabled the timely and complete
capture of significant cost savings and efficiencies, and provided the
opportunity to offer the full array of National City products and services to an
expanded customer base. The new areas within our six-state
"footprint"--Michigan, Illinois, and northern Indiana--are very attractive
contiguous markets, and we are seeing excellent revenue momentum in virtually
all business lines. These acquisitions are working exactly according to plan,
and could well be our best yet.
BANKING UNITS
In retail banking, which accounts for over half of our net income, we completed
a business reorganization from a geographically-oriented structure to two
functional lines: Retail Sales and Distribution, comprising deposit-gathering
and direct lending; and Consumer Finance, which includes dealer finance,
education finance, non-prime lending, and credit cards. The new functional
structure will enable us to fully leverage the information advantage inherent in
common systems and our enterprise-wide data warehouse. Quality of product
offerings and
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consistency of service levels will be enhanced. The new structure will also
foster a more effective sales and marketing culture with the objective of
enhancing the value of retail customer relationships on a segmented and
individualized basis. As the traditional deposit-gathering business continues to
be squeezed by non-bank competitors, this initiative is arguably the most
critical one for the company over the next several years.
In corporate banking, we have built upon our strong and reliable
middle-market lending capability with a host of expanded products and services,
including commercial finance, asset-based lending, payment solutions,
syndications, and investment banking. Corporate Select, our unique loan product
with built-in interest rate protection options introduced in 1997, continues to
grow in popularity among smaller corporate borrowers due to its unmatched
flexibility and ease of use. Cumulative volume has exceeded $2.5 billion, and
the sales pace is accelerating, especially in the new markets of Michigan and
Illinois. At the same time, we have not and will not sacrifice credit quality
for the sake of growth. National City's credit performance has been clearly
superior over repeated business cycles, and we expect that to be the case over
the next cycle as well.
FEE-BASED BUSINESSES
With the net interest margin under constant pressure, development of additional
fee-based revenue sources has become more critical than ever. The four major
fee-based businesses have each been refocused, and are all now moving in the
right direction.
Personal Wealth Management was established as a separate business several
years ago as a melding of personal trust, private banking and retail brokerage
under a single management structure. We have moved from a traditional product
mindset to a customer-oriented one, with very positive results. New product
initiatives such as financial planning and small-business 401(k) plans, as well
as improved investment performance, have also been part of this transformation.
In Institutional Trust, an overhaul of the investment function has
dramatically improved investment performance. This unit provides investment
management and trust services to businesses and organizations and manages the
ARMADA and PARKSTONE mutual fund families. We are also concentrating on
specialized market segments such as charitable foundations, where we can provide
unique value-added capabilities.
National City Mortgage is perhaps the most resounding success story of the
year. Several years ago, after an extensive strategic review, we began investing
in low-cost mortgage origination capacity and simultaneously initiated programs
to hedge the economic risks in the servicing side of the business. When mortgage
rates plummeted in 1998, triggering waves of refinancing activity, we were
perfectly positioned to benefit from the new volume, generating record profits.
At the same time, the hedging programs protected the value of the servicing
portfolio, in contrast to servicing-related losses reported by a number of other
companies in the mortgage business. This is a superb example of effective
interest rate risk management--a complex process at which National City has
excelled over many years.
[PICTURE]
"Our objectives for 1999 are straightforward. We must execute the game plan in
place for each business."
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Finally, at National Processing, our 88%-owned payment processing
subsidiary, we are exploring strategic options with respect to the sale,
restructuring, or liquidation of several business lines that have not met our
performance criteria. This is still a work in progress, but as we have done in
other businesses, we are addressing the issues head-on, and we will take all
actions necessary to restore the company to an acceptable level of
profitability. We are confident that National Processing will re-emerge as the
highly-focused, highly-efficient transaction processor that it once was.
OUTLOOK
All things considered, 1998 was an excellent year for National City, but 1999
has the potential to be even better. With the merger integration effort behind
us and Year 2000 systems readiness activities in the "home stretch," we will
benefit from significantly lower overhead expenses, while at the same time
realizing merger-related revenue enhancements from offering our products and
services to the new markets. Our banking businesses have the product set, the
informational infrastructure, and the nimble, responsive organizational
structure which will help us to sell more of the right things to the right
customers at the right time through the optimal delivery channel. The fee
businesses also have considerable momentum, and as a group should enjoy a very
strong year. The only wild card is the economy and its influence on loan volumes
and credit quality, but we feel we are well positioned in terms of reserves and
risk management skills to do relatively well in a downturn, should one occur.
Our objectives for 1999 are straightforward. We must execute the game plan
in place for each business. These plans are linked to our long-term financial
objectives of double-digit earnings per share growth, a return on equity in
excess of 20%, and frequent dividend increases commensurate with earnings
growth. We plan to continue to deploy our substantial excess capital for the
benefit of stockholders through further investment in growth initiatives and
ongoing share repurchases. Doing these things and doing them well will position
National City as one of the two or three best large banks in the country, with
stockholders, employees, customers, and our communities benefiting accordingly.
Thank you for your support.
/s/ David A. Daberko
David A. Daberko
Chairman and Chief Executive Officer
[PICTURE]
National City acknowledges the contribution of Richard F. Chormann, formerly
Chairman, President and Chief Executive Officer of First of America Bank
Corporation, toward building a well-respected, high-quality banking organization
over the course of his 41-year career. His leadership and guidance helped make
the National City/First of America merger integration one of the most successful
on record.
Effective December 1998, Dick retired as Vice Chairman of the Board of Directors
of National City Corporation. He will continue to serve as Chairman of National
City Bank of Michigan/Illinois. All of us at National City wish him continued
success.
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FINANCIAL REVIEW
EARNINGS SUMMARY
National City Corporation ("National City" or "the Corporation") reported net
income of $1,070.7 million, or $3.22 per diluted share, in 1998, compared to
$1,122.2 million, or $3.42 per diluted share, in 1997, and $993.5 million, or
$2.95 per diluted share, in 1996. Included in reported net income were after-tax
merger and restructuring expenses of $261.9 million, or $.78 per diluted share,
in 1998, $34.9 million, or $.11 per diluted share, in 1997, and $49.1 million,
or $.15 per diluted share, in 1996.
Excluding merger and restructuring expenses, net income in 1998 of $1,332.6
million, or $4.00 per diluted share, increased 15.2% over 1997's net income of
$1,157.1 million, or $3.53 per diluted share, and 27.8% over 1996's net income
of $1,042.6 million, or $3.10 per diluted share. Results for 1998 and 1997
reflect strong loan and noninterest income growth and lower credit costs.
Excluding merger and restructuring expenses, return on average common equity
was 19.18% in 1998, up from 18.77% in 1997 and 17.53% in 1996 (Chart 2). On this
same basis, return on average assets was 1.66% in 1998, compared to 1.61% in
1997 and 1.47% in 1996 (Chart 3).
Merger and restructuring expenses in 1998 related to the merger with First of
America Bank Corporation ("First of America") and the acquisition of Fort Wayne
National Corporation ("Fort Wayne") and are further discussed in Note 3 to the
Consolidated Financial Statements. Merger and restructuring expenses in 1997
consisted of costs associated with reorganizing National City's six Ohio banking
subsidiaries under a single statewide charter, costs incurred in connection with
the First of America merger, and reorganization costs at the Corporation's
item-processing subsidiary. Merger expenses in 1996 were incurred as a result of
the Integra Financial Corporation merger.
Financial data for all prior periods have been restated to reflect the merger
with First of America, which was completed March 31, 1998 and accounted for as a
pooling of interests. The financial results of Fort Wayne, accounted for as a
purchase, are included in the results of operations subsequent to the date of
acquisition, March 30, 1998. The Fort Wayne acquisition added $3.4 billion to
total assets, $2.1 billion to loans and $2.3 billion to deposits.
Excluding merger and restructuring expenses, tangible or cash earnings per
share were $4.20 in 1998, $3.68 in 1997 and $3.29 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
23.33% in 1998 versus 21.53% in 1997 and 20.39% in 1996.
LINE OF BUSINESS RESULTS
National City's operations are managed along three major lines of business:
corporate banking, retail banking, and fee-based businesses. A description of
each business and the methodologies used to measure financial performance are
described in Note 21 to the Consolidated Financial Statements on page 41. The
[CHART 1: DILUTED INCOME AND DIVIDENDS PER COMMON SHARE]
(not restated for poolings; excludes 1998 merger and restructuring charges)
Diluted Net Income Per Share Dividends Paid Per Share
78 0.84 0.29
79 0.91 0.33
80 0.89 0.37
81 0.76 0.41
82 0.84 0.41
83 0.95 0.41
84 1.21 0.41
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
98 4 1.88
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FINANCIAL REVIEW (continued)
following table summarizes net income by line of business for each of the last
three years:
- ---------------------------------------------------------------
NET INCOME
------------------------------
(DOLLARS IN MILLIONS) 1998 1997 1996
- ---------------------------------------------------------------
Corporate banking $ 324.0 $ 257.0 $ 226.5
Retail banking 723.6 683.6 645.9
Fee-based businesses 210.8 133.9 121.8
Parent and other (187.7) 47.7 (.7)
- ---------------------------------------------------------------
Consolidated total $1,070.7 $1,122.2 $ 993.5
- ---------------------------------------------------------------
Total excluding merger and
restructuring expenses $1,332.6 $1,157.1 $1,042.6
- ---------------------------------------------------------------
The increase in corporate banking net income in both 1997 and 1998 was due
primarily to loan and fee income growth coupled with lower credit costs.
The increase in retail banking net income in both years was due mainly to
higher fee income. Declining spreads on deposits tended to offset the effect of
higher lending volumes.
The increases in net income in the fee-based businesses reflect improved
mortgage banking results, particularly in 1998. In addition, the personal wealth
management and institutional trust businesses also contributed to the improving
trend, aided by strong equity markets and new business. Partially offsetting
these improvements were declines at the item-processing unit, National
Processing, Inc. (National Processing), driven by higher expenses.
The decline in the parent and other category in 1998 reflects merger and
restructuring expense partially offset by securities gains. In 1997, the
increase was due to a higher contribution from the investment/funding unit.
NET INTEREST INCOME
Net interest income increased in 1998 as a result of the Fort Wayne acquisition,
which added approximately $87 million, and strong loan growth, partially offset
by a lower net interest margin. The decline in the net interest margin over the
past two years was due primarily to the combination of a lower yield on earning
assets, the reliance on higher cost borrowed funds to fund loan growth, and a
lower contribution from free funds.
The following table reconciles net interest income shown in the financial
statements to tax-equivalent net interest income used to compute the net
interest margin. To compare the non-taxable asset yields to taxable yields,
amounts are adjusted to pre-tax equivalents based on the marginal corporate tax
rate of 35%.
- -----------------------------------------------------------------
(Dollars in Millions) 1998 1997 1996
- -----------------------------------------------------------------
Net interest income $2,911.6 $2,810.3 $2,845.1
Tax equivalent adjustment 40.3 43.0 38.4
- -----------------------------------------------------------------
Net interest income -
tax equivalent $2,951.9 $2,853.3 $2,883.5
- -----------------------------------------------------------------
Average earning assets $ 71,747 $ 65,259 $ 64,535
- -----------------------------------------------------------------
Net interest margin 4.11% 4.37% 4.47%
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[CHART 2: RETURN ON AVERAGE COMMON EQUITY]
(net income, excluding merger and restructuring charges,
divided by average common equity)
National City Top 50 Banks
93 18.38 16.04
94 16.39 15.5
95 15.82 16.16
96 17.53 16
97 18.77 17.2
98 19.18 16
[CHART 3: RETURN ON AVERAGE ASSETS]
(net income, excluding merger and restructuring charges,
divided by average assets)
National City Top 50 Banks
93 1.37 .86
94 1.23 .46
95 1.18 .49
96 1.47 .49
97 1.61 .54
98 1.66 .48
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National City's net interest income is affected by the use of off-balance
sheet financial instruments (derivatives). The following table summarizes the
contribution of derivatives to net interest income. Amounts in brackets
represent a reduction of the related interest income or expense line.
- ----------------------------------
(Dollars in Millions) 1998 1997 1996
- ----------------------------------
INTEREST ADJUSTMENT TO:
Loans $ 1.2 $ 9.2 $ 21.9
Securities (1.0) (2.5) (1.0)
- --------------------------------------------------------------
Earning assets .2 6.7 20.9
Interest-bearing liabilities (40.0) (35.6) (22.0)
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EFFECT ON NET INTEREST INCOME $ 40.2 $ 42.3 $ 42.9
- --------------------------------------------------------------
The effects of changing interest rates on corporate performance are more
fully discussed in the Market Risk Management discussion beginning on page 14.
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:
- ----------------------------------------------------------------------------------------
1998 VS. 1997 1997 vs. 1996
------------------------------- -----------------------------
DUE TO Due to
CHANGE IN Change in
(Dollars in ------------------- NET ------------------ Net
Millions) VOLUME RATE* CHANGE Volume Rate* Change
- ----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN TAX EQUIVALENT INTEREST INCOME --
Loans** $456.2 $(135.8) $320.4 $104.0 $(43.4) $ 60.6
Securities 54.8 (7.7) 47.1 (18.8) 10.3 (8.5)
Short-term
investments 27.8 (3.9) 23.9 (9.2) 5.3 (3.9)
- ----------------------------------------------------------------------------------------
TOTAL $538.8 $(147.4) $391.4 $ 76.0 $(27.8) $ 48.2
- ----------------------------------------------------------------------------------------
(INCREASE) DECREASE IN INTEREST EXPENSE --
NOW and money market
accounts $(64.6) $ 20.2 $(44.4) $ 6.5 $(44.6) $(38.1)
Savings 17.9 1.8 19.7 3.7 17.5 21.2
Time deposits 63.1 8.7 71.8 78.1 3.5 81.6
Borrowed funds (377.5) 37.6 (339.9) (144.7) 1.6 (143.1)
- ----------------------------------------------------------------------------------------
TOTAL $(361.1) $ 68.3 $(292.8) $(56.4) $(22.0) $(78.4)
- ----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN TAX EQUIVALENT NET
INTEREST INCOME $ 98.6 $(30.2)
- ----------------------------------------------------------------------------------------
* Changes in interest income and interest expense not arising solely from rate
or volume variances are included in rate variances.
** Includes mortgage loans held for sale.
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NONINTEREST INCOME
- -------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996
- -------------------------------------------------------------------
Item processing revenue $ 484,503 $ 393,115 $ 364,512
Service charges on deposits 384,938 359,268 323,636
Trust and investment
management fees 311,050 278,793 255,598
Card-related fees 201,168 205,631 191,272
Mortgage banking revenue 327,247 158,544 109,670
Service fees - other 91,869 93,936 80,713
Brokerage revenue 90,477 75,374 65,053
Real estate owned income 5,012 9,647 8,768
Other 283,419 192,085 129,265
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TOTAL FEES AND OTHER INCOME $2,179,683 $1,766,393 $1,528,487
- -------------------------------------------------------------------
Securities gains 134,459 81,239 108,650
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TOTAL NONINTEREST INCOME $2,314,142 $1,847,632 $1,637,137
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Total fees and other income increased 23.4% in 1998 and 15.6% in 1997. The
Fort Wayne acquisition added approximately $23 million to fee income in 1998
primarily within trust and investment management fees and service charges on
deposits. Lower service fees earned on securitized credit card receivables,
which have begun to amortize, reduced card-related fees in 1998.
Item processing revenue generated by National Processing increased 23.2% in
1998 and 7.8% in 1997. The increase in 1998 was due to acquisitions and an
increase in merchant card revenue, offset by a decline in National Processing's
merchant check and remittance operations. The increase in 1997 was primarily due
to acquisitions.
Deposit service charges increased 7.1% in 1998 and 11.0% in 1997. The
increase in 1998 was primarily due to an increase in debit card and other
transaction volume as well as an increase in cash management revenue. The
increase in 1997 was primarily due to the implementation of a uniform fee
structure across the National City franchise.
Trust and investment management fees, which include both institutional trust
and personal wealth management, increased 11.6% in 1998 and 9.1% in 1997.
Revenue growth occurred in both periods due to new business volume and an
increase in the market value of assets under management. At December 31, 1998,
total assets under administration were $141.5 billion, compared to $106.3
billion at year-end 1997. Of that number, managed assets were $68.3 billion at
December 31, 1998, compared to $55.4 billion at year-end 1997.
Mortgage banking revenue increased 106.4% in 1998 and 44.6% in 1997. Revenue
growth in 1998 was driven by a favorable rate environment which increased the
volume of loan originations to $20.1 billion in 1998, up from $8.4 billion in
1997. Pre-tax gains on mortgage loans sold totaled $211.0 million, $79.1 million
and
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FINANCIAL REVIEW (continued)
$47.8 million in 1998, 1997 and 1996, respectively. The volume of loans
originated in 1998 also increased the size of the servicing portfolio to $35.2
billion at December 31, 1998, compared to $24.9 billion at December 31, 1997,
and related servicing revenue. The increase in mortgage banking revenue in 1997
was also due to a favorable rate environment and the February 1997 acquisition
of a mortgage origination business.
Brokerage revenue increased 20.0% in 1998 and 15.9% in 1997. Fueled by a
strong equity market and aggressive marketing, the increase in both years
reflects both higher retail brokerage sales and investment banking revenue.
The growth in other income in 1998 was primarily attributable to an increase
in the cash surrender value of company-owned life insurance, and higher income
related to venture capital and trading activities. Other income included branch
sale gains of $52.1 million, $31.9 million and $38.9 million, in 1998, 1997 and
1996, respectively. Also in 1997, a gain of $18.8 million was realized from the
sale of First of America's Florida-based banking operations, along with $13.0
million in equity appreciation on a private partnership investment.
