SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
_____ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 0-9426
NATIONAL CITY BANCORPORATION
(Exact name of registrant as specified in its charter)
Iowa 42-0316731
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
651 Nicollet Mall
Minneapolis, Minnesota 55402-1611
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number (including area code): 612-904-8500
Securities registered pursuant to Section 12(g) of the Act:
$1.25 Par Value Common Stock
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(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 ___
As of February 21, 1997, the aggregate market value of 6,205,566 shares of
voting common stock, $1.25 par value, held by non-affiliates of the registrant
was approximately $145,830,801, based upon the reported closing price on the
NASDAQ National Market System. As of February 21, 1997, 7,374,479 shares of
$1.25 par value common stock of the registrant were outstanding.
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]
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of National City Bancorporation's Annual Report to
Stockholders for the year ended December 31, 1996 are incorporated by
reference into Parts I, II, and IV.
(2) Portions of the definitive Proxy Statement of National City
Bancorporation for the Annual Meeting of Stockholders to be held on
April 21, 1997 are incorporated by reference into Part III.
NATIONAL CITY BANCORPORATION
FORM 10-K
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YEAR ENDED DECEMBER 31, 1996
PART I
ITEM 1 - BUSINESS
National City Bancorporation (NCBC) was incorporated in 1937 under the
laws of the State of Iowa. NCBC is a bank holding company which owns
99.9% of the capital stock of National City Bank of Minneapolis (NCB),
which is a commercial bank. NCBC owns 100% of the capital stock of
Diversified Business Credit, Inc. (DBCI), a commercial finance company.
NCBC also owns 100% of the capital stock of National City Development &
Realty, Inc. (NCDR) an inactive subsidiary.
NCB has its main banking office in the business district of downtown
Minneapolis and also serves customers from two detached facilities. One
of these facilities provides a drive-up location in downtown
Minneapolis, and the other is a full service branch location in Edina,
Minnesota, a suburb of Minneapolis.
NCBC provides its subsidiaries advice and specialized services in
various fields of financial and banking policy. The responsibility for
the management of each subsidiary remains with the Board of Directors
of each subsidiary and with the officers elected by the subsidiary
Boards of Directors. NCB provides the usual banking services including,
but not limited to, business, personal and real estate loans; a full
range of deposit services; correspondent banking and safe deposit
facilities. In addition to the services generally provided by a
full-service bank, NCBC's subsidiaries offer specialized services as
described below:
TRUST SERVICES - NCB offers clients a wide variety of fiduciary
services ranging from the management of funds for individuals to the
administration of estates and trusts. For corporations, governmental
bodies, and public authorities, NCB acts as fiscal and paying agent,
registrar, and trustee under corporate indentures and pension and
profit sharing agreements. NCB also provides record keeping and
reporting for 401-K retirement savings plans.
INTERNATIONAL OPERATIONS - NCB provides a wide range of services in the
area of international banking including letters of credit.
ASSET-BASED FINANCING - DBCI specializes in providing working capital
loans secured by accounts receivable, inventory, and other marketable
assets. All loans are made on a full recourse basis to the borrower.
Personal guarantees from the owners of the borrower are normally
obtained. Loans are made on a demand basis with no fixed repayment
schedule. Compared to equity-based loans made by banks and others,
asset-based loans usually require closer monitoring which results in
higher loan servicing costs. Typically, interest rates earned on these
loans are higher than rates earned on equity-based loans.
OTHER SERVICES - NCBC and subsidiaries do not have more than one line
of business or class of service. All income is derived from commercial
banking and bank-related services. It is not dependent on a single
customer or a single industry for any material part of its business.
COMPETITION - Banking in Minnesota, as elsewhere, is highly
competitive, and NCB competes with other banks, both independent and
those affiliated with other bank holding companies. Additional
competitors may enter the Minnesota market after June, 1997, due to a
change in banking regulations (See Supervision & Regulations). In
addition, in lending funds and obtaining deposits, NCB competes with
other types of institutions such as savings and loan associations,
credit unions, insurance companies, finance companies, and various
institutions offering money market and mutual funds.
EMPLOYEES - NCBC and its subsidiaries have approximately 280 employees.
GOVERNMENT POLICIES - The earnings of NCBC's various operating units,
as lenders of money, are affected by state and federal legislative
changes and by policies of various regulatory authorities including
those of the State of Minnesota, the United States, foreign
governments, and international agencies. These policies include, for
example, statutory maximum legal interest rates, domestic monetary
policies of the Board of Governors of the Federal Reserve System,
United States fiscal policy, international currency regulations and
monetary policies, and capital adequacy and liquidity constraints
imposed by bank regulatory agencies.
SUPERVISION AND REGULATION - NCBC is a registered bank holding company
under the Bank Holding Company Act of 1956 (the Act) and is subject to
the supervision of and regulation by the Board of Governors of the
Federal Reserve System (the Board).
Under the Act, a bank holding company may engage in banking, managing
or controlling banks, furnishing and performing services for banks
which it controls, and activities which the Board has determined to be
closely related to banking. NCBC must obtain approval of the Board
before acquiring control of a bank or acquiring more than 5% of the
outstanding voting shares of a company engaged in a bank-related
business.
In general, beginning June 1, 1997, federal law will allow the merger
of insured banks within different home states, without regard to
whether such transaction is prohibited under the law of any state.
Under state law a bank subsidiary of an out-of state bank holding
company may establish branch offices in Minnesota if the bank
subsidiary's principal place of business is within the state. An
acquiring out-of-state bank may maintain and operate branches within
Minnesota provided the in-state acquired bank has been in continuous
operation for at least five years.
NCBC's subsidiary bank is a national bank and is, accordingly, subject
to the supervision of and examined by the Comptroller of the Currency
and is subject to examination by the Federal Reserve System. The
subsidiary bank is a member of the Federal Deposit Insurance
Corporation and, as such, is subject to examination thereby.
Areas subject to regulation by federal and state authorities include
deposit reserves, Investments, loans, mergers, issuance of securities,
payment of dividends, establishment of branches, and other aspects of
operations.
STATISTICAL DATA - Statistical data is presented on pages 25 through 31
of the Annual Report to Stockholders for the year ended December 31,
1996, and such statistical data is incorporated herein by reference.
ITEM 2 - PROPERTIES
NCB currently leases 95,200 square feet of space for its downtown main
office under a lease which expires in 2006.
NCB leases 3,380 square feet of record storage space at a downtown
location under a lease that expires in the year 2000.
NCB maintains a drive-up detached banking facility in downtown
Minneapolis on leased land. The lease expires in the year 2000.
NCB also owns an 8,500 square foot banking facility and land in Edina,
Minnesota.
DBCI leases 7,200 square feet of space in downtown Minneapolis. This
lease expires in December 1997.
The aggregate net rentals for all of the above described facilities
were approximately $2,170,000 in 1996.
NCB relocated its banking offices to Gaviidae Common at 651 Nicollet
Mall in March 1996. NCB entered into a ten year lease commencing March
16, 1996, to occupy approximately 95,200 square feet in the new
location. The effective annual base rent per square foot is $4.98 for
the first five years and $6.98 for the second five years of the lease
term. These rents are based upon NCB advancing $3,346,608 to the
landlord which was used to pay for certain base building improvements,
real estate commissions, design fees and reimbursement for moving
expenses. The annual cost for the first five years will be
approximately $1.7 million and for the last five years will be
approximately $1.8 million per year. In addition, NCB paid for all its
leasehold improvements, which cost approximately $2,000,000. NCB has
two options of five years each to extend the lease term at the then
current fair market rents for office and retail space. NCB has the
right to terminate the lease in its entirety or to give back
substantial portions of the leased premises on the sixth anniversary of
the lease term. NCB has expansion rights on all space on the third and
fourth levels of the premises, subject to the rights of existing
tenants. Rent for expansion space taken on or before March 31, 1999,
would be $8.00 net per square foot. Rent for expansion space taken
after March 31, 1999, would be at the lower of (i) $8.00 per square
foot plus any increase in the Minneapolis CPI with March 16, 1996, as
the base index, or (ii) the fair market value of the space. NCB will
pay its pro rata share of taxes when due. NCB will have the right to
contest real estate taxes against the premises if the landlord fails to
do so. NCB will pay normal operating expenses which will include a cap
on management fees and exclusions that are generally consistent with
other large office tenant leases.
ITEM 3 - LEGAL PROCEEDINGS
NCBC is party to various legal proceedings incidental to its business.
Certain claims, suits, and complaints arising in the ordinary course of
business have been filed or are pending against NCBC. In the opinion of
management, the resulting liability, if any, arising from all such
actions will not have a material impact on the consolidated financial
position, liquidity and results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the
solicitation of proxies or otherwise.
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The market for National City Bancorporation's common stock and related
stockholder matters is presented on pages 1 and 31 of the Annual Report
to Stockholders for the year ended December 31, 1996, and is
incorporated herein by reference.
PART II
ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data is presented on page 18 of the Annual Report to
Stockholders for the year ended December 31, 1996 and is incorporated
herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations are presented on pages 19 through 24 of the Annual Report
to Stockholders for the year ended December 31, 1996 and are
incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary financial
information of National City Bancorporation and subsidiaries are
presented on pages 3 through 18 and on page 31 of the Annual Report to
Stockholders for the year ended December 31, 1996 and are incorporated
herein by reference.
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
The directors and executive officers of National City Bancorporation
are presented on pages 3 through 5 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 21, 1997, and the said
presentation is incorporated herein by reference.
The executive officers referred to in this Item 10 are as follows:
Mr. David L. Andreas has been a director since 1980 and was
elected Chairman of the Board and Chief Executive Officer
effective November 1, 1987. Mr. Andreas had been a Vice
President and Senior Vice President of NCBC during the last
five years prior to being elected Chairman. Mr. Andreas was
elected President and Chief Executive Officer of NCB in 1994.
Mr. Andreas is also a director of NCB and Chairman of DBCI and
NCDR.
Mr. Thomas J. Freed was elected Secretary and Controller of
NCBC effective January 1, 1982. Mr. Freed was elected Senior
Vice President and Chief Financial Officer of NCB in 1986.
Previous to 1986, Mr. Freed served as an officer of NCB for
seventeen years.
ITEM 11 - EXECUTIVE COMPENSATION
Executive compensation is set forth on pages 5 through 9 of the Proxy
Statement for the Annual Meeting of Stockholders to be held April 21,
1997 and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The security ownership of certain beneficial owners and management is
presented on pages 1 through 5 of the Proxy Statement for the Annual
Meeting of Stockholders to be held April 21, 1997 and is incorporated
herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and related transactions are presented on page 8
of the Proxy Statement for the Annual Meeting of Stockholders to be
held April 21, 1997 and is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The Following consolidated financial statements and report of
independent auditors of National City Bancorporation and subsidiaries,
included in the annual report of the registrant to its stockholders for
the year ended December 31, 1996, are incorporated by reference in Item
8:
Independent Auditors' Report
Consolidated balance sheets - December 31, 1996 and 1995
Consolidated statements of earnings - years ended December 31,
1996, 1995 and 1994
Consolidated statements of stockholders'
equity - years ended December 31, 1996, 1995 and 1994
Consolidated statements of cash flows - years ended
December 31, 1996, 1995 and 1994
Notes to consolidated financial statements
(2) Financial Statement Schedules
All schedules are omitted because they are not applicable, not
required, or the required information is included in the consolidated
financial statements or notes thereto.