Net realized securities gains and losses are summarized as follows:
- -----------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996
- -----------------------------------------------------------------
Net realized gains (losses) --
debt securities $ 24,553 $ (3,633) $ 6,342
Tax expense (benefit) 8,594 (1,271) 2,219
- -----------------------------------------------------------------
After tax $ 15,959 $ (2,362) $ 4,123
- -----------------------------------------------------------------
Net realized gains -- equity
securities $109,906 $ 84,872 $102,308
Tax expense 38,467 29,862 27,544
- -----------------------------------------------------------------
After tax $ 71,439 $ 55,010 $ 74,764
- -----------------------------------------------------------------
Effect on net income $ 87,398 $ 52,648 $ 78,887
- -----------------------------------------------------------------
Effect on earnings per share $ .26 $ .16 $ .23
- -----------------------------------------------------------------
NONINTEREST EXPENSE
The following table provides details of noninterest expense for the last three
years:
- ------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996
- ------------------------------------------------------------------
Salaries $1,309,820 $1,165,604 $1,109,160
Benefits and other personnel 284,937 283,841 270,630
Equipment 212,871 204,862 193,601
Net occupancy 202,664 193,555 197,014
Third party services 226,262 176,084 196,928
Credit card fees 139,416 126,108 118,796
Postage and supplies 141,525 130,491 138,319
FDIC assessments 6,815 9,292 34,479
State and local taxes 45,687 47,977 48,474
Marketing and public
relations 63,608 69,083 104,538
Transportation 52,621 47,325 44,669
Telephone 74,963 63,420 59,675
Other real estate owned 9,016 9,773 10,658
Amortization of intangibles 65,186 49,140 62,992
Other 162,346 150,113 135,800
- ------------------------------------------------------------------
2,997,737 2,726,668 2,725,733
- ------------------------------------------------------------------
Merger and restructuring 379,376 65,902 74,745
- ------------------------------------------------------------------
TOTAL $3,377,113 $2,792,570 $2,800,478
- ------------------------------------------------------------------
Full-time equivalent staff 41,218 40,630 38,434
- ------------------------------------------------------------------
In 1998, merger and restructuring expenses were incurred in connection with
the First of America and Fort Wayne transactions. In 1997, merger and
restructuring expenses included $33.3 million in costs associated with
reorganizing National City's six Ohio banking subsidiaries under a single
statewide charter, $19.3 million in connection with the First of America merger
and $13.3 million in severance and reorganization costs at National Processing.
In 1996, merger and restructuring expenses were incurred in connection with the
Integra Financial Corporation Merger.
The purchase acquisition of Fort Wayne added approximately $80 million to
operating expenses in 1998.
Salary and other personnel expenses increased in both years as a result of
acquisitions and higher incentive-based compensation associated with increased
business activity. In 1998, the increase was also driven by internal and
contract labor costs associated with technology initiatives and the Year 2000
Project, offset by lower benefit costs.
Third party service fees have fluctuated over the past three years. In 1998,
the increase was due to the outsourcing of credit card processing to a third
party vendor, increased brokerage clearing fees and other consulting costs. In
1997, the decline was primarily due to savings arising from the Integra
Financial Corporation merger.
FDIC assessments decreased in 1998 and 1997 as a result of the statutory
reduction in the Federal Deposit Insurance Corporation's deposit insurance
premiums. In 1996, a one-time assessment of $22.0 million was incurred in
connection with the recapitalization of the Savings Association Insurance Fund
(SAIF).
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Marketing and public relations expense in 1996 included a $30.4 million
contribution to National City's Charitable Contributions Foundation.
Overhead performance by line of business is summarized in the table below:
- -------------------------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
OVERHEAD Efficiency Overhead Efficiency Overhead Efficiency
RATIO Ratio Ratio Ratio Ratio Ratio
- -------------------------------------------------------------------------------------------
Corporate banking 22.3% 38.2% 27.3% 41.6% 32.1% 44.2%
Retail banking 39.3 53.0 41.4 54.3 46.2 57.1
Fee-based businesses -- 75.6 -- 78.7 -- 77.5
Parent and other -- -- -- -- -- --
- -------------------------------------------------------------------------------------------
TOTAL 40.6% 65.8% 36.0% 60.5% 44.1% 63.5%
- -------------------------------------------------------------------------------------------
Excluding merger and
restructuring
expenses 27.7% 58.4% 33.7% 59.0% 41.5% 61.8%
- -------------------------------------------------------------------------------------------
The overhead ratio calculates noninterest expense less fee and other income
as a percentage of tax equivalent net interest income. The efficiency ratio
calculates noninterest expense as a percentage of fee and other income plus
tax-equivalent net interest income. The fee-based businesses generally have
lower gross margins than the banking businesses. Consequently, growth in these
businesses penalizes the efficiency ratio. Conversely, strong fee income
benefits the overhead ratio.
EARNING ASSETS
Average earning assets for 1998 were $71,747 million compared to $65,259 million
in 1997 and $64,535 million in 1996. The 9.9% increase in 1998 over 1997 was
primarily due to a 10.1% increase in average loans and a 9.3% increase in
securities and other earning assets. The increase in 1997 was due to a 2.3%
increase in average loans, offset by a 3.2% decline in securities and other
earning assets.
LOANS: Ending loan balances for the last five years are summarized in the
following table:
- ------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------
Commercial $22,243 $18,218 $15,739 $15,437 $13,887
Real
estate -- commercial 6,252 6,411 6,817 6,626 6,185
Real
estate -- residential 9,664 9,987 11,164 11,755 10,969
Consumer 14,823 12,357 12,009 11,662 11,438
Credit card 1,852 2,048 2,240 2,531 3,040
Home equity 3,177 2,973 2,473 2,116 1,877
- ------------------------------------------------------------------------
TOTAL LOANS $58,011 $51,994 $50,442 $50,127 $47,396
- ------------------------------------------------------------------------
The various categories of loans are subject to varying levels of risk.
Management mitigates these risks through portfolio diversification and through
standardization of lending policies.
Commercial: Commercial loans grew throughout 1998 due to strong demand in
local markets, aggressive sales efforts and competitive product offerings.
The majority of the commercial loan portfolio consists of loans made to
middle-market customers in National City's six-state market. The loan mix is
diverse, covering a broad range and number of borrowers. There are no
concentrations of loans in any one industry and as a matter of policy, emerging
concentrations within a particular industry are continually monitored and
controlled. International loans totaled approximately $40 million in both 1998
and 1997.
CHART 4: AVERAGE LOANS
Loan growth in 1998 was strongest in the
domestic commercial and consumer
installment categories, aided by a healthy
economy, a broad product line, and the
purchase acquisition of Fort Wayne.
93 94 95 96 97 98
CONSUMER LOANS
Revolving Credit 3.444 4.051 4.62 4.502 4.772 4.962
Real Estate - Residential 8.949 9.877 11.784 11.756 11.34 11.846
Consumer 9.496 10.956 11.754 12.055 12.113 13.499
CORPORATE LOANS
Real Estate - Commercial 5.667 6.097 6.661 6.766 6.561 6.407
Commercial 13.001 13.347 14.485 15.363 16.837 20.135
9
12
FINANCIAL REVIEW (continued)
An analysis of the maturity and interest rate sensitivity of commercial loans
at the end of 1998 follows:
- ---------------------------------------------------------------------
One Year One to Over
(Dollars in Millions) or Less Five Years Five Years Total
- ---------------------------------------------------------------------
Variable rate $8,653 $6,960 $1,961 $17,574
Fixed rate 1,260 2,570 839 4,669
- ---------------------------------------------------------------------
TOTAL $9,913 $9,530 $2,800 $22,243
- ---------------------------------------------------------------------
Commercial Real Estate: At December 31, 1998, total commercial real estate
loans comprised 10.8% of the total loan portfolio compared to 12.3% in 1997. The
portfolio contains no concentrations of real estate loans in any deteriorating
economic areas.
The following table presents a breakdown of commercial mortgage loans
(excluding owner-occupied) at December 31, 1998 by state and project type:
- ------------------------------------------------------------
(Dollars in Millions)
- ------------------------------------------------------------
BY STATE: BY PROJECT:
Ohio $1,691 Apartments $1,031
Michigan 1,014 Retail 960
Illinois 415 Office 888
Indiana 354 Industrial 223
Pennsylvania 306 Healthcare 167
Kentucky 263 Land 165
Florida 64 Condo/Single
Other 246 Family 154
Other 765
- ------------------------------------------------------------
TOTAL $4,353 TOTAL $4,353
- ------------------------------------------------------------
Activities in commercial real estate are based primarily on relationships
with developers who are active in National City's local markets, with more than
90% of outstandings in National City's six-state market.
Consumer: 73% of the portfolio is comprised of installment loans of which a
majority are automobile sales financing; 65% of these loans are indirect and 97%
are at fixed rates. The auto lease portfolio grew 56.2% to $1,528.5 million at
December 31, 1998 compared to $978.5 million at year-end 1997.
Credit Card: In 1998, credit card balances declined as a result of attrition.
The decline in credit card outstandings in 1997 and 1996 was primarily due to
the sale of credit card receivables. Off-balance sheet securitized credit cards
totaled $770 million and $870 million at December 31, 1998 and 1997,
respectively.
SECURITIES: Summary information with respect to the securities portfolio at
December 31 follows:
- ----------------------------------------------------------------
1998 1997 1996
(DOLLARS IN AMORTIZED 1998 Amortized Amortized
MILLIONS) COST Yield* Cost Cost
- ----------------------------------------------------------------
U.S. TREASURY AND FEDERAL AGENCY DEBENTURES:
Under 1 year $ 105 6.54% $ 404 $ 652
1 to 5 years 714 5.30 1,154 2,259
5 to 10 years 393 5.52 1,170 1,094
Over 10 years -- -- 2,346 1,709
- ----------------------------------------------------------------
TOTAL 1,212 5.47 5,074 5,714
- ----------------------------------------------------------------
MORTGAGE-BACKED SECURITIES:
Under 1 year 1,211 6.25 387 122
1 to 5 years 4,918 6.60 3,277 2,619
5 to 10 years 3,388 6.11 1,211 1,635
Over 10 years 202 6.01 349 501
- ----------------------------------------------------------------
TOTAL 9,719 6.37 5,224 4,877
- ----------------------------------------------------------------
ASSET-BACKED AND CORPORATE DEBT SECURITIES:
Under 1 year 762 6.13 453 95
1 to 5 years 1,953 6.27 814 625
5 to 10 years 294 6.41 231 233
Over 10 years 35 7.28 70 112
- ----------------------------------------------------------------
TOTAL 3,044 6.28 1,568 1,065
- ----------------------------------------------------------------
STATES AND POLITICAL SUBDIVISIONS:
Under 1 year 52 10.28 101 58
1 to 5 years 120 9.82 98 136
5 to 10 years 324 8.37 494 135
Over 10 years 421 8.22 122 321
- ----------------------------------------------------------------
TOTAL 917 8.60 815 650
- ----------------------------------------------------------------
OTHER SECURITIES:
Under 1 year -- -- -- 183
1 to 5 years -- -- -- 2
5 to 10 years -- -- -- 3
Over 10 years 809 -- 585 678
- ----------------------------------------------------------------
TOTAL 809 -- 585 866
- ----------------------------------------------------------------
TOTAL SECURITIES $15,701 6.40% $13,266 $13,172
- ----------------------------------------------------------------
* 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, 1998 was 6.40% compared to 6.60% at
December 31, 1997. The decrease in portfolio yield is attributable to lower
reinvestment rates and a decline in higher yielding assets that matured, prepaid
or were called.
Investments in collateralized mortgage obligations (CMOs) totaled $4.6
billion and $5.9 billion at December 31, 1998 and 1997, respectively. CMOs and
all mortgage-backed securities 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 $692 million at
December 31, 1998, or 7% of total mortgage-backed securities.
10
13
ASSET QUALITY
NONPERFORMING ASSETS: A summary of nonaccrual and restructured loans and other
nonperforming assets at December 31 follows:
- ------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
COMMERCIAL:
Nonaccrual $ 95.4 $ 108.9 $ 119.6 $ 150.1 $ 94.0
Restructured .4 1.1 3.5 10.6 2.8
- ------------------------------------------------------------------------------
TOTAL COMMERCIAL 95.8 110.0 123.1 160.7 96.8
- ------------------------------------------------------------------------------
REAL ESTATE MORTGAGE:
Nonaccrual 120.2 123.4 104.5 137.3 173.5
Restructured 2.6 4.4 6.1 5.9 8.9
- ------------------------------------------------------------------------------
TOTAL REAL ESTATE
MORTGAGE 122.8 127.8 110.6 143.2 182.4
- ------------------------------------------------------------------------------
TOTAL NONPERFORMING
LOANS 218.6 237.8 233.7 303.9 279.2
Other real estate owned
(OREO) 29.9 35.5 48.7 52.5 87.4
- ------------------------------------------------------------------------------
TOTAL NONPERFORMING
ASSETS $ 248.5 $ 273.3 $ 282.4 $ 356.4 $ 366.6
- ------------------------------------------------------------------------------
Loans 90 days past due
accruing interest $ 209.5 $ 136.1 $ 133.8 $ 92.8 $ 69.5
- ------------------------------------------------------------------------------
NONPERFORMING LOANS AND OREO AS A PERCENT OF:
Loans and OREO .4% .5% .6% .7% .8%
Assets .3 .4 .4 .5 .5
Equity 3.5 4.4 4.5 6.0 7.3
- ------------------------------------------------------------------------------
All loans considered impaired under SFAS No. 114 are included in
non-performing loans.
Commercial and residential real estate loans 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) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
Income potential based
on original contract $44.7 $31.5 $35.3 $34.4 $34.9
Actual income 10.2 13.1 15.9 15.2 14.1
- ------------------------------------------------------------------------------
CHART 5: NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS
93 94 95 96 97 98 National City has consistently
outperformed the banking
industry in credit quality.
National City 0.50 0.36 0.42 0.46 0.44 0.37 -- National City
Top 50 Banks 0.86 0.46 0.49 0.49 0.54 0.48 -- Top 50 Banks
11
14
FINANCIAL REVIEW (continued)
ALLOWANCE FOR LOAN LOSSES: The following table presents a reconciliation of
the allowance for loan losses:
- --------------------------------------------------------------------------------
(Dollars in Millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
BALANCE AT BEGINNING
OF YEAR $941.9 $958.7 $947.0 $934.6 $874.0
Provision 201.4 225.4 239.9 205.0 195.9
Allowance related to loans
acquired (sold) 27.4 (19.5) .1 11.6 21.2
CHARGE-OFFS:
Commercial 43.7 63.7 67.0 59.3 68.5
Real estate -- commercial 9.3 8.1 6.1 7.8 7.6
Real
estate -- residential 9.0 7.2 11.1 27.8 28.6
Consumer 154.9 165.3 176.3 132.4 82.1
Credit card 95.7 111.8 115.3 108.0 88.4
Home equity 8.8 4.7 4.9 2.6 1.7
- --------------------------------------------------------------------------------
TOTAL CHARGE-OFFS 321.4 360.8 380.7 337.9 276.9
- --------------------------------------------------------------------------------
RECOVERIES:
Commercial 25.4 28.1 40.0 31.5 43.3
Real estate -- commercial 7.3 7.2 4.0 3.8 2.1
Real
estate -- residential .7 1.3 5.8 10.0 5.5
Consumer 64.3 78.6 80.8 67.0 48.4
Credit card 19.8 21.2 20.5 19.7 20.1
Home equity 3.4 1.7 1.3 1.7 1.0
- --------------------------------------------------------------------------------
TOTAL RECOVERIES 120.9 138.1 152.4 133.7 120.4
- --------------------------------------------------------------------------------
Net charge-offs 200.5 222.7 228.3 204.2 156.5
- --------------------------------------------------------------------------------
BALANCE AT END OF YEAR $970.2 $941.9 $958.7 $947.0 $934.6
- --------------------------------------------------------------------------------
Ratio of ending allowance
to ending loans 1.67% 1.81% 1.90% 1.89% 1.97%
- --------------------------------------------------------------------------------
Net charge-offs as a percentage of average loans by portfolio type are shown
in the following table:
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Commercial .09% .21% .18% .20% .19%
Real estate -- commercial .03 .01 .03 .06 .09
Real estate -- residential .08 .06 .05 .15 .23
Consumer .67 .72 .79 .56 .31
Credit card 4.08 4.37 4.23 3.37 2.59
Home equity .17 .11 .16 .04 .05
TOTAL NET CHARGE-OFFS TO
AVERAGE LOANS .37% .44% .46% .42% .36%
- --------------------------------------------------------------------------------
Consumer and credit card loans are charged off within industry norms, while
commercial loans are evaluated individually.
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 is determined statistically using a loss migration
analysis that examines loss experience and the related internal gradings of
loans charged off. The loss migration analysis is performed quarterly and loss
factors are periodically updated based on actual experience.
The allocated component of the allowance for loan losses also includes
management's determination of the amounts necessary for concentrations and
changes in mix and volume of the portfolio.
The unallocated portion of the allowance is determined based on management's
assessment of general economic conditions as well as specific economic factors
in the individual markets in which National City operates. This determination
inherently involves a higher degree of uncertainty and considers current risk
factors that may not have yet manifested themselves in the Corporation's
historical loss factors used to determine the allocated component of the
allowance, and it recognizes that knowledge of the portfolio may be incomplete.