(3) Exhibits
3(a) - Restated Articles of Incorporation (incorporated herein
by reference to Exhibit 3.01 of the Registrant's Registration
Statement on Form S-1, Registration No. 269057).
3(b) - Restated By-laws [incorporated herein by reference to
Exhibit 3(ii) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1985].
10(b)1 - Amendment to Salary Continuation Agreement between
NCB and David L. Andreas [incorporated herein by reference to
Exhibit 10(b)1 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1990].
10(c) - Salary Continuation Agreement between NCB and Walter
E. Meadley, Jr. (incorporated herein by reference to Exhibit
10(c) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1990).
10(d) - Salary Continuation Agreement, as amended, between NCB
and Thomas J. Freed (incorporated herein by reference to
Exhibit 10(d) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994).
10(e) - Change in Control Agreement by and between NCBC, NCB
and Thomas J. Freed dated as of October 25, 1995.
[Incorporated herein by reference to Exhibit 10(e) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 10-K").]
10(f) - Fourth Amendment to Executive Salary Continuation
Agreement by and between NCB and Thomas J. Freed dated
November 31, 1995. [Incorporated herein by reference to
Exhibit 10(f) to the 1995 Form 10-K.]
10(g) - Fourth Amendment to Executive Salary Continuation
Agreement by and between NCB and Walter E. Meadley, Jr. dated
November 31, 1995. [Incorporated herein by reference to
Exhibit 10(g) to the 1995 Form 10-K.]
10(h) - Fourth Amendment to Executive Salary Continuation
Agreement by and between NCB and David L. Andreas dated
December 31, 1995. [Incorporated herein by reference to
Exhibit 10(h) to the 1995 Form 10-K.]
10(i) - Change in Control Agreement by and between NCBC, NCB,
and Thomas J. Freed dated as of November 19, 1996.
11 - Computation of Earnings Per Share.
13 - Annual Report to Stockholders (only those portions
incorporated herein by reference shall be deemed filed with
the Commission).
22 - Subsidiaries of Registrant are listed and described in
PART I, Item 1.
23 - Consent of Ernst & Young, LLP.
27 - Financial Data Schedule
Copies of the exhibits will be furnished upon request and
payment of registrant's reasonable expenses in furnishing the
exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
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.
NATIONAL CITY BANCORPORATION
Date: March 19, 1997 /S/David L. Andreas
-------------------
David L. Andreas, Chairman
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 and on the dates indicated.
Date: March 19, 1997 /S/David L. Andreas
-------------------
David L. Andreas, Chairman of the Board of Directors
(Principal Executive Officer)
Date: March 19, 1997 /S/Thomas J. Freed
------------------
Thomas J. Freed, Secretary and Comptroller
(Principal Financial and Accounting Officer)
Date: March 19, 1997 /S/Wendell R. Anderson
----------------------
Wendell R. Anderson, Director
Date: March 19, 1997 ----------------------
L.W. Andreas, Director
Date: March 19, 1997 --------------------------
Terry L. Andreas, Director
Date: March 19, 1997 /S/Marvin Borman
----------------
Marvin Borman, Director
Date: March 19, 1997 -----------------------------
Kenneth H. Dahlberg, Director
Date: March 19, 1997 /S/John H. Daniels, Jr.
-----------------------
John H. Daniels, Jr., Director
Date: March 19, 1997 /S/Thomas E. Holloran
---------------------
Thomas E. Holloran, Director
Date: March 19, 1997 ---------------------------
C. Bernard Jacobs, Director
Date: March 19, 1997 /S/David C. Malmberg
--------------------
David C. Malmberg, Director
Date: March 19, 1997 /S/Walter E. Meadley, Jr.
-------------------------
Walter E. Meadley, Jr., Director
Date: March 19, 1997 /S/Roger H. Scherer
-------------------
Roger H. Scherer, Director
NATIONAL CITY BANCORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
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<TABLE>
<CAPTION>
SUBSEQUENTLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
<S> <C> <C>
3(a) Restated Articles of Incorporation (incorporated herein by reference to
Exhibit 3.01 of the Registrant's Registration Statement on Form S-1,
Registration No. 2-69057
3(b) Restated By-laws [incorporated herein by reference to
Exhibit 3(ii) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1985].
10(b) Salary Continuation Agreement between NCB and David L.
Andreas (incorporated herein by reference to Registrant's
Annual Report on Form 10-K for the year ended December
31, 1987).
10(b)1 Amendment to Salary Continuation Agreement between NCB
and David L. Andreas [incorporated herein by reference to
Exhibit 10(b)1 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990].
10(c) Salary Continuation Agreement between NCB and Walter E. Meadley, Jr.
[incorporated herein by reference to Exhibit 10(c) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990].
10(d) Salary Continuation Agreement, as amended, between NCB
and Thomas J. Freed (incorporated herein by reference to
Exhibit 10(d) to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994).
10(e) Change in Control Agreement by and between NCBC, NCB and Thomas
J. Freed dated as of October 25, 1995. [Incorporated herein by
reference to Exhibit 10(e) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 (the "1995 Form
10-K").]