An allocation of the ending allowance for loan losses by major loan type
follows:
- ------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
Commercial $217.8 $196.3 $197.0 $232.1 $201.6
Real estate mortgage 88.1 85.0 89.7 121.3 166.6
Consumer 135.6 154.3 153.9 152.5 131.2
Revolving credit 101.7 81.3 82.2 77.2 70.0
Unallocated 427.0 425.0 435.9 363.9 365.2
- ------------------------------------------------------------------------------
TOTAL $970.2 $941.9 $958.7 $947.0 $934.6
- ------------------------------------------------------------------------------
The following table shows the percentage of loans in each category to total
loans at year-end:
- --------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------
Commercial 38.2% 35.1% 31.3% 30.8% 29.4%
Real
estate -- commercial 10.8 12.3 13.5 13.2 13.0
Real
estate -- residential 16.7 19.2 22.1 23.5 23.1
Consumer 25.6 23.8 23.8 23.3 24.1
Credit card 3.2 3.9 4.4 5.0 6.4
Home equity 5.5 5.7 4.9 4.2 4.0
- --------------------------------------------------------------------
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0%
- --------------------------------------------------------------------
DEPOSITS AND BORROWED FUNDS
Providing a stable source of low-cost funding, core deposits include noninterest
bearing demand deposits, NOW and money market accounts, savings accounts and
time deposits of individuals. Average core deposits
12
15
were $49.8 billion in 1998 compared to $49.1 billion in 1997. The increase was
due to the acquisition of Fort Wayne, with the balance mix shifting toward money
market products from savings and certificate of deposit accounts.
Short- and long-term borrowed funds provided most of the funding to support
loan growth. Average borrowed funds were $22.0 billion in 1998 compared to $15.4
billion in 1997.
A maturity distribution of certificates of deposit of $100,000 or more at
year-end follows:
- -------------------------------------------------------------
(DOLLARS IN MILLIONS) 1998 1997
- -------------------------------------------------------------
DUE IN:
3 months or less $2,415 $1,714
3 to 6 months 572 616
6 to 12 months 557 636
Over 1 year 1,936 2,271
- -------------------------------------------------------------
TOTAL $5,480 $5,237
- -------------------------------------------------------------
Details regarding federal funds borrowed and security repurchase agreements
follow:
- ---------------------------------------------------------------
(DOLLARS IN MILLIONS) 1998 1997 1996
- ---------------------------------------------------------------
Balance at December 31 $9,427 $4,811 $5,157
Maximum outstanding at any month-end 9,738 5,945 5,267
Daily average amount outstanding 7,242 5,019 4,603
Weighted daily average interest rate 4.89% 4.70% 5.40%
Weighted daily interest rate for
amounts outstanding at December 31 4.30% 5.54% 5.82%
- ---------------------------------------------------------------
CAPITAL
The Corporation has consistently maintained regulatory capital ratios at or
above the "well capitalized" standards. For further detail on capital ratios,
see Note 12 to the Consolidated Financial Statements.
On October 26, 1998, the Board of Directors authorized the repurchase of up
to 30 million shares of National City common stock in the open market or through
privately negotiated transactions subject to an aggregate purchase limit of $2.7
billion. Five million shares were repurchased during the fourth quarter of 1998.
The total market capitalization of the Corporation was approximately $23.7
billion at December 31, 1998, and there were 71,592 common stockholders of
record.
Quarterly dividends paid per share and common stock prices follow:
- -------------------------------------------------------------------
NYSE: NCC First Second Third Fourth Year
1998
Dividends paid $ .46 $ .46 $ .48 $ .48 $ 1.88
High 74.81 77.50 74.00 74.00 77.50
Low 56.94 65.38 57.00 58.75 56.94
Close 73.31 71.00 65.94 72.50 72.50
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
- -------------------------------------------------------------------
Cash dividend payout is continually reviewed by management and the Board of
Directors. For the past three- and five-year periods, the dividend payout ratio,
excluding merger and restructuring expenses, has averaged 47.29% and 48.86%,
respectively.
In December 1998, the Board of Directors declared a first quarter 1999
dividend of $.52 per common share, representing an 8.3% increase. The dividend
is payable February 1 to stockholders of record on January 11, 1999, and
continues the pattern of increasing the dividend twice per year.
CHART 6: BOOK VALUE AND STOCK PRICE HISTORY
(adjusted for stock splits; not restated for poolings)
Over the past 20 years, the
compounded annual rate of
total return on National City
common stock including
reinvestment of dividends,
was 19.3% versus 17.6% for
the S&P 500.
Stock Price Range
High Low
78 7.19 5.71
79 6.82 5.89
80 6.41 4.41
81 5.56 4.26
82 5.41 3.45
83 6.89 4.49
84 8.61 5.78
85 11.28 8.39
86 16.46 10.95
87 19.13 11.94
88 16.82 13.88
89 20.75 15.38
90 19.94 11.32
91 21.13 14.07
92 24.82 17.94
93 28.06 23.13
94 29 23.75
95 33.75 25.25
96 47.25 30.63
97 67.56 42.5
98 77.5 56.94
Year-End Stock Price
78 5.95
79 6.39
80 5.08
81 4.52
82 4.78
83 6.89
84 8.47
85 10.97
86 15.29
87 14.56
88 16.44
89 19.56
90 15.63
91 18.63
92 24.81
93 24.5
94 25.88
95 33.13
96 44.88
97 65.75
98 72.5
Book Value Per Share
78 5.81
79 6.34
80 6.83
81 7.18
82 7.69
83 8.24
84 8.65
85 8.74
86 10.4
87 10.58
88 10.92
89 12.43
90 13.39
91 14.24
92 14.54
93 16.15
94 16.36
95 18.8
96 19.86
97 20.28
98 21.38
16
FINANCIAL REVIEW (continued)
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, 1999, $904.6 million was available within the
bank subsidiaries to pay parent company dividends without prior regulatory
approval, versus $501.2 million at January 1, 1998. During 1998, subsidiary
banks declared $752.2 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 24
may not represent cash immediately available to National City's stockholders.
Funds raised in the commercial paper market through the Corporation's
subsidiary, National City Credit Corporation, support short-term cash needs.
National City has a $350 million revolving credit agreement with a group of
unaffiliated banks which serves as a back-up liquidity facility. The agreement
expires February 1, 2001, with a provision to extend the expiration date under
certain circumstances. No borrowings have occurred under this facility.
The parent company also has in place a $250 million shelf registration with
the Securities and Exchange Commission permitting ready access to the public
debt and preferred stock markets.
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 involve significant risks
and uncertainties including changes in general economic and financial market
conditions, the Corporation's ability to execute its business plans, including
its plan to address the Year 2000 issue, and the ability of third parties to
effectively address their Year 2000 issues. Although National City believes that
the expectations reflected in such forward-looking statements are reasonable,
actual results may differ materially.
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 Asset/Liability Management 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
14
17
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 2.2% of stable-rate net income if rates fall gradually by two
percentage points over the next year. It projects a decrease of approximately
2.8% if the rates rise gradually by two percentage points, well within the
(5.0%) policy 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 2.5% in a falling rate scenario and fall by 7.9% in a rising rate
scenario. Both of these forecasts are within the two-year policy guideline of
(15.0%).
Net income is also subject to changes in the shape of the yield curve. In
general, a flattening of the yield curve would result in a decline in earnings
due to the compression of earning asset yields and funding rates. Conversely, a
steepening would result in increased earnings as investment margins widen. The
earnings impact of these twist scenarios is modeled on a monthly basis and
results of this analysis indicate an acceptable level of risk. Earnings are also
affected by changes in spread relationships between key rate indices, such as
Prime and Fed Funds. Variability between these key rate indices is simulated on
a monthly basis. Management believes the earnings exposure to this variability
is modest.
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
periodically 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 3.8%. Additionally, NPV is projected to decrease by 3.7% 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 Maximum Minimum Year-end ALCO
1998 1998 1998 1998 1997 Guidelines
- ----------------------------------------------------------------------------------------------------------------------------
Static 1-Year Cumulative Gap -8.8% -8.1% -6.0% -10.6% -8.8% -15.0%
1-Year Net Income Simulation Projection
-200 bp Ramp vs. Stable Rate 2.2% 2.2% 2.9% 1.5% 1.7% - 5.0%
+200 bp Ramp vs. Stable Rate -2.8% -2.9% -2.3% - 3.6% -1.8% - 5.0%
2-Year Net Income Simulation Projection
-200 bp Ramp vs. Stable Rate -2.5% -1.2% 1.5% - 4.1% -2.7% -15.0%
+200 bp Ramp vs. Stable Rate -7.9% -7.4% -4.9% - 9.5% -7.2% -15.0%
Static Net Present Value Change
-150 bp Shock vs. Stable Rate -3.7% -4.2% -2.3% - 5.9% -3.5% -10.0%
+150 bp Shock vs. Stable Rate -3.8% -2.9% -1.4% - 4.0% -3.9% -10.0%
- ----------------------------------------------------------------------------------------------------------------------------
15
18
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 stable to slightly lower during 1999
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 1998, the maximum month-end measured VAR was $1.0 million, well within
the limit established by ALCO of $2.3 million. Month-end VAR estimates are
reported monthly to ALCO. Trading income for 1998 totaled $22.5 million.
OTHER
YEAR 2000: Management initiated the process of preparing its computer systems
and applications for the Year 2000 in January 1995. The process involves
identifying and remediating date recognition problems in computer systems and
software and other operating equipment that could be caused by the date change
from December 31, 1999 to January 1, 2000.
Management has completed its assessment of all business processes that could
be affected by the Year 2000 issue. Each business process assessment included a
review of the information systems used in that process, including related
hardware and software, the involvement of any third parties, and any affected
operating equipment. To date, the affected systems within 85% of those business
processes determined to be critical for supporting the core services offered by
National City have been remediated, unit tested, and returned to production. As
part of the testing process, National City established a separate isolated
testing environment that further tests the functioning of modified systems when
linked together. Management expects to complete the remediation and testing of
all affected systems within the critical business processes by the end of the
second quarter of 1999.
Management is also working with significant customers, vendors, and business
counterparties to monitor the progress of their Year 2000 efforts.
Management believes it has an effective plan in place to resolve the Year
2000 issue in a timely manner and, thus far, activities have tracked in
accordance with the original plan. Management is in the process of modifying its
existing business continuity plans and is also developing contingency plans to
address potential risks in the event of Year 2000 failures, including non-
compliance by third parties. Despite National City's efforts to date to
remediate affected systems and develop contingency plans for potential risks,
management has not yet completed all activities associated with resolving its
Year 2000 issues. Under the unlikely scenario that the additional phases are not
completed, National City could be materially adversely affected as a result of
not being able to process transactions related to its core business activities.
In addition, non-compliance by third parties (including loan customers) and
disruptions to the economy in general resulting from Year 2000 issues could also
have a negative impact of undeterminable magnitude on National City.
The total cost of the Year 2000 project is estimated at $65 million.
Approximately one-half of this estimate represents costs related to internal
personnel working on the project and certain capitalizable costs related to
replacing non-compliant hardware and software. To date, $37 million of the total
project costs have been incurred. During 1998, incremental noninterest expense
associated with the project totaled approximately $21 million.
16
19
STATISTICAL DATA
CONSOLIDATED SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
For the Calendar Year
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in Millions Except Per
Share Amounts and Ratios) 1998 1997 1996 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $4,812 $4,487 $4,425 $4,383 $3,673 $3,420 $3,540 $3,869
Securities 885 840 854 966 911 945 1,041 1,052
Other 60 36 40 52 20 14 56 120
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 5,757 5,363 5,319 5,401 4,604 4,379 4,637 5,041
INTEREST EXPENSE
Deposits 1,846 1,813 1,862 1,975 1,479 1,547 1,949 2,513
Other 999 739 612 673 420 187 153 212
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 2,845 2,552 2,474 2,648 1,899 1,734 2,102 2,725
- -----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 2,912 2,811 2,845 2,753 2,705 2,645 2,535 2,316
PROVISION 201 225 240 205 196 228 305 394
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision 2,711 2,586 2,605 2,548 2,509 2,417 2,230 1,922
FEES AND OTHER INCOME 2,180 1,766 1,528 1,332 1,274 1,202 1,099 957
SECURITIES GAINS 134 81 109 42 35 59 100 50
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,314 1,847 1,637 1,374 1,309 1,261 1,199 1,007
NONINTEREST EXPENSE BEFORE MERGER AND
RESTRUCTURING 2,998 2,727 2,725 2,690 2,635 2,540 2,597 2,309
MERGER AND RESTRUCTURING EXPENSE 379 66 75 24 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,377 2,793 2,800 2,714 2,635 2,540 2,597 2,309
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of accounting
changes 1,648 1,640 1,442 1,208 1,183 1,138 832 620
INCOME TAXES 577 518 448 380 364 334 256 161
- -----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting changes 1,071 1,122 994 828 819 804 576 459
Cumulative effect of accounting changes,
net -- -- -- -- -- 60 (21) --
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,071 $ 1,122 $ 994 $ 828 $ 819 $ 864 $ 555 $ 459
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE MEASURES
Diluted net income per common share $ 3.22 $ 3.42 $ 2.95 $ 2.45 $ 2.38 $ 2.43 $ 1.64 $ 1.42
Diluted net income per common share,
excluding merger and restructuring
expense 4.00 3.53 3.10 2.46 2.38 2.43 1.64 1.42
Average common shares -- diluted 332.86 327.73 336.55 338.24 337.42 345.84 338.82 320.83
Dividends paid per common share 1.88 1.67 1.47 1.30 1.18 1.06 0.94 0.94
FINANCIAL RATIOS
Return on average common equity 15.40% 18.20% 16.69% 15.44% 16.39% 18.38% 13.72% 12.60%
Return on average common equity --
excluding merger and restructuring
expense 19.18 18.77 17.53 15.82 16.39 18.38 13.72 12.60
Return on average assets 1.34 1.56 1.40 1.15 1.23 1.37 0.91 0.80
Return on average assets -- excluding
merger and restructuring expense 1.66 1.61 1.47 1.18 1.23 1.37 0.91 0.80
Average equity to average assets 8.70 8.57 8.44 7.59 7.62 7.88 7.27 7.00
Dividends paid to net income 58.39 48.83 49.83 53.06 49.58 43.62 57.32 66.20
Net interest margin 4.11 4.37 4.47 4.24 4.53 4.71 4.68 4.59
AT YEAR-END
Assets $88,246 $75,779 $72,918 $74,142 $70,438 $66,395 $62,469 $61,443
Loans and mortgage loans held for sale 61,518 53,244 50,886 50,543 47,536 42,996 39,708 38,723
Securities 16,119 13,798 13,412 15,406 15,338 16,441 15,525 14,327
Deposits 58,247 52,617 53,619 54,923 54,755 51,388 51,228 50,370
Long-term debt 9,689 6,297 3,516 3,515 2,693 1,515 1,264 780
Common equity 6,977 6,158 6,216 5,706 4,851 5,120 4,269 3,756
Total equity 7,013 6,158 6,216 5,892 5,039 5,318 4,582 4,159
Common shares outstanding 326.33 315.70 330.86 325.48 326.34 332.83 326.70 304.33
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in Millions Except Per
Share Amounts and Ratios) 1990 1989 1988
- ----------------------------------------------------------------------
INTEREST INCOME
Loans $4,110 $3,984 $3,390
Securities 1,025 934 808
Other 128 158 138
- ----------------------------------------------------------------------
Total interest income 5,263 5,076 4,336
INTEREST EXPENSE
Deposits 2,762 2,648 2,164
Other 295 307 239
- ----------------------------------------------------------------------
Total interest expense 3,057 2,955 2,403
- ----------------------------------------------------------------------
NET INTEREST INCOME 2,206 2,121 1,933
PROVISION 484 298 269
- ----------------------------------------------------------------------
Net interest income after provision 1,722 1,823 1,664
FEES AND OTHER INCOME 888 773 756
SECURITIES GAINS -- 13 9
- ----------------------------------------------------------------------
Total noninterest income 888 786 765
NONINTEREST EXPENSE BEFORE MERGER AND
RESTRUCTURING 2,177 1,933 1,784
MERGER AND RESTRUCTURING EXPENSE -- -- --
- ----------------------------------------------------------------------
Total noninterest expense 2,177 1,933 1,784
- ----------------------------------------------------------------------
Income before income taxes and
cumulative effect of accounting
changes 433 676 645
INCOME TAXES 143 162 154
- ----------------------------------------------------------------------
Income before cumulative effect of
accounting changes 290 514 491
Cumulative effect of accounting changes,
net -- -- --
- ----------------------------------------------------------------------
NET INCOME $ 290 $ 514 $ 491
- ----------------------------------------------------------------------
PER SHARE MEASURES
Diluted net income per common share $ 0.92 $ 1.62 $ 1.56
Diluted net income per common share,
excluding merger and restructuring
expense 0.92 1.62 1.56
Average common shares -- diluted 313.41 315.70 310.09
Dividends paid per common share 0.94 0.84 0.72
FINANCIAL RATIOS
Return on average common equity 8.11% 15.26% 16.34%
Return on average common equity --
excluding merger and restructuring
expense 8.11 15.26 16.34
Return on average assets 0.53 1.00 1.03
Return on average assets -- excluding
merger and restructuring expense 0.53 1.00 1.03
Average equity to average assets 6.96 7.08 6.96
Dividends paid to net income 102.17 51.85 46.15
Net interest margin 4.62 4.78 4.73
AT YEAR-END
Assets $57,417 $54,633 $51,823
Loans and mortgage loans held for sale 37,492 35,460 32,883
Securities 12,003 11,222 11,110
Deposits 47,537 44,240 42,345
Long-term debt 575 568 584
Common equity 3,492 3,527 3,181
Total equity 3,719 3,757 3,415
Common shares outstanding 305.57 306.62 302.02
- ----------------------------------------------------------------------
Note: Prior period amounts, except for dividends paid per share, have been
restated for pooling-of-interests transactions.
17
20
STATISTICAL DATA(continued)
DAILY AVERAGE BALANCE SHEETS/NET INTEREST INCOME/RATES
Daily Average Balance
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Millions) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Earning assets:
Loans:
Commercial $20,135 $16,837 $14,899 $14,044 $12,990
Real estate mortgage 18,253 17,901 18,986 18,886 16,331
Consumer 13,499 12,113 12,055 11,754 10,956
Revolving credit 4,962 4,772 4,502 4,620 4,051
- -----------------------------------------------------------------------------------------------------------------
Total loans 56,849 51,623 50,442 49,304 44,328
Securities:
Taxable 12,967 12,298 12,705 14,918 14,883
Tax-exempt 941 781 662 737 940
- -----------------------------------------------------------------------------------------------------------------
Total securities 13,908 13,079 13,367 15,655 15,823
Federal funds sold 151 82 148 120 109
Security resale agreements 724 283 285 404 470
Other short-term investments 115 192 293 355 359
- -----------------------------------------------------------------------------------------------------------------
Total earning assets/ 71,747 65,259 64,535 65,838 61,089
Total interest income/rates
Allowance for loan losses (983) (969) (958) (955) (913)
Market value appreciation of securities available for 530 316 170 4 3
sale
Cash and demand balances due from banks 3,645 3,347 3,366 3,304 3,313
Properties and equipment 1,095 1,044 1,002 1,044 1,013
Accrued income and other assets 4,019 2,945 2,809 2,597 2,257
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $80,053 $71,942 $70,924 $71,832 $66,762
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
NOW and money market accounts $17,472 $15,467 $15,689 $14,537 $14,487
Savings accounts 4,158 5,037 5,190 6,084 7,044
Time deposits of individuals 18,263 19,397 20,797 21,903 18,898
Other time deposits 2,365 1,566 1,456 1,541 1,511
Deposits in overseas offices 1,715 1,052 859 1,365 1,026
Federal funds borrowed 3,124 2,044 1,351 1,754 1,748
Security repurchase agreements 4,118 2,975 3,252 3,315 2,328
Borrowed funds 3,005 2,771 2,309 2,889 2,504
Long-term debt 7,698 4,972 3,611 3,051 2,377
- -----------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/ 61,918 55,281 54,514 56,439 51,923
Total interest expense/rates
Noninterest bearing deposits 9,945 9,230 9,188 8,800 8,881
Accrued expenses and other liabilities 1,225 1,265 1,239 1,140 869
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 73,088 65,776 64,941 66,379 61,673
Preferred stock 28 -- 56 186 191
Common stock 6,937 6,166 5,927 5,267 4,898
- -----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,965 6,166 5,983 5,453 5,089
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $80,053 $71,942 $70,924 $71,832 $66,762
- -----------------------------------------------------------------------------------------------------------------
Net interest income
- -----------------------------------------------------------------------------------------------------------------
Interest spread
Contribution of noninterest bearing sources of funds
- -----------------------------------------------------------------------------------------------------------------
Net interest margin
- -----------------------------------------------------------------------------------------------------------------
Tax equivalent basis computed using a 35% effective tax rate.
Average loan balances include nonperforming loans and mortgage loans held for
sale.
18
21
Interest Daily Average Rate
- --------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
$1,641.1 $1,441.7 $1,265.3 $1,233.4 $1,028.9 8.15% 8.56% 8.49% 8.78% 7.92%
1,463.0 1,466.9 1,578.3 1,571.2 1,275.9 8.02 8.19 8.31 8.32 7.81
1,182.2 1,066.3 1,034.6 1,025.6 871.9 8.76 8.80 8.58 8.73 7.96
538.8 529.8 565.9 583.1 513.8 10.86 11.10 12.57 12.62 12.68
- --------------------------------------------------------------------------------------------
4,825.1 4,504.7 4,444.1 4,413.3 3,690.5 8.49 8.73 8.81 8.95 8.33
836.4 795.2 813.7 912.6 861.9 6.45 6.47 6.40 6.12 5.79
75.8 69.9 59.9 60.5 76.2 8.04 8.95 9.05 8.21 8.11
- --------------------------------------------------------------------------------------------
912.2 865.1 873.6 973.1 938.1 6.56 6.61 6.54 6.22 5.93
7.3 4.6 8.1 6.9 3.4 4.82 5.61 5.47 5.75 3.12
36.5 15.6 15.4 23.9 20.0 5.04 5.51 5.40 5.92 4.26
15.8 15.5 16.1 20.6 13.9 13.74 8.07 5.49 5.80 3.87
- --------------------------------------------------------------------------------------------
$5,796.9 $5,405.5 $5,357.3 $5,437.8 $4,665.9 8.08% 8.28% 8.30% 8.26% 7.64%
$ 542.0 $ 497.6 $ 459.5 $ 423.1 $ 333.1 3.10% 3.22% 2.93% 2.91% 2.30%
82.9 102.6 123.8 153.7 166.5 1.99 2.04 2.39 2.53 2.36
1,006.4 1,078.2 1,159.8 1,232.7 873.5 5.51 5.56 5.58 5.63 4.62
125.6 79.8 74.4 86.1 61.5 5.31 5.10 5.11 5.59 4.07
89.3 54.9 44.6 79.2 44.1 5.21 5.22 5.19 5.80 4.30
167.8 91.6 84.1 107.3 79.3 5.37 4.48 6.23 6.12 4.54
186.1 144.3 164.4 184.5 140.3 4.52 4.85 5.06 5.57 6.03
168.5 180.1 130.8 174.7 55.5 5.61 6.50 5.66 6.05 2.22
476.4 323.1 232.4 206.9 145.3 6.19 6.50 6.44 6.78 6.11
- --------------------------------------------------------------------------------------------
$2,845.0 $2,552.2 $2,473.8 $2,648.2 $1,899.1 4.59% 4.62% 4.54% 4.69% 3.66%
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
$2,951.9 $2,853.3 $2,883.5 $2,789.6 $2,766.8
- --------------------------------------------------------------------------------------------
3.49% 3.66% 3.76% 3.57% 3.98%
.62 0.71 0.71 0.67 0.55
- --------------------------------------------------------------------------------------------
4.11% 4.37% 4.47% 4.24% 4.53%
- --------------------------------------------------------------------------------------------
19
22
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, 1998 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, 1998, its system of
internal control met those criteria.
Cleveland, Ohio
January 21, 1999
/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 (National City) as of December 31, 1998 and 1997,
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, 1998. 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. The consolidated financial statements give
retroactive effect to the merger of National City and First of America Bank
Corporation (FOA) on March 31, 1998, which has been accounted for using the
pooling of interests accounting method as described in Note 3 to the
consolidated financial statements. We did not audit the 1997 and 1996 financial
statements of FOA, which statements reflect total assets constituting 28% for
1997 and net income constituting 28% for 1997 and 26% for 1996 of the related
consolidated financial statement totals. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for FOA, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits, and for 1997 and 1996 the report of
other auditors, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National City at
December 31, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 21, 1999
20
23
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
December 31
- -------------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------------------------
ASSETS
Loans:
Commercial $22,243,114 $18,218,837
Real estate -- commercial 6,251,879 6,410,531
Real estate -- residential 9,664,115 9,987,066
Consumer 14,822,759 12,357,229
Credit card 1,852,635 2,047,769
Home equity 3,176,664 2,972,987
- -------------------------------------------------------------------------------------------
Total loans 58,011,166 51,994,419
Allowance for loan losses (970,243) (941,874)
- -------------------------------------------------------------------------------------------
Net loans 57,040,923 51,052,545
Mortgage loans held for sale 3,507,487 1,249,708
Securities available for sale, at market 16,119,370 13,797,566
Federal funds sold and security resale agreements 930,492 542,156
Other short-term investments 218,149 84,204
Cash and demand balances due from banks 4,783,491 4,319,309
Properties and equipment 1,150,210 1,031,912
Accrued income and other assets 4,495,510 3,701,681
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $88,245,632 $75,779,081
- -------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits (noninterest bearing) $10,911,926 $10,287,007
NOW and money market accounts 18,610,832 16,106,637
Savings accounts 4,021,113 4,222,729
Time deposits of individuals 17,450,904 18,631,280
Other time deposits 2,280,973 1,633,282
Deposits in overseas offices 4,971,161 1,736,419
- -------------------------------------------------------------------------------------------
Total deposits 58,246,909 52,617,354
Federal funds borrowed and security repurchase
agreements 9,427,309 4,810,953
Borrowed funds 2,117,916 4,264,556
Long-term debt 9,009,448 5,647,302
Corporation obligated mandatorily redeemable capital
securities of subsidiary trusts holding solely
debentures of the Corporation 679,894 649,892
Accrued expenses and other liabilities 1,751,248 1,630,764
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES 81,232,724 69,620,821
- -------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred Stock, stated value $50 per share,
authorized 5,000,000 shares, outstanding 721,954
shares in 1998 36,098 --
Common stock, par value $4 per share, authorized
700,000,000 shares,
outstanding 326,327,360 shares in 1998 and
315,697,488 shares in 1997 1,305,309 1,262,790
Capital surplus 1,968,751 1,108,920
Retained earnings 3,430,672 3,440,763
Accumulated other comprehensive income 272,078 345,787
- -------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 7,012,908 6,158,260
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $88,245,632 $75,779,081
- -------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
21
24
CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF INCOME
For the Calendar Year
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $4,811,735 $4,486,529 $4,425,124
Securities:
Taxable 836,430 795,229 813,653
Exempt from Federal income taxes 48,831 45,043 40,548
Federal funds sold and security resale agreements 43,793 20,225 23,498
Other short-term investments 15,888 15,486 16,066
- --------------------------------------------------------------------------------------------------------------
Total interest income 5,756,677 5,362,512 5,318,889
INTEREST EXPENSE
Deposits 1,846,276 1,813,251 1,862,084
Federal funds borrowed and security repurchase
agreements 353,882 235,882 248,512
Borrowed funds 168,507 180,082 130,811
Long-term debt 476,364 322,959 232,418
- --------------------------------------------------------------------------------------------------------------
Total interest expense 2,845,029 2,552,174 2,473,825
- --------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 2,911,648 2,810,338 2,845,064
PROVISION FOR LOAN LOSSES 201,400 225,367 239,936
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,710,248 2,584,971 2,605,128
NONINTEREST INCOME
Item processing revenue 484,503 393,115 364,512
Service charges on deposit accounts 384,938 359,268 323,636
Trust and investment management fees 311,050 278,793 255,598
Card-related fees 201,168 205,631 191,272
Mortgage banking revenue 327,247 158,544 109,670
Brokerage revenue 90,477 75,374 65,053
Other 380,300 295,668 218,746
- --------------------------------------------------------------------------------------------------------------
Total fees and other income 2,179,683 1,766,393 1,528,487
Securities gains 134,459 81,239 108,650
- --------------------------------------------------------------------------------------------------------------
Total noninterest income 2,314,142 1,847,632 1,637,137
NONINTEREST EXPENSE
Salaries, benefits and other personnel 1,594,757 1,449,445 1,379,790
Equipment 212,871 204,862 193,601
Net occupancy 202,664 193,555 197,014
Assessments and taxes 52,502 57,269 82,953
Merger and restructuring 379,376 65,902 74,745
Other 934,943 821,537 872,375
- --------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,377,113 2,792,570 2,800,478
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 1,647,277 1,640,033 1,441,787
Income tax expense 576,596 517,839 448,271
- --------------------------------------------------------------------------------------------------------------
NET INCOME $1,070,681 $1,122,194 $ 993,516
- --------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $1,068,499 $1,122,194 $ 989,488
- --------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $3.28 $3.48 $3.00
Diluted 3.22 3.42 2.95
AVERAGE COMMON SHARES OUTSTANDING
Basic 326,005,752 322,223,892 329,548,231
Diluted 332,860,165 327,732,584 336,549,137
- --------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
22
25
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Unallocated
Shares Accumulated
Held by Other
Preferred Common Capital Retained ESOP Comprehensive
(Dollars in Thousands Except Per Share Amounts) Stock Stock Surplus Earnings Trust Income
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 $185,400 $1,150,046 $1,012,299 $3,324,421 $ (2,741) $222,402
Comprehensive Income:
Net income 993,516
Other comprehensive income, net of tax
Unrealized gains on securities of $4,405,
net of reclassification adjustment for
gains included in net income of $70,623 (66,218)
Total comprehensive income
Common dividends declared, National City,
$1.88 per share (363,999)
Common dividends declared of pooled company,
prior to merger (147,011)
Preferred dividends, $2.00 per depositary
share (6,458)
Issuance of 2,868,566 common shares under
corporate stock and dividend reinvestment
plans 11,474 46,345
Purchase of 4,356,000 common shares (17,424) (157,686)
Issuance of 110,453 common shares pursuant to
acquisitions 442 3,446
Issuance of common stock by subsidiary 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
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $ -- $1,179,897 $1,079,522 $3,800,658 $ -- $156,184
Comprehensive Income:
Net income 1,122,194
Other comprehensive income, net of tax
Unrealized gains on securities of
$242,408, net of reclassification
adjustment for gains included in net
income of $52,805 189,603
Total comprehensive income
Common dividends declared, National City,
$1.72 per share (369,370)
Common dividends declared of pooled company,
prior to merger (116,393)
Issuance of 3,349,463 common shares under
corporate stock and dividend reinvestment
plans 13,397 66,599
Purchase of 18,075,000 common shares (72,300) (199,082) (702,363)
Issuance of 201,120 common shares pursuant to
acquisitions 804 8,910
Stock dividend declared of pooled company,
prior to merger 140,992 152,971 (293,963)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $ -- $1,262,790 $1,108,920 $3,440,763 $ -- $345,787
Comprehensive Income:
Net income 1,070,681
Other comprehensive income, net of tax
Unrealized gain on securities of $13,689
net of reclassification adjustment for
gains included in net income of $87,398 (73,709)
Total comprehensive income
Common dividends declared, National City,
$1.88 per share (637,099)
Preferred dividends declared (2,182)
Issuance of 4,792,495 common shares under
corporate stock and dividend reinvestment
plans 19,170 185,835
Purchase of 5,000,000 common shares (20,000) (17,041) (310,667)
Net issuance of 10,810,084 common shares and
739,976 preferred shares pursuant to
acquisition 36,999 43,240 690,245 (130,824)
Conversion of 18,022 shares of preferred stock
to 27,295 common shares (901) 109 792
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 $ 36,098 $1,305,309 $1,968,751 $3,430,672 $ -- $272,078
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------
(Dollars in Thousands Except Per Share Amounts) Total
- ------------------------------------------------------------
BALANCE DECEMBER 31, 1995 $$5,891,827
Comprehensive Income:
Net income 993,516
Other comprehensive income, net of tax
Unrealized gains on securities of $4,405,
net of reclassification adjustment for
gains included in net income of $70,623 (66,218)
----------
Total comprehensive income 927,298
Common dividends declared, National City,
$1.88 per share (363,999)
Common dividends declared of pooled company,
prior to merger (147,011)
Preferred dividends, $2.00 per depositary
share (6,458)
Issuance of 2,868,566 common shares under
corporate stock and dividend reinvestment
plans 57,819
Purchase of 4,356,000 common shares (175,110)
Issuance of 110,453 common shares pursuant to
acquisitions 3,888
Issuance of common stock by subsidiary 25,077
Conversion of 3,708,000 depositary shares of
preferred stock to 8,839,650 common shares --
Shares distributed by ESOP trust and tax
benefit on dividends 2,930
- ------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $6,216,261
Comprehensive Income:
Net income 1,122,194
Other comprehensive income, net of tax
Unrealized gains on securities of
$242,408, net of reclassification
adjustment for gains included in net
income of $52,805 189,603
----------
Total comprehensive income 1,311,797
Common dividends declared, National City,
$1.72 per share (369,370)
Common dividends declared of pooled company,
prior to merger (116,393)
Issuance of 3,349,463 common shares under
corporate stock and dividend reinvestment
plans 79,996
Purchase of 18,075,000 common shares (973,745)
Issuance of 201,120 common shares pursuant to
acquisitions 9,714
Stock dividend declared of pooled company,
prior to merger --
- ------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $6,158,260
Comprehensive Income:
Net income 1,070,681
Other comprehensive income, net of tax
Unrealized gain on securities of $13,689
net of reclassification adjustment for
gains included in net income of $87,398 (73,709)
----------
Total comprehensive income 996,972
Common dividends declared, National City,
$1.88 per share (637,099)
Preferred dividends declared (2,182)
Issuance of 4,792,495 common shares under
corporate stock and dividend reinvestment
plans 205,005
Purchase of 5,000,000 common shares (347,708)
Net issuance of 10,810,084 common shares and
739,976 preferred shares pursuant to
acquisition 639,660
Conversion of 18,022 shares of preferred stock
to 27,295 common shares --
- ------------------------------------------------------------
BALANCE DECEMBER 31, 1998 $7,012,908
- ------------------------------------------------------------
See notes to consolidated financial statements.