10(f) Fourth Amendment to Executive Salary Continuation Agreement by
and between NCB and Thomas J. Freed dated November 31, 1995.
[Incorporated herein by reference to Exhibit 10(f) to the 1995
Form 10-K.]
10(g) Fourth Amendment to Executive Salary Continuation Agreement by
and between NCB and Walter E. Meadley, Jr. dated November 31,
1995. [Incorporated herein by reference to Exhibit 10(g) to
the 1995 Form 10-K.]
10(h) Fourth Amendment to Executive Salary Continuation Agreement by
and between NCB and David L. Andreas dated December 31, 1995.
[Incorporated herein by reference to Exhibit 10(h) to the 1995
Form 10-K.]
10(i) Change in Control Agreement by and between NCBC, NCB, and Thomas J. Freed
dated as of November 19, 1996.
11 Computation of Earnings Per Share.
13 Annual Report to Stockholders (only those portions
incorporated herein by reference shall be deemed filed
with the Commission).
22 Subsidiaries of Registrant are listed and described in PART I, Item 1.
23 Consent of Ernst & Young, LLP.
27 Financial Data Schedule
</TABLE>
NATIONAL CITY BANCORPORATION
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT is made by and between NATIONAL CITY BANCORPORATION, an
Iowa corporation (hereinafter called the "Holding Company"); NATIONAL CITY BANK
OF MINNEAPOLIS, a national banking association controlled by the Holding Company
(hereinafter called the "Bank," and together with the Holding Company,
collectively referred to as the "Companies") and Thomas J. Freed (the
"Executive"), as of the 19th day of November , 1996 (the "Effective Date").
RECITALS:
WHEREAS, the Executive is currently employed by the Bank, and may from
time to time be employed by either of the Companies;
WHEREAS, the Board of Directors of the Holding Company (the "Parent
Board") has determined that it is in the best interests of the Holding Company,
its stockholders and the Bank to reinforce and encourage the continued attention
and dedication of certain officers and senior managers of the Companies,
including the Executive, to their assigned duties;
WHEREAS, the existence of this Agreement and any similar agreements
with other employees of either of the Companies shall not be construed to imply
that any successors to their respective positions or offices (or any other
employees) would ever be entitled to severance benefits similar to those
provided thereunder; and
WHEREAS, this Agreement sets forth the minimum severance compensation
that the Executive will receive from the Employer (as defined below) if the
Executive's employment with such Employer terminates under one of the
circumstances described herein in connection with or following a Change in
Control (as defined below).
NOW THEREFORE, in consideration of the mutual covenants and conditions
herein contained and in further consideration of services performed and to be
performed by the Executive for the Companies, the parties hereto agree as
follows:
AGREEMENT
1. CERTAIN DEFINITIONS. For purposes of this Agreement, the terms
defined above and the following terms have the meanings indicated:
(a) EMPLOYER. "Employer" shall mean whichever of the Companies
is the employer of the Executive at the specified time; and shall also
include any other entity that (i) employs the Executive immediately
after a Change in Control, (ii) is a successor to or assignee of the
business and/or assets of one of the Companies and (iii) either
executes and delivers the agreement provided for in Section 5 or
otherwise becomes or remains bound by all the terms and provisions of
this Agreement by operation of law.
(b) CHANGE IN CONTROL. A "Change in Control" of the Employer
shall occur if any person (as defined in Sections 3 (a) (9) and
13(d)(3) of the '34 Act, as defined below) becomes the "beneficial
owner" (as defined in Rule 13d-3 promulgated pursuant to the '34 Act),
directly or indirectly, of thirty percent (30%) or more of combined
voting power of the then outstanding securities of either of the
Companies; provided, however, that no Change in Control shall be deemed
to occur if such person:
(i) includes any individual, corporation or other
entity (or any Affiliate thereof, as defined below) that is
now the beneficial owner of at least five percent (5%) of such
securities; or
(ii) became a beneficial owner of such securities in
a transaction after which the Holding Company remains as the
survivor and the majority of the members of the Parent Board
remain such members after the closing of the transaction.
For purposes of this subsection (b), the term " '34 Act" shall
mean the Securities Exchange Act of 1934, as amended; and the term
"Affiliate" shall mean any individual, corporation or other entity that
controls, is controlled by or is under common control with (as
applicable) any other individual, corporation or other entity referred
to herein.
(c) CAUSE. In the case of a discharge from employment, the
term "Cause" shall mean:
(i) the willful and continued failure by the
Executive to substantially perform his or her duties under
this Agreement or any other employment agreement between the
Executive and the Employer (other than any such failure
resulting from the Executive's incapacity due to physical or
mental illness or any such actual or anticipated failure after
the issuance of a Notice of Termination by the Executive for
Good Reason), after a written demand for substantial
performance is delivered by the Employer that specifically
identifies the manner in which the Employer believes the
Executive has not substantially performed his or her duties;
or
(ii) the willful engaging by the Executive in
misconduct that is materially injurious to either or both of
the Companies, monetarily or otherwise. No act, or failure to
act, on the Executive's part shall be considered "willful"
unless done, or omitted to be done, by him or her not in good
faith and without reasonable belief that his or her action or
omission was in the best interest of one or both of the
Companies.