23
26
CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Calendar Year
- ------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,070,681 $ 1,122,194 $ 993,516
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 201,400 225,367 239,936
Depreciation and amortization 220,784 152,303 139,750
Amortization of intangibles and servicing rights 65,186 74,931 85,193
Amortization of securities discount and premium 1,717 1,092 3,502
Securities gains (134,459) (81,239) (108,650)
Other gains, net (52,590) (148,273) (89,210)
Net (increase) decrease in trading account assets 7,170 151,925 (131,993)
Originations and purchases of mortgage loans held for
sale (18,596,649) (7,273,818) (3,812,069)
Proceeds from sales of mortgage loans held for sale 15,844,235 6,525,601 3,636,424
Deferred income taxes 230,093 113,781 (19,035)
(Increase) decrease in interest receivable (8,180) 79,611 (2,919)
Increase (decrease) in interest payable (78,669) 6,648 (22,972)
Net change in other assets/liabilities (586,486) (484,910) (356,125)
- ------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (1,815,767) 465,213 555,348
LENDING AND INVESTING ACTIVITIES
Net decrease in short-term investments (509,633) 410,820 97,640
Purchases of securities (14,877,259) (6,658,951) (5,120,760)
Proceeds from sales of securities 9,957,772 4,157,999 4,481,357
Proceeds from maturities and prepayments of securities 3,662,739 2,247,546 2,508,438
Net increase in loans (3,863,339) (1,904,919) (750,509)
Proceeds from sales of loans 192,698 136,057 400,558
Net increase in properties and equipment (210,705) (91,488) (101,512)
Acquisitions 157,632 42,207 944
- ------------------------------------------------------------------------------------------------------------
Net cash provided (used) by lending and investing activities (5,490,095) (1,660,729) 1,516,156
DEPOSIT AND FINANCING ACTIVITIES
Net increase (decrease) in Federal funds borrowed and
security repurchase agreements 4,331,739 (345,618) (1,367,368)
Net increase (decrease) in borrowed funds (2,177,174) 1,312,406 964,054
Net increase in demand, savings, NOW, money market
accounts, and deposits in overseas offices 4,715,556 152,101 479,999
Net (decrease) in time deposits (1,636,016) (1,153,790) (1,784,390)
Repayment of long-term debt (1,770,596) (407,589) (602,376)
Proceeds from issuance of long-term debt, net 5,045,431 3,187,751 602,010
Dividends paid, net of tax benefit of ESOP shares (596,193) (477,931) (425,572)
Issuance of common stock 205,005 79,996 57,819
Repurchase of common and preferred stock (347,708) (973,745) (175,110)
Proceeds from issuance of common stock by subsidiary -- -- 114,966
ESOP trust repayment -- -- 2,741
- ------------------------------------------------------------------------------------------------------------
Net cash provided (used) by deposit and financing activities 7,770,044 1,373,581 (2,133,227)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and demand balances due from
banks 464,182 178,065 (61,723)
Cash and demand balances due from banks, January 1 4,319,309 4,141,244 4,202,967
- ------------------------------------------------------------------------------------------------------------
Cash and demand balances due from banks, December 31 $ 4,783,491 $ 4,319,309 $ 4,141,244
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
Interest paid $ 2,992,709 $ 2,545,518 $ 2,496,797
Income taxes paid 242,892 337,499 512,890
Common stock issued in purchase acquisitions 639,660 9,714 3,888
- ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
24
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
National City Corporation ("National City" or "the Corporation") is a
multi-bank holding company headquartered in Cleveland, Ohio.
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.
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. The consolidated financial statements have been prepared to give
retroactive effect to the March 31, 1998 merger with First of America Bank
Corporation which was accounted for as a pooling of interests. 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 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
positive intent and ability to hold the securities to maturity. Securities held
to maturity, when present, are carried at amortized cost.
Securities not classified as held to maturity or trading are classified as
available for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately through accumulated other
comprehensive income, net of tax.
Interest and dividends on securities, including amortization of premiums and
accretion of discounts, are included in interest income. The adjusted cost of
specific securities sold is used to compute gains or losses on sales.
EQUITY-RELATED INVESTMENTS: Equity investments of the Corporation's venture
capital and small business investment subsidiaries are included in other assets.
These investments are carried at fair value with changes in fair value
recognized in other noninterest
25
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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: 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. Capitalized
mortgage servicing rights are included in other assets and totaled $564.0
million and $262.6 million at December 31, 1998 and 1997, respectively. The
Corporation hedges its exposure to the prepayment risk associated with the
servicing rights by using off-balance sheet derivative financial instruments.
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 other comprehensive income within 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 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
26
29
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, 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.
An effective tax rate of 35% is used to determine after-tax components of
other comprehensive income included in the statements of changes in
stockholders' equity.
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: Certain provisions of SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, 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. SFAS No. 125 established new criteria for
determining whether a transfer of financial assets in exchange for cash or other
consideration should be accounted for as a sale or as a pledge of collateral in
a secured borrowing and also established new accounting requirements for pledged
collateral. The adoption of these provisions did not have a material impact on
financial position or results or 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 Corporation adopted the
provisions of this statement in 1998. These disclosure requirements had 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. The Corporation adopted the
provisions of this statement for 1998 annual reporting. These disclosure
requirements had no impact on financial position or results of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In June 1998,
the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The provisions of this statement require that derivative instruments
be carried at fair value on the balance sheet. The statement continues to allow
derivative instruments to be used to hedge various risks and sets forth specific
criteria to be used to determine when hedge accounting can be used. The
statement also provides for offsetting changes in fair value or cash flows of
both the derivative and the hedged asset or liability to be recognized in
earnings in the same period; however, any changes in fair value or cash flow
that represent the ineffective portion of a hedge are required to be recognized
in earnings and cannot be deferred. For derivative instruments not accounted for
as hedges, changes in fair value are required to be recognized in earnings.
The provisions of this statement become effective for quarterly and annual
reporting beginning January 1, 2000. Although the statement allows for early
27
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
adoption in any quarterly period after June 1998, National City has no plans to
adopt the provisions of SFAS No. 133 prior to the effective date. The impact of
adopting the provisions of this statement on National City's financial position,
results of operations and cash flow subsequent to the effective date is not
currently estimable and will depend on the financial position of the Corporation
and the nature and purpose of the derivative instruments in use by management at
that time.
3. MERGERS AND ACQUISITIONS
On March 30, 1998, National City acquired Fort Wayne National Corporation
(FWNC), a $3 billion asset bank holding company headquartered in Fort Wayne,
Indiana, in a transaction accounted for as a purchase. Upon acquisition, each
share of FWNC common stock outstanding was converted into .75 shares of National
City common stock. A net of 10.8 million shares of National City common stock
were issued. National City also issued .7 million shares of 6% Cumulative
Convertible Preferred Stock, Series 1 in exchange for all of the outstanding
shares of FWNC's 6% Cumulative Convertible Class B Preferred Stock. Goodwill of
$536.0 million and core deposit intangible of $71.9 million were recorded in
connection with the acquisition and are being amortized on a straight-line basis
over twenty-five and seven years, respectively. The pro forma effects of this
transaction are not material to historical results of operations.
On March 31, 1998, National City Corporation merged with First of America
Bank Corporation (FOA), a $21 billion asset bank holding company headquartered
in Kalamazoo, Michigan, in a transaction accounted for as a pooling of
interests. National City issued 104.9 million shares of common stock to the
shareholders of FOA based upon an exchange ratio of 1.2 shares of National City
common stock for each outstanding share of FOA common stock. The historical
consolidated financial statements have been restated to reflect this
transaction.
Net interest income, net income and diluted net income per common share for
National City and FOA as originally reported for the two years ended December
31, 1997 prior to restatement are as follows:
- --------------------------------------------------------------
(Dollars in Thousands) 1997 1996
- --------------------------------------------------------------
NET INTEREST INCOME
National City $1,942,828 $1,942,576
First of America 871,922 902,488
- --------------------------------------------------------------
Combined $2,814,750 $2,845,064
- --------------------------------------------------------------
NET INCOME
National City $ 807,433 $ 736,630
First of America 314,761 256,886
- --------------------------------------------------------------
Combined $1,122,194 $ 993,516
- --------------------------------------------------------------
DILUTED NET INCOME PER COMMON SHARE
National City $3.66 $3.27
First of America 3.53 2.77
Combined 3.42 2.95
- --------------------------------------------------------------
Merger expenses incurred in 1998 as a result of the FOA and FWNC transactions
totaled $379.4 million and consisted of: personnel-related costs in the amount
of $109.8 million; facilities and equipment adjustments of $71.2 million;
professional fees of $58.5 million; system conversion related costs of $48.3
million, and miscellaneous expenses of $91.6 million.
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.
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 $599.7 million
in 1998 and $438.8 million in 1997.
28
31
The following table summarizes the activity in the allowance for loan losses:
For the Calendar Year
- -----------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 941,874 $ 958,739 $ 947,028
Allowance related to loans
acquired (sold) 27,501 (19,522) 94
Provision 201,400 225,367 239,936
Charge-offs (321,385) (360,792) (380,656)
Recoveries 120,853 138,082 152,337
- -----------------------------------------------------------------
Net charge-offs (200,532) (222,710) (228,319)
- -----------------------------------------------------------------
BALANCE AT END OF YEAR $ 970,243 $ 941,874 $ 958,739
- -----------------------------------------------------------------
The financial review section provides detail regarding nonperforming loans.
At December 31, 1998 and December 31, 1997 loans that were considered to be
impaired under SFAS No. 114 totaled $16.9 million and $28.8 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 1998 and 1997 was $7.4 million and $10.1 million,
respectively. All impaired loans at December 31, 1998 and 1997 had an associated
allowance. 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, 1998, was $44.7 million and $10.2 million, compared to $31.5
million and $13.1 million, respectively, for the twelve months ended December
31, 1997.
At December 31, 1998, nonaccrual and restructured loans were $218.6 million
and other real estate owned was $29.9 million. At December 31, 1997, the
corresponding amounts were $237.8 million and $35.5 million, respectively.
5. SECURITIES
The following is a summary of securities available for sale:
DECEMBER 31, 1998
- --------------------------------------------------------------------------
(DOLLARS IN AMORTIZED UNREALIZED UNREALIZED MARKET
THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------
U.S. Treas. and Fed.
agency debentures $ 1,212,437 $ 33,914 $ 100 $ 1,246,251
Mortgage-backed
securities 9,717,908 107,350 15,926 9,809,332
Asset-backed and
corporate debt
securities 3,044,075 11,549 10,167 3,045,457
States and political
subdivisions 917,424 51,101 406 968,119
Other 809,154 241,148 91 1,050,211
- --------------------------------------------------------------------------
TOTAL SECURITIES $15,700,998 $445,062 $26,690 $16,119,370
- --------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------
(Dollars in Amortized Unrealized Unrealized Market
Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------
U.S. Treas. and Fed.
agency debentures $ 5,074,131 $ 27,903 $12,677 $ 5,089,357
Mortgage-backed
securities 5,223,467 71,616 17,073 5,278,010
Asset-backed and
corporate debt
securities 1,568,334 8,655 1,895 1,575,094
States and political
subdivisions 814,225 42,207 400 856,032
Other 585,445 413,743 115 999,073
- --------------------------------------------------------------------------
TOTAL SECURITIES $13,265,602 $564,124 $32,160 $13,797,566
- --------------------------------------------------------------------------
Other securities include the Corporation's internally-managed equity
portfolio of bank and thrift common stock investments, which had an amortized
cost and market value of $395.0 million and $646.8 million, respectively, at
December 31, 1998, and $204.8 million and $612.2 million, respectively, at
December 31, 1997.
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.
29
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table shows the amortized cost and market value (carrying
value) of securities at December 31, 1998 by maturity:
- --------------------------------------------------------------
Available for Sale
------------------------------
(Dollars in Thousands) Amortized Cost Market Value
- --------------------------------------------------------------
Due in 1 year or less $ 2,129,928 $ 2,138,517
Due in 1 to 5 years 7,704,912 7,789,132
Due in 5 to 10 years 4,398,779 4,458,659
Due after 10 years 1,467,379 1,733,062
- --------------------------------------------------------------
TOTAL $15,700,998 $16,119,370
- --------------------------------------------------------------
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, 1998, 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 $12.9 billion.
At December 31, 1998, there were no securities of a single issuer, other than
U.S. Treasury and other U.S. government agency securities, which exceeded 10% of
stockholders' equity.
In 1998, 1997 and 1996, gross gains of $177.9 million, $96.5 million and
$127.3 million and gross losses of $43.4 million, $15.3 million and $18.6
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.
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, 1998 and 1997. 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.
- --------------------------------------------------------------------
1998 1997
------------------- -------------------
CARRYING Fair Carrying Fair
(DOLLARS IN MILLIONS) VALUE Value Value Value
- --------------------------------------------------------------------
ASSETS:
Cash and cash
equivalents $ 6,545 $ 6,545 $ 5,646 $ 5,646
Loans held for sale 3,507 3,507 1,250 1,250
Loans receivable 58,011 59,681 51,994 52,821
Allowance for loan
losses (970) (970) (942) (942)
Securities 16,119 16,119 13,978 13,978
Other assets 164 164 130 130
- --------------------------------------------------------------------
LIABILITIES:
Demand deposits $(10,912) $(10,912) $(10,287) $(10,287)
Savings and time
deposits (47,335) (47,855) (42,330) (42,641)
Short-term borrowings (11,545) (11,545) (9,075) (9,075)
Long-term debt (9,689) (9,806) (6,297) (6,696)
Other liabilities (477) (477) (564) (564)
- --------------------------------------------------------------------
OFF-BALANCE SHEET INSTRUMENTS:
Interest rate swaps $ 29 $ 156 $ (7) $ 70
Interest rate caps,
floors and futures (15) 36 18 4
Trading account
derivatives 19 19 5 5
Commitments to
extend credit (19) (19) (12) (12)
Standby letters of
credit (4) (4) (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
liabil-
30
33
ity, 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).
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 $134.3 million for 1998.
8. PROPERTIES AND EQUIPMENT
A summary of properties and equipment follows:
December 31
- --------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------
Land $ 160,049 $ 154,917
Buildings and leasehold improvements 1,085,225 965,412
Equipment 1,239,007 1,032,895
- --------------------------------------------------------------
2,484,281 2,153,224
Less accumulated depreciation
and amortization 1,334,071 1,121,312
- --------------------------------------------------------------
NET PROPERTIES AND EQUIPMENT $1,150,210 $1,031,912
- --------------------------------------------------------------
The Corporation and certain of its subsidiary banks occupy their respective
headquarters offices and other facilities under long-term operating leases and,
in addition, lease certain data processing equipment. The aggregate minimum
annual rental commitments under these leases total approximately $76.6 million
in 1999, $69.7 million in 2000, $62.1 million in 2001, $56.6 million in 2002,
$51.8 million in 2003 and $213.2 million thereafter.
Total expense recorded under all operating leases in 1998, 1997 and 1996 was
$104.2 million, $97.8 million and $96.2 million, respectively.
9. OTHER BORROWINGS
The composition of other borrowings follows:
December 31
- -------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- -------------------------------------------------------------
U.S. Treasury demand notes and
Federal funds borrowed-term $ 916,342 $2,001,665
Notes payable to Student Loan
Marketing Association -- 300,000
FHLB advances 250,000 450,000
Bank Notes and other 556,313 716,702
- -------------------------------------------------------------
Total bank subsidiaries 1,722,655 3,468,367
Commercial paper 392,938 795,895
Other 2,323 294
- -------------------------------------------------------------
Total parent company and other
subsidiaries 395,261 796,189
- -------------------------------------------------------------
TOTAL $2,117,916 $4,264,556
- -------------------------------------------------------------
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
31
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 outstanding at December 31, 1997 was secured by and provided 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) 1998 1997
- -------------------------------------------------------------
9 7/8 % Subordinated Notes due 1999 $ 64,965 $ 64,918
6.50% Subordinated Notes due 2000 99,931 99,881
8.50% Subordinated Notes due 2002 99,920 99,896
6 5/8 % Subordinated Notes due 2004 249,330 249,201
7.75% Subordinated Notes due 2004 200,000 200,000
8.50% Subordinated Notes due 2004 150,000 150,000
7.20% Subordinated Notes due 2005 249,814 249,785
Other 10,000 10,939
- -------------------------------------------------------------
TOTAL PARENT COMPANY 1,123,960 1,124,620
- -------------------------------------------------------------
6.50% Subordinated Notes due 2003 199,675 199,600
7.25% Subordinated Notes due 2010 223,107 222,944
6.30% Subordinated Notes due 2011 200,000 200,000
7.25% Subordinated Notes due 2011 197,475 197,278
Other 1,475 3,133
- -------------------------------------------------------------
TOTAL SUBSIDIARY SUBORDINATED NOTES 821,732 822,955
- -------------------------------------------------------------
TOTAL LONG-TERM DEBT QUALIFYING FOR
TIER II CAPITAL 1,945,692 1,947,575
Senior Bank Notes 4,992,219 2,394,055
Federal Home Loan Bank Advances 2,063,207 1,303,721
Other 8,330 1,951
- -------------------------------------------------------------
TOTAL OTHER LONG-TERM DEBT 7,063,756 3,699,727
- -------------------------------------------------------------
TOTAL $9,009,448 $5,647,302
- -------------------------------------------------------------
All of the subordinated notes of the parent and bank subsidiaries pay
interest semi-annually and may not be redeemed prior to maturity.
Long-term advances from the Federal Home Loan Bank (FHLB) are at fixed and
variable rates and mature at various dates through 2023. The weighted average
interest rate of the advances as of December 31, 1998 and 1997 was 5.45% and
5.97%, respectively. 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 2078. The weighted average interest rate of the notes as of
December 31, 1998 and 1997 was 5.60% and 6.14%, 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.
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,
1998.
Long-term debt maturities for the next five years are as follows: $1,483
million in 1999; $2,173 million in 2000; $152 million in 2001; $527 million in
2002; and $1,238 million in 2003.
11. CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY DEBENTURES OF THE CORPORATION
December 31
- ------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- ------------------------------------------------------------
Capital Securities of National City
Capital Trust I $499,895 $499,892
Capital Securities of First of America
Capital Trust I 150,000 150,000
Capital Securities of Fort Wayne
Capital Trust I 30,000 --
- ------------------------------------------------------------
TOTAL $679,895 $649,892
- ------------------------------------------------------------
The corporation-obligated mandatorily redeemable capital securities (the capital
securities) of subsidiary trusts holding solely junior subordinated debt
securities of the Corporation (the debentures) were issued by three statutory
business trusts -- First of America Capital Trust I, Fort Wayne Capital Trust I
and National City Capital Trust I, of which 100% of the common equity in each of
the trusts is owned by the Corporation. The trusts were formed for the purpose
of issuing the capital securities and investing the proceeds from the sale of
such capital securities in the debentures. The debentures held by each trust are
the sole assets of that trust. Distributions on the capital securities issued by
each trust are payable semi-annually at a rate per annum equal to the interest
rate being earned by the trust on the debentures held by that trust and are
recorded as interest expense by the Corporation. The capital securities are
subject to mandatory redemption, in whole or in part, upon repayment of the
debentures. The Corporation has entered into agreements which, taken
collectively, fully and unconditionally guarantee the capital securities subject
to the terms of each of the guarantees.