Notwithstanding the foregoing, the Executive shall
not be deemed to have been terminated for Cause without (x) a
reasonable advance written notice to the Executive, given
before the delivery of a Notice of Termination and setting
forth the reasons for the Employer's intention to terminate
for Cause; (y) an opportunity for the Executive, together with
his or her counsel, to be heard before the Board; and (z)
delivery to the Executive of a Notice of Termination from the
Board stating that, in the good faith opinion of the Board,
the Executive was guilty of conduct set forth above in clause
(i) or (ii) hereof, and specifying the particulars thereof in
detail.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean:
(i) if this Agreement is terminated by the Employer
for Disability, the date 30 days after Notice of Termination
is given to the Executive; provided; however, that such date
shall not have been delayed pursuant to the following clause
(ii); or
(ii) if the Executive's employment is terminated by
the Employer for any other reason, the date on which a Notice
of Termination is delivered to the Executive or any later date
specified in such Notice.
(f) DISABILITY. "Disability" shall mean the Executive's
incapacity due to physical or mental illness to substantially perform
his or her duties on a full-time basis for six consecutive months. If
the Executive does not agree with a determination to terminate him or
her because of Disability, the question of the Executive's Disability
shall be subject to the certification of a qualified medical doctor
agreed to by the Employer and the Executive or, in the event of the
Executive's incapacity to designate a doctor, the Executive's legal
representative. In the absence of agreement between the Employer and
the Executive, each party shall nominate a qualified medical doctor and
the two doctors shall select a third qualified medical doctor, who
shall determine the question of the Executive's Disability.
(g) GOOD REASON. In the case of a resignation from employment,
the term "Good Reason" shall mean:
(i) the assignment to the Executive by the Employer
of duties inconsistent with the Executive's position, duties,
responsibilities and status with the Employer immediately
prior to a Change in Control of the Employer;
(ii) a reduction by the Employer in the Executive's
base salary as in effect on the date hereof or as the same may
be increased from time to time during the term of this
Agreement;
(iii) any Relocation of Executive by the Employer;
provided, however, that if Executive resigns in connection
with such a Relocation, then any severance pay due under
Section 3 shall be payable only at the times prescribed by
Section 3(C) and shall be subject to reduction or forfeiture
as provided therein;
(iv) any material breach by either of the Companies
of any provision of this Agreement;
(v) if the assets of the Employer have been sold in
connection with a Change in Control, any failure by either of
the Companies to obtain the assumption of this Agreement by
the purchaser pursuant to Section 5; or
(vi) any purported termination of the Executive's
employment that is not properly effected hereunder and
pursuant to a Notice of Termination. For purposes of this
Agreement, no such purported termination shall be effective.
(h) NOTICE OF TERMINATION. A "Notice of Termination" shall
mean a written notice, which shall indicate the specific employment
termination provisions in this Agreement that are relied upon by the
party giving such notice, and which sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for the Executive's
termination of employment. Any termination of the Executive's
employment by the Employer shall be communicated by a Notice of
Termination.
(i) RELOCATION. A "Relocation" shall mean any requirement that
the Executive perform his or her principal duties at any place other
than (i) the location at which the Executive performed such duties
prior to a Change in Control of the Employer, or (ii) within the city,
town or village wherein such place was located; except for reasonably
required travel by the Executive on the business of the Companies and
their subsidiaries to an extent substantially consistent with the
Executive's business travel obligations at the time of a Change in
Control of the Employer.
2. TERM. This Agreement shall commence on the Effective Date first
above written and shall continue in effect until the first anniversary of the
Effective Date. Commencing on that date, and each anniversary thereof, the term
of this Agreement shall automatically be extended for one additional year,
unless at any time the Employer shall have given the Executive a written notice
that the Companies intend to terminate this Agreement effective eighteen (18)
months from the date of such notice; provided, however, that if a Change of
Control shall have occurred during such term, the term of this Agreement shall
be automatically extended until the end of the twenty-four (24) month period
beginning on the date of such Change of Control and shall terminate at the end
of such period. To the extent that any obligation of the Companies or any of
their successors hereunder remains unpaid as of the end of such term, this
Agreement shall remain in effect until such obligation is satisfied.
3. MINIMUM SEVERANCE COMPENSATION IN CONNECTION WITH A CHANGE OF
CONTROL. In the event that (a) a Change in Control of the Employer occurs during
the term of this Agreement; and (b) within the period beginning on the date
either of the Companies announces such Change in Control generally to its
employees and ending twenty-four (24) months after the date of the Change in
Control, either (i) the Employer terminates the Executive's employment for any
reason (or no reason) other than his or her death, Disability or for Cause (it
being understood that a purported termination for Disability or for Cause that
is finally determined not to have such reason, or not to have been properly
done, shall not be a termination for Disability or for Cause), or (ii) the
Executive terminates his or her employment with the Employer for Good Reason,
then:
(A) the Employer shall pay the Executive any unpaid
installment of base salary (to the extent earned and accrued through
the Date of Termination) at the rate in effect at the time the Notice
of Termination is given, any accrued vacation time (at that same rate)
and all other pro-rated and unpaid amounts to which the Executive is
entitled as of the Date of Termination under any compensation plan or
program of the Employer, including without limitation a portion of the
amount (pro-rated based on the number of days in the fiscal year or any
lesser measurement period) that otherwise would be earned under the
Management Incentive Plan or any other executive compensation plan in
which the Executive is then participating for the year in which occurs
such Date of Termination; in each case determined by assuming that a
bonus under such plan would have been earned for the fiscal year or any
lesser measurement period in which the Date of Termination falls, by
performance that reaches the previously budgeted level under the plan
for that period; and all of such payments shall be made in a lump sum
on or before the fifth day following the Date of Termination;
(B) in lieu of any further salary or bonus payments to the
Executive for periods subsequent to the Date of Termination, the