The debentures held by First of America Capital Trust I have a stated
maturity of January 31, 2027 and an interest rate of 8.12%. These debentures are
first redeemable, in whole or in part, by the Corporation on January 31, 2007.
The capital securities issued by First
32
35
of America Capital Trust I qualify as Tier 1 capital under Federal Reserve Board
guidelines.
The debentures held by the Fort Wayne Capital Trust I have a stated maturity
of April 15, 2027 and an interest rate of 9.85%. These debentures are first
redeemable, in whole or in part, by the Corporation on April 15, 2007. The
Capital Securities issued by Fort Wayne Capital Trust I qualify as Tier 1
capital.
The debentures held by National City Capital
Trust I have a stated maturity of June 1, 2029 and an interest rate of 6.75%.
These debentures are first redeemable by the Corporation on June 1, 1999. If the
debentures are not redeemed on June 1, 1999, the interest rate per annum will be
reset based on an interest rate auction at that time. The capital securities
issued by National City Capital Trust I currently do not qualify as Tier 1
capital.
12. CAPITAL RATIOS
The following table reflects various measures of capital at year-end:
1998 1997
(Dollars in ---------------- ----------------
MILLIONS) AMOUNT Ratio Amount Ratio
- --------------------------------------------------------
Total equity(1) $7,012.9 7.95% $6,158.3 8.13%
Total common
equity(1) 6,976.8 7.91 6,158.3 8.13
Tangible common
equity(2) 5,850.6 6.72 5,595.3 7.44
Tier 1 capital(3) 5,538.5 7.74 5,435.1 8.93
Total risk-based
capital(4) 8,307.4 11.61 8,013.4 13.16
Leverage(5) 5,538.5 6.69 5,435.1 7.58
- --------------------------------------------------------
(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; computed as a ratio to
total assets less intangible assets.
(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.
- ------------------------------------------------------------
The parent company and its banking subsidiaries must meet specific capital
requirements that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as set forth by banking industry regulators.
Failure to meet minimum capital requirements can result in certain mandatory and
possible additional discretionary actions by regulators that could have a
material effect on a bank's operations. National City's Tier 1, total risk-based
capital and leverage ratios are well above the required minimum capital levels
of 4.00%, 8.00% and 4.00%, respectively. The capital levels at all of National
City's subsidiary banks are maintained at or above the well-capitalized minimums
of 6.00%, 10.00% and 5.00% for the Tier 1 capital, total risk-based capital and
leverage ratios, respectively. As of December 31, 1998, National City and each
of its affiliate banks were categorized as well-capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
December 31, 1998 that management believes have changed any entity's capital
category.
Intangible asset totals used in the capital ratio calculations are summarized
below:
December 31
- --------------------------------------------------------------
(DOLLARS IN MILLIONS) 1998 1997
- --------------------------------------------------------------
Goodwill $1,043.3 $544.9
Other intangibles 82.9 18.1
-------- ------
Total intangibles $1,126.2 $563.0
- --------------------------------------------------------------
13. OTHER CAPITAL TRANSACTIONS
As part of the acquisition of Fort Wayne National Corporation (FWNC), National
City issued 739,976 shares of 6% Cumulative Convertible Preferred Stock, Series
1 in exchange for all of the outstanding shares of FWNC's 6% Cumulative
Convertible Class B Preferred Stock. The preferred shares have a stated value of
$50 per share. The holders of the preferred shares are entitled to receive
cumulative preferred dividends payable quarterly at the annual rate of 6%. The
preferred shares may be redeemed by National City at its option at any time, or
from time to time, on or after April 1, 2002 at $50 per share, plus accrued and
unpaid dividends. Such redemption may be subject to prior approval by the
Federal Reserve Bank. Holders of the preferred shares have the right, at any
time at their option, to convert each share of preferred stock into 1.51455
shares of National City common stock.
On October 26, 1998, the board of directors authorized the repurchase of up
to 30 million shares of National City common stock in the open market or through
privately negotiated transactions subject to an aggregate purchase limit of $2.7
billion. Five million shares were repurchased during the fourth quarter of 1998.
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.
33
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. NET INCOME PER COMMON SHARE
The calculation of net income per common share follows:
For the Calendar Year
- -------------------------------------------------------------------
(Dollars in Thousands
EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- -------------------------------------------------------------------
BASIC:
Net income $1,070,681 $1,122,194 $993,516
Less preferred
dividends 2,182 -- 4,028
- -------------------------------------------------------------------
Net income applicable to
common stock $1,068,499 $1,122,194 $989,488
- -------------------------------------------------------------------
Average common shares
outstanding 326,005,752 322,233,892 329,548,231
- -------------------------------------------------------------------
Net income per common
share -- basic $3.28 $3.48 $3.00
- -------------------------------------------------------------------
DILUTED:
Net income $1,070,681 $1,122,194 $993,516
- -------------------------------------------------------------------
Average common shares
outstanding 326,005,752 322,233,892 329,548,231
Stock option adjustment 6,020,125 5,498,692 4,321,731
Preferred stock
adjustment 834,288 -- 2,679,175
- -------------------------------------------------------------------
Average common shares
outstanding -- diluted 332,860,165 327,732,584 336,549,137
- -------------------------------------------------------------------
Net income per common
share -- diluted $3.22 $3.42 $2.95
- -------------------------------------------------------------------
15. PARENT COMPANY AND REGULATORY RESTRICTIONS
At December 31, 1998, retained earnings of the parent company included $3,857.9
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 1998, subsidiary banks declared $752.2
million in dividends to the parent company. The subsidiary banks can initiate
dividend payments in 1999, without prior regulatory approval, of $904.6 million,
plus an additional amount equal to their net profits for 1999, 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 ($392.9 million outstanding at
December 31, 1998) are guaranteed by the parent company.
Condensed parent company financial statements, which include transactions
with subsidiaries, follow:
BALANCE SHEETS
December 31
- ---------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------
ASSETS
Cash and demand balances
due from banks $ 192,499 $ 96,817
Loans to and accounts receivable
from subsidiaries 130,134 743,554
Securities 1,093,694 1,469,740
Investments in:
Subsidiary banks 7,058,754 5,111,422
Nonbank subsidiaries 511,087 535,117
Goodwill, net of accumulated
amortization 97,039 119,193
Other assets 241,827 300,458
- ---------------------------------------------------------------
TOTAL ASSETS $9,325,034 $8,376,301
- ---------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Corporate long-term debt $1,659,056 $1,624,512
Accrued expenses and other
liabilities 653,070 593,529
- ---------------------------------------------------------------
Total liabilities 2,312,126 2,218,041
Stockholders' equity 7,012,908 6,158,260
- ---------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $9,325,034 $8,376,301
- ---------------------------------------------------------------
STATEMENTS OF INCOME
For the Calendar Year
- -----------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------
INCOME
Dividends from:
Subsidiary banks $ 752,217 $ 664,348 $ 940,300
Nonbank subsidiaries 21,000 4,318 10,420
Interest on loans to
subsidiaries 28,034 23,153 10,810
Interest and dividends
on securities 33,590 38,268 27,511
Securities gains 109,906 65,929 93,720
Other income 13,588 212,169 139,847
- -----------------------------------------------------------------
TOTAL INCOME 958,335 1,008,185 1,222,608
- -----------------------------------------------------------------
EXPENSE
Interest on debt and
other borrowings 129,586 118,556 97,918
Goodwill amortization 7,389 7,672 8,165
Other expense 310,108 328,213 312,127
- -----------------------------------------------------------------
TOTAL EXPENSE 447,083 454,441 418,210
- -----------------------------------------------------------------
Income before taxes and
equity in undistributed
income of subsidiaries 511,252 553,744 804,398
Income tax (benefit) (60,621) (68,657) (99,507)
- -----------------------------------------------------------------
Income before equity in
undistributed net
income
of subsidiaries 571,873 622,401 903,905
Equity in undistributed
net
income of subsidiaries 498,808 499,793 89,611
- -----------------------------------------------------------------
NET INCOME $1,070,681 $1,122,194 $ 993,516
- -----------------------------------------------------------------
34
37
STATEMENTS OF CASH FLOWS
For the Calendar Year
- -----------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,070,681 $1,122,194 $993,516
Adjustments to reconcile
net income to net cash
provided
by operating activities:
Equity in undistributed net
income of subsidiaries (498,808) (499,793) (89,611)
Amortization of goodwill 7,389 7,672 8,165
Depreciation of premises
and equipment 1,596 18,286 21,507
Decrease (increase) in
dividends receivable from
subsidiaries 35,000 223,820 (114,820)
Securities gains (109,906) (65,929) (93,720)
Other, net (104,770) 105,173 (146,870)
- -----------------------------------------------------------------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 401,182 911,423 578,167
- -----------------------------------------------------------------
INVESTING ACTIVITIES
Net change in short-term
money market investments 446,003 (155,861) 29,065
Purchases of securities (577,267) (161,758) (260,765)
Sales and maturities of
securities 460,391 139,251 199,324
Net sales of premises and
equipment -- (12,057) 4,765
Principal collected on
loans to subsidiaries 260,721 594,820 8,524
Loans to subsidiaries (233,147) (741,689) (54,628)
Investment in subsidiaries (192,707) 9,948 --
Return of investment
from subsidiaries 310,000 495,000 198,000
Sale of subsidiary -- 160,000 --
- -----------------------------------------------------------------
NET CASH PROVIDED
BY INVESTING ACTIVITIES 473,994 327,654 124,285
- -----------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of corporate
long-term debt (15,043) (129,023) (123,081)
Proceeds from issuance
of long-term debt -- 345,360 --
Decrease in other
borrowings (25,555) (1,163) (44,052)
Common and preferred
dividends (596,193) (477,931) (425,572)
Issuance of common stock 205,005 79,996 57,819
Repurchase of stock (347,708) (973,745) (175,110)
Shares distributed by ESOP -- -- 2,741
- -----------------------------------------------------------------
NET CASH (USED)
BY FINANCING ACTIVITIES (779,494) (1,156,506) (707,255)
- -----------------------------------------------------------------
Increase (decrease) in cash
and demand balances due
from banks 95,682 82,571 (4,803)
Cash and demand balances
due from banks, January 1 96,817 14,246 19,049
- -----------------------------------------------------------------
Cash and demand balances
due from banks,
December 31 $ 192,499 $ 96,817 $ 14,246
- -----------------------------------------------------------------
For the Calendar Year
- -----------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 132,590 $ 117,917 $ 95,402
Securities transferred from
subsidiaries -- -- (248,234)
Shares issued in purchase
acquisitions 639,660 9,714 3,888
- -----------------------------------------------------------------
16. 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 18,600,000 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 became exercisable in 1998.
The remaining two thirds become exercisable in each of the years 1999 and 2000.
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 within a four-year period. The Corporation generally recognizes
compensation expense over the restricted period. Compensation expense recognized
in 1998, 1997 and 1996 totaled $5.8 million, $3.2 million and $2.0 million,
respectively, related to shares issued under this plan.
35
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 1996 6,639,352 290,690 15,913,471 $24.54
Authorized 3,600,000 -- --
Cancelled 125,368 (11,300) (838,718) 29.21
Exercised -- (49,532) (3,350,988) 19.83
Granted (4,634,317) 237,377 5,015,803 33.69
- ----------------------------------------------------------------------
December 31, 1996 5,730,403 467,235 16,739,568 28.32
Authorized 16,500,000 -- --
Cancelled 151,415 (23,059) (173,999) 34.56
Exercised -- (77,803) (3,410,405) 21.71
Granted (3,877,279) 215,579 4,114,268 53.36
- ----------------------------------------------------------------------
December 31, 1997 18,504,539 581,952 17,269,432 33.66
Authorized -- -- --
Options acquired -- -- 498,559
FOA shares
cancelled (1,667,998) -- --
Cancelled 151,796 (16,048) (334,248) 41.29
Exercised -- (134,861) (4,321,888) 29.15
Granted (4,447,599) 249,705 4,762,723 68.20
- ----------------------------------------------------------
DECEMBER 31, 1998 12,540,738 680,748 17,874,578 $43.82
- ----------------------------------------------------------------------
At December 31, 1998, 1997 and 1996, options exercisable under National City
option plans totaled 9,343,619, 8,998,700, and 8,781,620 shares, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1998.
- -------------------------------------------------------------------------------
Weighted
Average
Weighted Remaining Weighted
Average Contractual Average
Range of Exercise Life Exercise
Exercise Prices Outstanding Price (in years) Exercisable Price
- -------------------------------------------------------------------------------
$6.94-23.99 2,314,846 $18.33 2.7 2,314,846 $18.34
24.00-34.99 6,862,029 30.55 6.5 4,548,110 29.95
35.00-44.99 653,334 36.76 4.9 653,334 36.76
45.00-54.99 651,030 47.93 7.0 582,152 47.67
55.00-64.99 2,870,740 57.74 8.2 1,118,261 57.68
65.00-74.69 4,522,599 68.46 9.3 126,916 70.43
- -------------------------------------------------------------------------------
Total 17,874,578 $43.82 9,343,619 $30.83
- -------------------------------------------------------------------------------
PRO FORMA DISCLOSURES: For purposes of providing the pro forma disclosures
required under SFAS No. 123, the fair value of stock options granted in 1996,
1997 and 1998 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 4.54%, 5.70% and 6.04% for 1998, 1997 and
1996, respectively; an expected life of the option of 3.9 years for 1998 and
1997, and 4.2 years for 1996; an expected dividend yield of 3.00% for 1998,
3.50% for 1997 and 3.80% for 1996; and a volatility factor of .208 for 1998,
.194 for 1997 and .206 for 1996. The weighted-average grant date fair value of
options granted during 1998, 1997 and 1996 was $11.21, $9.12 and $6.41,
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) 1998 1997 1996
- ------------------------------------------------------------------
Pro forma net income $1,043,044 $1,103,911 $981,962
Pro forma earnings per share:
Basic $3.19 $3.43 $2.97
Diluted 3.13 3.37 2.92
- ------------------------------------------------------------------
Due to the inclusion of only 1996, 1997 and 1998 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.
17. PENSION AND OTHER POSTRETIREMENT BENEFIT 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.
National City also has a benefit plan which offers post-retirement medical
and life insurance benefits. The medical portion of the plan is contributory and
the life insurance coverage is noncontributory to the participants. The
Corporation has no plan assets attributable to the plan and funds the benefits
as claims arise. Post-retirement benefit costs are recognized in the periods
during which employees provide service for such benefits. The Corporation
reserves the right to terminate or make plan changes at any time.
36
39
The following table summarizes benefit obligation and plan asset activity for
each of the plans.(1)
- ---------------------------------------------------------------------------
Other Post-
Retirement
Pension Benefits Benefits
----------------------- --------------------
(DOLLARS IN THOUSANDS) 1998 1997 1998 1997
- ---------------------------------------------------------------------------
Change in Fair Value of Plan Assets:
Balance at beginning of
measurement period $1,246,944 $1,074,997 $ -- $ --
Actual return on plan
assets 54,979 230,693 -- --
Employer contribution -- 79 6,879 6,233
Participant contribution -- -- 3,452 3,224
Settlements -- (2,513) -- --
Expenses paid (1,150) (1,323) -- --
Benefits paid (43,001) (54,989) (10,331) (9,457)
Acquisitions 36,745 -- -- --
- ---------------------------------------------------------------------------
Balance at end of
measurement period 1,294,517 1,246,944 -- --
- ---------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Balance at beginning of
measurement period 922,003 889,287 105,958 100,937
Service cost 31,180 39,328 2,072 2,521
Interest costs 63,924 66,594 7,363 7,752
Participant contribution -- -- 3,452 3,224
Actuarial (gains) losses 51,747 (23,279) 3,559 1,779
Settlements -- 3,245 -- --
Prior service cost -- 1,817 (4,017) (798)
Benefits paid (43,001) (54,989) (10,331) (9,457)
Acquisitions 27,936 -- -- --
Plan amendment (95,797) -- (904) --
- ---------------------------------------------------------------------------
Balance at end of
measurement period 957,992 922,003 107,152 105,958
- ---------------------------------------------------------------------------
Funded status 336,525 324,941 (107,152) (105,958)
Unamortized prior service
cost (73,766) 18,568 (2,722) 647
Unrecognized net actuarial
loss (162,456) (263,738) 8,525 5,994
Unrecognized net obligation (20,155) (25,934) 23,363 25,287
- ---------------------------------------------------------------------------
Prepaid (accrued) benefit
cost $ 80,148 $ 53,837 $ (77,986) $(74,030)
- ---------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS FOR THE MEASUREMENT PERIOD
Discount rate 6.70% 7.25-7.50% 6.70% 7.50%
Rate of compensation
increase 2.75-7.50 2.75-7.50 2.75-7.50 5.00
Expected return on plan
assets 10.00 9.50-10.00 -- --
- ---------------------------------------------------------------------------
Plan assets of the defined benefit retirement plan consisted primarily of
marketable equity securities and bonds, including $43.3 million and $33.5
million of National City common stock at December 31, 1998 and 1997,
respectively.
National City adopted a cash balance plan formula for the pension plan in the
first quarter of 1998 resulting in a decrease of $95.8 million in the pension
benefit obligation and a reduction of $14.9 million in pension costs during
1998. National City adopted an age-graded rate of compensation increase
assumption in 1997 that did not have a material impact on the pension benefit
obligation or pension costs.
Components of net defined benefit pension plan and post-retirement benefit
plan costs follow:(1)
- ----------------------------------------------------------------
Pension Benefits
-------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------
Service cost $ 34,192 $ 39,328 $ 35,338
Interest cost 64,753 66,594 61,431
Expected return on plan assets (110,585) (94,774) (83,060)
Amortization of prior service
cost (3,454) 1,789 2,546
Transition obligation (5,778) (5,952) (5,735)
Recognized net actuarial (loss) (6,531) (5,288) (1,780)
- ----------------------------------------------------------------
Net periodic (benefit) cost $ (27,403) $ 1,697 $ 8,740
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Other Post-Retirement
Benefits
-------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------
Service cost $ 2,072 $ 2,521 $ 2,247
Interest cost 7,363 7,752 7,322
Amortization of prior service
cost (648) (397) (586)
Transition obligation 1,923 1,923 1,923
Recognized net actuarial gain 125 54 96
- ----------------------------------------------------------------
Net periodic cost $ 10,835 $ 11,853 $ 11,002
- ----------------------------------------------------------------
(1) Using a measurement date of October 31, 1998 for the pension plans and
December 31, 1998 and 1997 for the postretirement plans. Various measurement
dates were used for pension plans in 1997 and 1996.
The health care trend rate assumption only affects those participants retired
under the plan prior to April 1, 1989. The 1998 health care trend rate is
projected to be 9.5 percent for participants under age 65 and 6.5 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 one percentage point change in the
trend rate is not material in the determination of the accumulated
postretirement benefit obligation or the ongoing expense.
The Corporation also maintains nonqualified supplemental retirement plans for
certain key employees. All benefits provided under these plans are unfunded and
any payments to plan participants are made by the Corporation. At December 31,
1998 and 1997, approximately $53.6 million and $41.5 million, respectively, were
included in accrued expenses and other liabilities for these plans. For the
years ended December 31, 1998, 1997 and 1996, expenses related to these plans
was $24.9 million, $9.5 million and $20.2 million, respectively. The expense for
1998 and 1996 includes a $14.4 million and $11.4 million
37
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
curtailment charge relating to supplemental executive retirement plans for
former key employees of First of America and Integra Financial Corporation,
respectively.
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 1998, 1997 and 1996,
the expense related to this plan was $39.2 million, $40.4 million and $13.9
million, respectively. Contributions made in the form of National City shares by
an ESOP reduced expense in 1996.
18. INCOME TAXES
The composition of income tax expense (benefit) follows:
- -------------------------------------------------------------
For the Calendar Year
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------
Current:
Federal $340,074 $394,864 $442,193
State 6,429 9,194 25,113
- -------------------------------------------------------------
Total current 346,503 404,058 467,306
Deferred:
Federal 222,194 107,267 (18,625)
State 7,899 6,514 (410)
- -------------------------------------------------------------
Total deferred 230,093 113,781 (19,035)
- -------------------------------------------------------------
Tax expense $576,596 $517,839 $448,271
- -------------------------------------------------------------
Tax expense applicable
to securities
transactions $ 47,061 $ 28,484 $ 38,028
- -------------------------------------------------------------
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
1998 1997 1996
- -----------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
Life insurance (2.0) (1.2) (1.6)
Tax-exempt income (1.6) (1.7) (1.8)
Merger charges and
goodwill 3.0 .9 1.2
Other .6 (1.4) (1.7)
- -----------------------------------------------
EFFECTIVE TAX RATE 35.0% 31.6% 31.1%
- -----------------------------------------------
Significant components of deferred tax liabilities and assets as of December
31 are as follows:
- -------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- -------------------------------------------------------------
Deferred tax liabilities:
Mortgage Servicing $125,644 $ 41,076
Lease accounting 357,713 214,901
Depreciation 8,711 28,304
Mark to market adjustments 139,467 181,761
Other - net 123,899 95,404
- -------------------------------------------------------------
Total deferred tax liabilities 755,434 561,446
Deferred tax assets:
Provision for losses 338,831 333,124
Employee benefits 24,737 39,801
Other - net 134,813 132,055
- -------------------------------------------------------------
Total deferred tax assets 498,381 504,980
- -------------------------------------------------------------
Net deferred tax liability $257,053 $ 56,466
- -------------------------------------------------------------
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, 1998, these
collateral agreements covered 90.3% 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 $148 million from various counterparties to
collateralize unrealized gains. The Corporation has never experienced a credit
loss associated with any interest rate derivative.
38
41
INTEREST RATE RISK MANAGEMENT: On December 31, 1998, the total notional
amount of the interest rate swap portfolio used to manage interest rate
sensitivity was $11.3 billion, which is an increase of $2.9 billion from
December 31, 1997. 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. During 1998, the Corporation
entered into $600 million of receive fixed and receive fixed cancelable interest
rate swaps to hedge the issuance of fixed rate funding products and $975 million
of receive fixed and receive fixed cancelable interest rate swaps to convert
portions of its variable rate loan portfolios into synthetic fixed rate loans.
During 1998, $1.5 billion of receive fixed interest rate swaps matured or
amortized, $525 million of indexed amortizing receive fixed interest rate swaps
matured or amortized and $575 million of receive fixed and receive fixed or
cancelable interest rate swaps were terminated prior to maturity. These
terminations generated pre-tax net gains of $6.4 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 1998, the Corporation entered into $2.2 billion of pay fixed interest
rate swaps, primarily to hedge fixed rate commercial loans and investment
securities. During 1998, $251 million of pay fixed interest rate swaps were
terminated prior to maturity. These terminations generated pre-tax net losses of
$1.3 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
1998, the Corporation purchased $1.0 billion three-month Eurodollar caps with
maturities of two years and an average strike rate of 6.5%.
The Corporation uses basis swaps to manage the short term repricing risk of
variable rate assets and liabilities. During 1998, the Corporation entered into
$1.5 billion of three-month to one-month libor basis swaps and $400 million of
libor to commercial paper basis swaps to reduce the repricing risk in the
funding of its variable rate loan portfolio.
On December 31, 1998, the Corporation had $14.3 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 interest rate risk management purposes follows:
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, 1998
-------------------------------------------------------------------------
Weighted Average
--------------------------------- December 31, 1997
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 $ 3,724,000 $116,660 $ (447) 6.39% 5.28% -- 3.0 $ 3,266,000
Pay fixed swaps 2,894,120 3,854 (59,123) 5.29 5.81 -- 5.3 895,754
Basis swaps 2,251,000 813 (464) 5.53 5.33 -- 3.0 325,000
Receive fixed callable swaps 1,867,000 37,724 (631) 6.62 5.44 -- 1.6 2,842,000
Receive fixed indexed amortizing
swaps 509,319 1,074 -- 5.72 5.32 -- 1.1 1,034,493
Pay fixed callable swaps 82,968 -- (3,359) 5.55 6.35 -- 4.6 53,588
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps 11,328,407 160,125 (64,024) 8,416,835
INTEREST RATE CAPS AND FLOORS:
Three-month Eurodollar caps
purchased 1,570,000 -- (1,902) -- -- 6.77% 1.3 500,000
Three-month Eurodollar
floors purchased 1,010,000 15,477 -- -- -- 5.78 2.7 1,400,000
One-month Eurodollar caps
purchased 3,814 -- (101) -- -- 9.00 13.2 3,971
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest rate caps and
floors 2,583,814 15,477 (2,003) 1,903,971
INTEREST RATE FUTURES:
Futures sold 2,673,000 66 (118) -- -- -- -- 749,000
Futures purchased 379,000 28 (44) -- -- -- -- 212,000
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest rate futures 3,052,000 94 (162) 961,000
INTEREST RATE CORRIDORS PURCHASED:
1% Payout corridors -- -- -- -- -- -- -- 500,000
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps,
caps, floors, corridors &
futures $16,964,221 $175,696 $(66,189) $11,781,806
- ---------------------------------------------------------------------------------------------------------------------------------
39
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 on page 39 are those in effect in the specific contracts at December 31,
1998.
The following table details the expected notional maturities of off-balance
sheet instruments used for interest-rate risk management at December 31, 1998:
- ------------------------------------------------------------------------------------------------------------------------------
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 $2,345,000 $2,545,319 $ 525,000 $ 260,000 $425,000
Pay fixed swaps 150,000 695,475 863,472 1,223,334 44,807
Basis swaps -- 1,725,000 526,000 -- --
Floors purchased 320,000 150,000 490,000 -- 50,000
Caps purchased -- 1,550,000 20,000 -- 3,814
Futures sold 796,000 1,042,000 525,000 310,000 --
Futures purchased 90,000 9,000 47,000 233,000 --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $3,701,000 $7,716,794 $2,996,472 $2,026,334 $523,621
- ------------------------------------------------------------------------------------------------------------------------------
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, 1998
------------------------------------------------------------------------
Weighted Average
--------------------------------- December 31, 1997
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 $1,688,000 $ 32,716 $ (2,288) 5.79% 5.28% -- 6.0 $ 708,000
Principal only swaps 422,685 66,910 (8,714) -- 5.70 -- 2.4 141,715
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps 2,110,685 99,626 (11,002) 849,715
INTEREST RATE CAPS AND FLOORS:
Ten-year U.S. Treasury caps
purchased 1,550,000 1,171 (1,652) -- -- 6.85% 3.8 225,000
Ten-year U.S. Treasury floors
purchased 840,662 8,084 -- -- -- 4.13 1.4 1,015,662
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest rate caps and
floors 2,390,662 9,255 (1,652) 1,240,662
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps,
caps and floors $4,501,347 $108,881 $(12,654) $2,090,377
- ---------------------------------------------------------------------------------------------------------------------------------
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, 1998, the total notional amount of interest rate derivative
contracts held for trading was $5.0 billion with a net market value of $18.6
million compared to $3.2 billion in notional and a net market value of $5.5
million at December 31, 1997. Trading revenue from derivatives totaled $15.1
million, $2.4 million and $3.4 million in 1998, 1997 and 1996, respectively.
All off-balance sheet contracts in the preceding tables are valued using cash
flow projection models either acquired from third parties or developed
40
43
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, 1998.
OTHER OFF-BALANCE SHEET COMMITMENTS: The Corporation also enters into forward
contracts related to its mortgage banking business. At December 31, 1998 and
1997, the Corporation had commitments to sell mortgages and mortgage-backed
securities totaling $5.2 billion and $1.9 billion, 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) 1998 1997
- --------------------------------------------------------------
Commitments to extend credit $36,073 $34,016
Standby letters of credit 3,227 2,938
- --------------------------------------------------------------
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.
20. OTHER CONTINGENT LIABILITIES
The Corporation or its subsidiaries are involved in a number of legal
proceedings arising out of their businesses and regularly face various claims,
including unasserted claims, which may ultimately result in litigation. While in
management's opinion the financial statements would not be materially affected
by the outcome of any present legal proceedings, commitments, or asserted
claims, management is aware of a potential claim, currently unasserted, by the
Internal Revenue Service concerning the Corporation's corporate-owned life
insurance programs. While the exact nature of the potential claim is unknown,
management believes that it has complied with all applicable tax laws and
regulations with respect to such programs and will vigorously contest any claim.
21. LINE OF BUSINESS REPORTING
National City operates three major lines of business. Corporate Banking includes
lending and related financial services to large and medium-sized corporations.
Retail Banking includes sales and distribution (direct lending,
deposit-gathering, and small business services) and consumer finance. Fee-Based
Businesses consists of mortgage banking, institutional trust, personal wealth
management, and item processing (conducted through National Processing, Inc).
The business units are identified by the products or services offered by the
business unit and the channel through which the product or service is delivered.
The accounting policies of the individual business units are the same as those
of the Corporation described in Note 1.
The reported results reflect the underlying economics of the businesses.
Expenses for centrally provided services are allocated based upon estimated
usage of those services. The portion of the provision for loan losses that is
not related to specific loans is allocated to the business unit based upon
factors such as loan growth and net chargeoffs for the unit among other
qualitative factors. The business units are match-funded and interest rate risk
is centrally-managed by an investment/funding unit within the "Parent and other"
line item. Transactions between business units are primarily conducted at fair
value, resulting in profits that are eliminated for reporting consolidated
results of operations.
Parent and other is comprised of several smaller business units including
venture capital and the investment/funding unit as well as inter-segment income
elimination and unallocated expenses. Selected segment information is included
in the table on the following page.
41
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CORPORATE RETAIL FEE-BASED PARENT CONSOLIDATED
(DOLLARS IN THOUSANDS) BANKING BANKING BUSINESSES AND OTHER TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
1998
Net interest income (taxable equivalent) $666,765 $2,239,997 $ 122,215 $(77,104) $2,951,873
Provision for loan losses 16,378 227,628 2,074 (44,680) 201,400
-------- ---------- ---------- --------- ----------
Net interest income after provision 650,387 2,012,369 120,141 (32,424) 2,750,473
Noninterest income 171,610 653,690 1,227,922 260,920 2,314,142
Noninterest expense 320,172 1,533,656 1,020,484 502,801 3,377,113
-------- ---------- ---------- --------- ----------
Income (loss) before income taxes 501,825 1,132,403 327,579 (274,305) 1,687,502
Income tax expense (benefit) 177,814 408,773 116,813 (86,579) 616,821
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $324,011 $ 723,630 $ 210,766 $(187,726) $1,070,681
- -------------------------------------------------------------------------------------------------------------------------------
Inter-segment revenue (expense) $ -- $ 20,771 $ 51,302 $(72,073) $ --
- -------------------------------------------------------------------------------------------------------------------------------
Average assets (In Millions) $ 19,676 $ 37,056 $ 1,958 $ 21,363 $ 80,053
- -------------------------------------------------------------------------------------------------------------------------------
1997
Net interest income (taxable equivalent) $613,752 $2,173,125 $ 94,610 $(28,152) $2,853,335
Provision for loan losses 43,698 200,280 1,607 (20,218) 225,367
-------- ---------- ---------- --------- ----------
Net interest income after provision 570,054 1,972,845 93,003 (7,934) 2,627,968
Noninterest income 150,500 611,302 900,937 184,893 1,847,632
Noninterest expense 317,956 1,511,289 783,567 179,758 2,792,570
-------- ---------- ---------- --------- ----------
Income (loss) before income taxes 402,598 1,072,858 210,373 (2,799) 1,683,030
Income tax expense (benefit) 145,613 389,236 76,453 (50,466) 560,836
- -------------------------------------------------------------------------------------------------------------------------------
Net income $256,985 $ 683,622 $ 133,920 $ 47,667 $1,122,194
- -------------------------------------------------------------------------------------------------------------------------------
Inter-segment revenue (expense) $ -- $ 5,200 $ 18,972 $(24,172) $ --
- -------------------------------------------------------------------------------------------------------------------------------
Average assets (In Millions) $ 15,561 $ 36,472 $ 1,507 $ 18,402 $ 71,942
- -------------------------------------------------------------------------------------------------------------------------------
1996
Net interest income (taxable equivalent) $603,930 $2,253,319 $ 79,201 $(52,943) $2,883,507
Provision for loan losses 57,793 202,731 1,869 (22,457) 239,936
-------- ---------- ---------- --------- ----------
Net interest income after provision 546,137 2,050,588 77,332 (30,486) 2,643,571
Noninterest income 131,634 574,052 794,920 136,531 1,637,137
Noninterest expense 325,186 1,614,680 677,482 183,130 2,800,478
-------- ---------- ---------- --------- ----------
Income (loss) before income taxes 352,585 1,009,960 194,770 (77,085) 1,480,230
Income tax expense (benefit) 126,056 364,059 72,986 (76,387) 486,714
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $226,529 $ 645,901 $ 121,784 $ (698) $ 993,516
- -------------------------------------------------------------------------------------------------------------------------------
Inter-segment revenue (expense) $ -- $ 3,951 $ 7,657 $(11,608) $ --
- -------------------------------------------------------------------------------------------------------------------------------
Average assets (In Millions) $ 14,283 $ 37,042 $ 1,284 $ 18,315 $ 70,924
- -------------------------------------------------------------------------------------------------------------------------------
42
45
QUARTERLY DATA
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 1998 was $291.3 million, or $.88 per
diluted share, compared to $292.1 million or $.90 per diluted share for the same
period last year. Net income, excluding merger and restructuring expenses,
increased 19.2% to $359.3 million, or $1.06 per diluted share, compared to
$301.5 million, or $.93 per diluted share, for the same period last year.
Excluding merger and restructuring costs, the increase was due mainly to higher
net interest and noninterest revenues. Merger and restructuring expenses were
$104.7 million in the fourth quarter of 1998 and $26.3 million in the fourth
quarter of 1997.
For the fourth quarter of 1998, excluding merger and restructuring expenses,
return on average common equity and average assets was 19.43% and 1.69%,
respectively, compared to 18.67% and 1.59%, respectively, for the fourth quarter
of 1997.
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly results:
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Amounts) First Second Third Fourth Full Year
- ---------------------------------------------------------------------------------------------------------------------------------
1998
Interest income $1,368,645 $1,445,291 $1,470,482 $1,472,259 $5,756,677
Interest expense 670,670 715,168 734,117 725,074 2,845,029
Net interest income 697,975 730,123 736,365 747,185 2,911,648
Provision for loan losses 56,267 43,033 45,212 56,888 201,400
Securities gains 1,052 19,714 64,451 49,242 134,459
Net overhead 480,230 195,049 226,883 295,268 1,197,430
Income before income taxes 162,530 511,755 528,721 444,271 1,647,277
Net income 103,722 331,244 344,456 291,259 1,070,681
Net income before merger and restructuring expense 297,607 331,244 344,456 359,301 1,332,608
Basic net income per common share .33 1.01 1.05 .89 3.28
Diluted net income per common share .32 .99 1.03 .88 3.22
Diluted net income per common share before merger
and restructuring expense .92 .99 1.03 1.06 4.00
Dividends paid per common share .46 .46 .48 .48 1.88
- ---------------------------------------------------------------------------------------------------------------------------------
1997
Interest income $1,297,687 $1,341,559 $1,362,559 $1,360,707 $5,362,512
Interest expense 605,208 633,819 651,378 661,769 2,552,174
Net interest income 692,479 707,740 711,181 698,938 2,810,338
Provision for loan losses 58,697 54,580 59,186 52,904 225,367
Securities gains 15,951 31,177 53 34,058 81,239
Net overhead 239,818 286,546 236,481 263,332 1,026,177
Income before income taxes 409,915 397,791 415,567 416,760 1,640,033
Net income 275,567 271,430 283,053 292,144 1,122,194
Net income before merger and restructuring expense 279,434 293,075 283,053 301,520 1,157,082
Basic net income per common share .84 .84 .88 .92 3.48
Diluted net income per common share .82 .83 .87 .90 3.42
Diluted net income per common share before merger
and restructuring expense .83 .90 .87 .93 3.53
Dividends paid per common share .41 .41 .425 .425 1.67
- ---------------------------------------------------------------------------------------------------------------------------------
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 1998 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, 1998.