Employer shall pay to the Executive as severance pay an amount equal to
the product of:
(i) the sum of (a) the Executive's annual base salary
in effect as of the Date of Termination, and (b) the annual
amount that otherwise would be earned under the Management
Incentive Plan or any other executive compensation plan in
which the Executive is then participating for the fiscal year
in which occurs such Date of Termination, in each case
determined by assuming that a bonus under such plan would have
been earned for the fiscal year in which the Date of
Termination falls, by performance that reaches the previously
budgeted level under the plan for that year; and
(ii) the number 1.5;
such payment to be made in a lump sum on or before the fifth calendar
day following the Date of Termination; provided, however, that the
amount payable to the Executive under this Section 3(B) shall be
reduced by the sum of any other severance pay amounts due the Executive
from the Employer or either of the Companies under any other plan or
agreement and shall be subject to the conditions of the following
Section 3(C), if applicable;
(C) Notwithstanding any other provision of this Agreement, if
any severance pay amount payable to the Executive under Section 3(B) is
due as a result of Executive's resignation in connection with a
Relocation, such amount shall be payable in installments (without
interest) over an eighteen (18) month period commencing on or before
the fifth calendar day following the Date of Termination, at the times
such amount would have been payable as salary and bonus (if applicable)
if the Executive had not resigned, and such amount shall be subject to
reduction or forfeiture for any one or more of the following reasons:
(i) any such installment of salary or bonus due for a
pay period shall be reduced by any similar compensation earned
by the Executive for the same period as the result of
employment after the Date of Termination by another employer;
(ii) any remaining installments of salary or bonus
due Executive shall be forfeited if the Executive is employed
after the Date of Termination by another employer and the
principal duties of such employment are required to be
performed at any place outside the city, town or village
wherein the place was located at which the Executive performed
his or her principal duties prior to a Change in Control of
the Employer; and
(iii) any remaining installments of salary or bonus
due Executive shall be forfeited if the Executive is employed
at any location after the Date of Termination by another
employer that is engaged in the business of banking.
(D) for the eighteen (18) month period described in Section
3(C), the Employer shall pay the same share of the costs of health
insurance of Executive as was paid for by the Employer prior to the
Date of Termination, except that the Employer shall discontinue paying
for such health insurance if Executive becomes eligible to be covered
by the health insurance of another employer;
(E) to assist Executive in getting a new job, the Employer
will provide out placement assistance through a vendor selected by the
Employer up to a cost of $1,000 to the Employer; provided, however,
that Executive must begin to utilize out placement services within
thirty (30) days of the Date of Termination and that Executive shall
not receive additional compensation for any unused out placement fees.
(F) Executive may, at his or her option, elect to receive the
severance benefits Employee would otherwise be entitled from the
Employer instead and in lieu of the payments and benefits described in
Sections 3(A), (B), (C), (D) and (E), by providing written notice
thereof to Employer within four (4) days after the Date of Termination.
4. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL
RIGHTS.
(a) Except as expressly provided in Section 3(C), the
Executive shall not be required to mitigate damages or the amount of
any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided
for under this Agreement be reduced by any compensation earned by the
Executive as the result of employment by another employer after the
Date of Termination, or otherwise.
(b) The provisions of this Agreement, and any payment provided
for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish the Executive's existing rights, or rights which would
accrue solely as a result of the passage of time, under any employee
benefit plan, incentive plan, Employer securities plan, employment
agreement or other contract, plan or arrangement.
5. SUCCESSORS TO THE COMPANIES.
(a) Each of the Companies will require any successor or assign
that purchases (other than by a merger of corporations) all or
substantially all of the business and/or assets of the Employer, by
agreement in form and substance reasonably satisfactory to the
Executive, to expressly, absolutely and unconditionally assume and
agree to perform this Agreement in the same manner and to the same
extent that the Employer would be required to perform it if no such
purchase had taken place. Any failure of either of the Companies to
obtain such agreement prior to the effectiveness of any such purchase
shall be a material breach of this Agreement and shall entitle the
Executive to terminate his or her employment for Good Reason.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Companies and their successors and assigns, and by
the Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
If the Executive should die while any amounts are still payable to him
or her hereunder, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the
Executive's beneficiary last designated in a writing delivered to the
Employer before his or her death, or otherwise to the Executive's
devisee or legatee under a last will and testament or testamentary
trust or, if there be none of the foregoing, to the Executive's estate.
6. NOTICE. For purposes of this Agreement, all notices and other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to either of the Companies:
National City Bank of Minneapolis
Attention: Chief Executive Officer
75 South 5th Street
P.O. Box E-1919
Minneapolis, MN 55480
With a copy to:
Maslon Edelman Borman & Brand,
a Professional Limited Liability Partnership
3300 Norwest Center
Minneapolis, Minnesota 55402-4140
Attention: Joseph Alexander, Esq.
If to the Executive:
Thomas J. Freed
Home Address:
4941 Winterset Drive
Minnetonka MN 55343
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
7. MISCELLANEOUS. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Holding Company as
may be specifically designated by the Parent Board. If any party hereto at any
time waives any breach of this Agreement by another party hereto, or waives
compliance with any condition or provision of this Agreement to be performed by
another party hereto, such waiver shall not be deemed a waiver of that provision
or condition at any prior or subsequent time, or any similar or dissimilar
provision or condition at the same or any other time. No agreements or
representations, oral or otherwise, express or impled, with respect to the
subject matter hereof have been made by either party except as expressly set
forth in this Agreement. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
8. VALIDITY. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
9. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same instrument.
10. FEES AND LICENSES. The Employer shall pay all fees and expenses
(including attorney's fees) that the Executive may incur as a result of either
of the Companies contesting the validity, enforceability or the Executive's
interpretation of, or any determinations under, this Agreement.
11. CONFIDENTIALITY. The Executive shall retain in confidence any and
all confidential information known to the Executive concerning the Companies and
their business so long as such information is not otherwise publicly disclosed.
12. EMPLOYER'S RIGHT TO TERMINATE EMPLOYMENT. Notwithstanding anything
contained in this Agreement to the contrary, the Employer may terminate the
Executive's employment at any time, for any reason or no reason, except as may
be otherwise provided under a separate written employment agreement (if any)
between the Executive and the Employer; and no provision contained herein shall
affect the Employer's ability to terminate the Executive's employment at any
time, with or without Cause. Nothing in this Agreement shall in any way require
either of the Companies to provide any of the benefits specified in this
Agreement prior to a Change in Control, nor shall this Agreement be construed in
any way to establish any policies or other benefits for the Executive or any
other employee of either of the Companies whose employment with either of the
Companies is terminated prior to a Change in Control.
13. PREVIOUS CHANGE IN CONTROL AGREEMENT. This Agreement shall
supersede and take the place of the Change in Control Agreement dated October
25, 1996 between the parties hereto and said agreement shall be of no further
force or effect.
IN WITNESS WHEREOF, the parties have executed this Agreement with full
authority as of the Effective Date first above written.
ATTEST: NATIONAL CITY BANCORPORATION
/s/ Thomas J. Freed By /s/ David Andreas
- ----------------------------------- -----------------------------------
Thomas J. Freed Its Chairman, David Andreas
Secretary
"HOLDING COMPANY"
ATTEST: NATIONAL CITY BANK OF MINNEAPOLIS
/s/ Thomas J. Freed By /s/ David Andreas
- ----------------------------------- -----------------------------------
Thomas J. Freed Its President, David Andreas
Secretary
"BANK"
/s/ Thomas J. Freed
----------------------------------
Thomas J. Freed
"EXECUTIVE"
NATIONAL CITY BANCORPORATION AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS
ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1996 1995 1994
Net earnings applicable to common stock $12,686 $11,454 $8,496
Weighted average common shares outstanding* 7,374 7,375 7,377
Earnings per share $1.72 $1.55 $1.21
*Adjusted for stock dividends
NATIONAL CITY BANCORPORATION
1996 ANNUAL REPORT
The photographic essay on the cover of this year's annual report is the work of
Carla Lee-Eichenwald, a student at Minneapolis College of Art and Design (MCAD).
Working in association with Barsuhn Design, Incorporated, Carla aimed to capture
the open, customer-oriented atmosphere of National City Bank while showing "an
appreciation for the detail of the architecture and design of the bank." She is
a freelance photographer and illustrator who's interest in photography ranges
from documentary to commercial work.
National City Bank is pleased to showcase the work of MCAD students as a
reflection of our belief that businesses and community leaders can play an
important role in supporting the arts and education in our communities.
MCAD is an internationally recognized, accredited college. To find out more
about the programs of Minneapolis College of Art and Design, call 612-874-3700.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE) 1996 1995
- -------------------------------------------------------------------
For the Year
Net interest income $ 39,247 $ 37,101
Net earnings 12,686 11,454
Earnings per share 1.72 1.55
At Year End
Total assets $900,129 $800,637
Loans 596,504 552,581
Deposits 519,631 439,985
Stockholders' equity 118,013 106,034
Book value per share 16.00 14.38
TABLE OF CONTENTS
Report to Stockholders 2
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 7
Independent Auditors' Report 17
Selected Financial Data 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Statistical Data 25
Selected Consolidated Quarterly Financial Data 31
Directors and Officers 32
NATIONAL CITY BANCORPORATION
National City Bancorporation (NCBC) is a bank holding company headquartered in
Minneapolis, Minnesota. NCBC owns National City Bank of Minneapolis (the "Bank")
which has three offices in metropolitan Minneapolis. NCBC also owns Diversified
Business Credit, Inc. (DBCI), a commercial finance company.
FORM 10-K
The consolidated financial statements and related footnotes and certain other
information included in this Annual Report will be incorporated by reference in
the Company's Annual Report on Form 10-K to the Securities Exchange Commission.
A copy of the Form 10-K report is available free of charge upon written request
to the Company, attention: D.L. Andreas, Chairman of the Board and Chief
Executive Officer, National City Bancorporation, 651 Nicollet Mall, Minneapolis,
Minnesota 55402-1611.
STOCK TRANSFER AGENT AND REGISTRAR
National City Bank of Minneapolis, Gaviidae Common, 651 Nicollet Mall,
Minneapolis, Minnesota 55402-1611.
ANNUAL MEETING
The annual meeting of Stockholders will be held in the Company's offices on the
fifth floor of Gaviidae Common, 651 Nicollet Mall, Minneapolis, Minnesota, on
Monday, April 21, 1997, at 2:00 p.m.
MARKET FOR COMMON STOCK
NCBC's common stock is traded on the over-the-counter market in the NASDAQ
National Market System under the symbol NCBM. There are currently approximately
2,800 registered stockholders.
[LOGO] PRINTED WITH SOY INK
[Logo] Recycled Paper
This annual report is printed with soy ink on recycled paper. All papers meet or
exceed the current E.P.A. guidelines for recycled paper. To help our
environment, please recycle this publication.