[ ] 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)
6% Cumulative Convertible Preferred Stock,
stated value -- $50 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. X
The aggregate market value of the voting stocks held by nonaffiliates of the
registrant as of December 31, 1998 - $23,489,149,140
The number of shares outstanding of each of the registrant's classes of common
stock, as of December 31, 1998.
Common Stock, $4.00 Per Share -- 326,327,360
Documents Incorporated By Reference:
Portions of the registrant's Proxy Statement (to be dated approximately March 5,
1999) 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 18-19
Volume and Rate Variance Analysis 7
Securities 10
Loans 9-10
Risk Elements of Loan Portfolio 11-12
Interest-bearing liabilities 12, 18-19
Financial Ratios 17
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 13
Item 6 -- Selected Financial Data 17
Item 7 -- Management's Discussion and Analysis
of Financial Condition and Results
of Operations 5-16
Item 7A -- Quantitative and Qualitative
Disclosures About Market Risk 14-16, 26-27
Item 8 -- Financial Statements and
Supplementary Data 20-43
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 46-47
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 20
Consolidated Financial Statements 20-42
Signatures 47
Reports on Form 8-K filed in the fourth quarter of 1998: Form 8-K, dated October
14, 1998, concerning a news release reporting earnings for the third quarter
and first nine months of fiscal year 1998.
Form 8-K, dated October 27, 1998, concerning a news release that the Board of
Directors had authorized the repurchase of up to 30 million shares of the
Corporation's issued and outstanding common stock, subject to a purchase limit
of $2.7 billion, out of approximately 330 million common shares currently
outstanding. All shares will be held as Treasury shares for reissue in
connection with the Corporation's dividend reinvestment and stock option
plans, and for general corporate purposes.
Exhibits -- The index of exhibits has been filed as separate pages of the 1998
Form 10-K and is available to stockholders on request from the Secretary of
the Corporation at the principal executive offices. Copies of exhibits may be
obtained at a cost of 30 cents per page.
Financial Statement Schedules -- Omitted due to inapplicability or because
required information is shown in the Financial Statements or the Notes
thereto.
- ------------------------------------------------------------
Note (1) -- Incorporated by reference from the Corporation's
Proxy Statement to be dated approximately
March 5, 1999.
- ------------------------------------------------------------
BUSINESS
At December 31, 1998, National City Corporation ("National City" or "the
Corporation") was approximately the 11th largest in the United States on the
basis of total assets. National City owns and operates 7 commercial banks with a
total of 1,455 offices in Ohio, Kentucky, Illinois, Indiana, Michigan and
Pennsylvania. 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 other
financial-related businesses. National City and its subsidiaries had 41,218
full-time equivalent employees at December 31, 1998.
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.
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
45
48
FORM 10-K (continued)
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 15.
The subsidiary banks are subject to the provisions of the National Bank Act
or the banking laws of their respective states, are under the supervision of,
and are subject to periodic examination by, the Comptroller of the Currency (the
"OCC") or the respective state banking departments, and are subject to the rules
and regulations of the OCC, Board of Governors of the Federal Reserve System and
the Federal Deposit Insurance Corporation (FDIC).
National City's subsidiary banks are also subject to certain laws of each
state in which such bank is located. Such state laws may restrict branching of
banks within the state and acquisition or merger involving banks located in
other states. Ohio, Kentucky, Illinois, Indiana, Michigan and Pennsylvania have
all adopted nationwide reciprocal interstate banking.
The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides
that a holding company's controlled insured depository institutions are liable
for any loss incurred by the FDIC in connection with the default of 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, Cleveland, and Kalamazoo and Royal Oak, Michigan and leases
operations centers in Pittsburgh and Chicago. 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. See also
Note 20 on page 41.
EXECUTIVE OFFICERS
The Executive Officers of National City (as of January 21, 1999) are as follows:
Name Age Position
- ----------------------------------------------------------------
David A. Daberko 53 Chairman and Chief
Executive Officer
Vincent A. DiGirolamo 61 Vice Chairman
Robert G. Siefers 53 Vice Chairman and
Chief Financial Officer
James R. Bell III 42 Executive Vice President
Paul G. Clark 45 Executive Vice President
Gary A. Glaser 54 Executive Vice President
Thomas W. Golonski 56 Executive Vice President
Jon L. Gorney 48 Executive Vice President
Christopher Graffeo 51 Executive Vice President
Jeffrey D. Kelly 45 Executive Vice President
William E. MacDonald III 52 Executive Vice President
Herbert R. Martens, Jr. 46 Executive Vice President
Robert J. Ondercik 52 Executive Vice President
A. Joseph Parker 44 Executive Vice President
Harold B. Todd, Jr. 57 Executive Vice President
James P. Gulick 40 Senior Vice President
and General Auditor
Thomas A. Richlovsky 47 Senior Vice President
and Treasurer
David L. Zoeller 49 Senior Vice President,
General Counsel
and Secretary
The term of office for executive officers is one year.
There is no family relationship between any of the executive officers.
Except as noted below, each of the officers listed above has been an
executive officer of the Corporation or one of its subsidiaries during
the past five years.
Mr. Parker was elected executive vice president in 1998. Prior to that
time he was the Retail Business Line
46
49
Manager of the Corporation since 1994 and in charge of developing a new retail
delivery system strategy during 1993.
Mr. Clark was elected executive vice president during 1998 and is the
president and chief executive officer of National City Bank of
Michigan/Illinois. Prior to that time he led the integration of Integra
Financial Corporation into the Corporation from 1995 to 1997 and led the
Metro/Ohio division of National City Bank from 1992 to 1995.
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.
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, 1999.
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, 1999.
/s/ David A. Daberko
- ---------------------------------------
David A. Daberko
Chairman and Chief Executive Officer
/s/ Robert G. Siefers
- ---------------------------
Robert G. Siefers
Vice Chairman and Chief Financial Officer
/s/ Vincent A. DiGriolame
- ---------------------------------------
Vincent A. DiGirolamo
Vice Chairman
/s/ Thomas A. Richlovsky
- ---------------------------------------
Thomas A. Richlovsky
Senior Vice President
and Treasurer
The Directors of National City Corporation (listed on page 48, except John W.
Brown and W. Bruce Lunsford) executed a power of attorney appointing David L.
Zoeller their attorney-in-fact, empowering him to sign this report on their
behalf.
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)
Management Consultant
JON E. BARFIELD (1,6)
Chairman & President
The Bartech Group
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
JOHN W. BROWN (3,5)
Chairman, President & CEO
Stryker Corporation
DUANE E. COLLINS (2,3,5)
President & CEO
Parker Hannifin Corporation
DANIEL E. EVANS (1,5)
Chairman & CEO
Bob Evans Farms, Inc.
CLIFFORD L. GREENWALT (1,7)
Retired President & CEO
Central Illinois Public Service Company, Inc.
BERNADINE P. HEALY, M.D. (6,7)
Dean, College of Medicine
& Public Health
The Ohio State University
DOROTHY A. JOHNSON (4,6)
President & CEO
Council of Michigan Foundations
JOSEPH H. LEMIEUX (2,3,5)
Chairman & CEO
Owens-Illinois, Inc.
W. BRUCE LUNSFORD (1,3,7)
Chairman & CEO
Vencor, Inc.
ROBERT A. PAUL (2,3,7)
President & CEO
Ampco-Pittsburgh Corporation
WILLIAM F. ROEMER (4,6)
Retired 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
JEROME F. TATAR
Chairman, President & CEO
The Mead Corporation
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
Retail Sales & Distribution
PAUL G. CLARK
Michigan/Illinois Banking
GARY A. GLASER
Ohio Banking
THOMAS W. GOLONSKI
Pennsylvania Banking
JON L. GORNEY
Information Services & Operations
J. 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
A. JOSEPH PARKER
Consumer Finance
HAROLD B. TODD, JR.
Institutional Trust
Senior Vice Presidents
W. DOUGLAS BANNERMAN
Corporate Banking
JEFFREY M. BIGGAR
Private Client Group
J. ANDREW DUNHAM
Investments
JOHN D. GELLHAUSEN
Comptroller
MARY H. GRIFFITH
Marketing Communications
JAMES P. GULICK
General Auditor
JOSEPH J. HERR
Loan Review
JAMES A. HUGHES
Information Services & Operations
J. MICHAEL KEARNEY
Properties
JANIS E. LYONS
Corporate Accounting
GARY P. OBERS
Corporate Services
J. ARMANDO RAMIREZ
Strategic Planning and Mergers & Acquisitions
EDWARD B. REILLY
Corporate Banking
THOMAS A. RICHLOVSKY
Treasurer
WILLIAM H. SCHECTER
Merchant Banking
THOMAS H. SCHROTH
Operations
SHELLEY J. SEIFERT
Human Resources
JEFFREY T. SILER
Dealer Finance
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, April 12, 1999 at
10:00 a.m. Eastern Daylight Time.
National City Corporation
National City Center
1900 East Ninth Street
Cleveland, Ohio 44114
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 proud sponsor of the National Association of Investors
Corporation (NAIC) and participates in its Low-Cost Investment Plan. To receive
more information on NAIC, call (248) 583-NAIC.
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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
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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
www.national-city.com
TRANSFER AGENT AND REGISTRAR
National City Bank
Corporate Trust Operations
Department 5352
P.O. Box 92301
Cleveland, Ohio 44193-0900
1-800-622-6757
INVESTOR INFORMATION
Julie I. Sabroff, Vice President
Investor Relations
Department 2101
P.O. Box 5756
Cleveland, Ohio 44101-0756
1-800-622-4204
52
[NATIONAL CITY LOGO]
1900 East Ninth Street
Cleveland, Ohio 44114-3484
Bulk Rate
U.S. Postage
PAID
National City
Corporation
First Class
U.S. Postage
Replaces indicia -------- PAID
above for part of run National City
Corporation
53
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
2.1 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).
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 Appendix A to Registrant's
Form S-4 Registration Statement No. 333-46571 dated February
19, 1998.
3.1 Restated Certificate of Incorporation of National City
Corporation, as amended, (filed as Exhibit 3.1 to National
City Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and incorporated herein by
reference).
3.2 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 National City 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 National City. National City
undertakes to file these instruments with the Commission
upon request.
4.2 Credit Agreement dated as of February 2, 1996, by and
between National City and the banks named therein (filed as
Exhibit 4.2 to Registrant's Form S-4 Registration Statement
No. 333-01697 dated March 13, 1996 and incorporated herein
by reference).
4.3 Certificate of Stock Designation dated as of February 2,
1998 designating National City Corporation's 6% Cumulative
Convertible Preferred Stock, Series 1, without par value,
and fixing the powers, preferences, rights, qualifications,
limitations and restrictions thereof (filed as Appendix D to
Registrant's Form S-4 Registration Statement No. 333-46571
dated February 19, 1998 and incorporated herein by
reference) in addition to those set forth in National City
Corporation's Restated Certificate of Incorporation, as
amended (filed as Exhibit 3.1 to National City Corporation's
Annual Report on Form 10K for the fiscal year ended December
31, 1997 and incorporated herein by reference).
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 No. 10.2 to National City's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1987); both incorporated herein by reference.
10.7 National City Corporation 1989 Stock Option Plan (filed as
Exhibit 10.7 to National City's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989, and
incorporated herein by reference).
54
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.8 National City Corporation's 1993 Stock Option Plan (filed as
Exhibit 10.5 to Registration Statement No. 33-49823 and
incorporated herein by reference).
10.9 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 1997 Stock Option Plan (filed as
Exhibit A to National City Corporation's Proxy Statement
Form 14A #000-07229 dated February 19, 1997 and incorporated
herein by reference).
10.11 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).
10.12 National City Corporation Supplemental Executive Retirement
Plan, as Amended and Restated Effective January 1, 1997
(filed as Exhibit 10.12 to Registrant's Form S-4
Registration Statement No. 333-46571 dated February 19, 1998
and incorporated herein by reference).
10.13 National City Corporation Executive Savings Plan As Amended
and Restated Effective January 1, 1995 (filed as Exhibit
10.9 to National City's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, and incorporated herein
by reference).
10.14 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).
10.15 National City Corporation 1997 Restricted Stock Plan (filed
as Exhibit B to National City Corporation's Proxy Statement
Form 14A #000-07229 dated February 19, 1997 and incorporated
herein by reference).
10.16 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).
10.17 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).
10.18 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 National City's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992, and incorporated herein by reference).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
55
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.23 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).
10.24 Merchants National Corporation Non-qualified Stock Option
Plan effective January 20, 1987, and the First Amendment to
that Merchants National Non-qualified Stock Option Plan,
effective October 16, 1990 (filed respectively as Exhibit
10(23) to Merchants National Corporation Annual Report on
Form 10-K for the year ended December 31, 1986, and as
Exhibit 10(55) to Merchants National Corporation Annual
Report on Form 10-K for the year ended December 31, 1990,
both of which are incorporated herein by reference).
10.25 Merchants National Corporation 1987 Non-qualified Stock
Option Plan, effective November 17, 1987, and the First
Amendment to effective October 16, 1990, (filed respectively
as Exhibit 10(30) to Merchants National Corporation Annual
Report on Form 10-K for the year ended December 31, 1987,
and as Exhibit 10(61) to Merchants National Corporation
Annual Report on Form 10-K for the year ended December 31,
1990, both of which are incorporated herein by reference).
10.26 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).
10.27 Central Indiana Bancorp Option Plan effective March 15, 1991
(filed as Exhibit 10.26 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference).
10.28 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).
10.29 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 10.29 to Registrant's Form
S-4 Registration Statement No 333-46571 dated February 19,
1998 and incorporated herein by reference).
10.30 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).
10.31 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).
10.32 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).
10.33 Stock Option Agreement dated as of November 30, 1997 between
National City Corporation ("Grantee") and First of America
Bank Corporation ("Issuer") (filed as Exhibit 2.2 to Form
8-K dated December 9, 1997 and incorporated herein by
reference).
10.34 Stock Option Agreement dated as of November 30, 1997 between
National City Corporation ("Issuer") and First of America
Bank Corporation ("Grantee") (filed as Exhibit 2.3 to Form
8-K dated December 9, 1997 and incorporated herein by
reference).
10.35 Stock Option Agreement dated as of January 12, 1998 between
National City Corporation ("Grantee") and Fort Wayne
National Corporation ("Issuer") (filed as Appendix C to
Registrant's Form S-4 Registration Statement No. 333-46571
dated February 19, 1998 and incorporated herein by
reference).
56
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.36 Restated First of America Bank Corporation 1987 Stock Option
Plan (filed as Exhibit 4.4 to Registrant's Post-Effective
Amendment No. 2 (on Form S-8) to Form S-4 Registration
Statement No. 333-46571), Amended and Restated First of
America Bank Corporation Stock Compensation Plan (filed as
Exhibit 4.5 to Registrant's Post-Effective Amendment No. 2
(on Form S-8) to Form S-4 Registration Statement No.
333-46571) and First of America Bank Corporation Directors
Stock Compensation Plan (filed as Exhibit 4.6 to
Registrant's Post-Effective Amendment No. 2 (on Form S-8) to
Form S-4 Registration Statement No. 333-46571) and each
herein incorporated by reference.
10.37 Fort Wayne National Corporation 1985 Stock Incentive Plan
(filed as Exhibit 4.4 to Registrant's Post-Effective
Amendment No. 1 (on Form S-8) to Form S-4 Registration
Statement No. 333-45609), Fort Wayne National Corporation
1994 Stock Incentive Plan (filed as Exhibit 4.5 to
Registrant's Post-Effective Amendment No. 1 (on Form S-8) to
Form S-4 Registration Statement No. 333-45609) and Fort
Wayne National Corporation 1994 Nonemployee Director Stock
Incentive Plan (filed as Exhibit 4.6 to Registrant's
Post-Effective Amendment No. 1 (on Form S-8) to Form S-4
Registration Statement No. 333-45609), and each herein
incorporated by reference.
10.38 National City Corporation 1997 Stock Option Plan (filed as
Exhibit 4.4 to Registrant's Form S-8 Registration Statement
No. 333-58923, dated July 10, 1998 and incorporated herein
by reference).
10.39 National City Corporation 1997 Restricted Stock Plan (filed
as Exhibit 4.4 to Registrant's Form S-8 Registration
Statement No. 333-60411, dated July 31, 1998 and
incorporated herein by reference).
10.40 Employment Agreement dated as of November 30, 1997 by and
between National City Corporation and Richard F. Chormann,
(filed as Exhibit 10.31 to the Registrant's Quarterly Report
on Form 10-Q No. 000-07229 for the quarter ended March 31,
1998 and incorporated herein by reference).
21.1 Subsidiaries. (Filed as Exhibit 21.1).
23.1 Consent of Ernst & Young LLP, Independent Auditors for
National City Corporation (filed as Exhibit 23.1).
23.2 Consent of KPMG LLP, Independent Auditors for First of
America Bank Corporation (filed as Exhibit 23.2).
24.1 Powers of Attorney (filed as Exhibit 24.1).
27.1 Financial Data Schedule (filed as Exhibit 27.1).
99.1 Report of KPMG LLP on First of America Bank Corporation's
financial statements as of December 31, 1997 and for each of
the years in the two year period ended December 31, 1997
(filed as Exhibit 99.1).