1
REPORT TO STOCKHOLDERS
To Our Stockholders:
We have made considerable progress on our journey to the future. We relocated
our offices to the Gaviidae Commons in the center of the Minneapolis core
business district. The move was important for many of us who had always heard of
the "heady" days at our company when we moved to our former banking offices in
the remodeled Federal Reserve Bank building. At that time we had run out of
space in the offices within a hotel retail concourse and needed to modernize and
consolidate to efficiently serve our customers. The bank grew quickly in size
immediately following the move and many of our employees experienced the
challenges of managing that growth. They all remember the excitement and
non-routine tasks and projects relating to the move and subsequent growth. The
bank was a success, had an identity, and was showing progress.
Comparing our company today to where we were in 1975, when we last moved
provides some fascinating contrast. We had been growing assets at the rate of
twenty percent in the years leading up to 1975. The country was in the middle of
a highly variable economy with high unemployment and highly variable corporate
earnings. The annual report for that year emphasized that 35 percent of our
employees took advantage of educational opportunities that year. The bank had
purchased its first mainframe computer six years before and had no personal
computers at all. Year end loans were $112 million. Deposits were $167 million,
and we had 166 employees. The company earned $2.4 million, returning 11.8
percent on average equity and 1.28 percent on average assets.
The twenty-year lease on that building ended during the second quarter of 1996,
and we had changed since the previous move. We had undertaken rigorous and
extensive planning processes beginning two and one-half years earlier to prepare
for our major move to new quarters and strategic organizational redesign.
Our company now employs 280 full-time equivalent bankers who manage over $900
million of total assets and $596 million of loans. Deposits totaled $520 million
at year-end. We exceeded our income for the prior year by 11 percent totaling
$12.7 million, another record. Our five-year compounded growth in earnings is 21
percent. We extensively use all sizes and types of computers and communications
technology to accomplish volumes of transactions and maintain quantities of
information undreamed of in 1975. Now at our modern offices, our staff work with
each other on plans using systems and procedures that are constantly updated and
maintained to respond to constantly changing regulations and customer
expectations. Training and education of ALL of our staff is a requirement simply
to stay current as well as progressing into our increasingly demanding roles. We
are poised to leverage our investment in our operating systems, training, and
merchandising opportunities to improve our ability to reach our customer and
effect improved results in their operations. We will be more available, better
informed, and more capable of suggesting actions and taking actions anytime,
anywhere, and in many ways. We will be perceived as a full-service financial
business that is fast, effective, and informed. We will do this by continuing to
be innovative and working as a team to serve and assist our customers toward
their goals and being aware of what might be possible for them to improve their
results.
/s/ David L. Andreas
David L. Andreas
Chairman of the Board
and Chief Executive Officer
2
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
(IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 47,934 $ 42,006
Federal funds sold and resale agreements 60,120 25,000
Available-for-sale securities 133,190 122,043
Held-to-maturity securities 31,505 36,126
(market value: 1996-$31,812 and 1995-$36,487)
Loans 596,504 552,581
Less allowance for loan losses (8,511) (8,602)
-------- --------
587,993 543,979
Bank premises and equipment 11,798 4,312
Accrued interest receivable 6,306 6,335
Customer acceptance liability 787 478
Other assets 20,496 20,358
-------- --------
$900,129 $800,637
======== ========
- ------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $162,895 $137,766
Interest bearing 356,736 302,219
-------- --------
519,631 439,985
Federal funds purchased and
repurchase agreements 96,640 110,535
Commercial paper 98,107 79,986
Other short-term borrowed funds 11,366 6,687
Acceptances outstanding 787 478
Other liabilities 7,665 8,812
Long-term debt 47,920 48,120
-------- --------
Total liabilities 782,116 694,603
Stockholders' equity:
Common stock, par value $1.25, Authorized 20,000,000 shares;
Issued: 1996-7,374,520 shares; 1995-6,705,808 shares 9,218 8,382
Additional paid-in capital 79,199 65,484
Unrealized gains (losses) net of tax effect (405) 275
Retained earnings 30,001 31,903
-------- --------
118,013 106,044
Less common stock in treasury at cost:
1996-16 shares; 1995-562 shares (10)
-------- --------
Total stockholders' equity 118,013 106,034
-------- --------
$900,129 $800,637
======== ========
</TABLE>
See Notes To Consolidated Financial Statements
3
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
-----------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $57,992 $54,952 $41,046
Interest on federal funds sold and resale agreements 804 727 725
Interest and dividends on securities:
Taxable 10,580 9,369 8,028
Exempt from federal income taxes 20 321 426
------- ------- -------
10,600 9,690 8,454
------- ------- -------
Total interest income 69,396 65,369 50,225
- -------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 14,980 12,950 8,490
Interest on short-term borrowed funds 11,908 11,680 8,933
Interest on long-term debt 3,261 3,638 1,015
------- ------- -------
Total interest expense 30,149 28,268 18,438
------- ------- -------
Net interest income 39,247 37,101 31,787
Provision for loan losses 2,345 1,502 1,150
------- ------- -------
Net interest income after provision for loan losses 36,902 35,599 30,637
- -------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 2,189 1,862 2,113
Fees for other customer services 1,837 1,655 2,386
Trust fees 4,605 4,839 4,683
Gains (losses) on sale of securities 133 (122) (32)
Other 1,318 943 791
------- ------- -------
10,082 9,177 9,941
- -------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 14,965 15,156 15,325
Net occupancy expense of bank premises 2,750 2,272 2,476
Equipment rentals, depreciation and maintenance 2,731 2,481 2,228
Other 5,743 6,144 6,255
------- ------- -------
26,189 26,053 26,284
------- ------- -------
Earnings before income taxes 20,795 18,723 14,294
Income taxes 8,109 7,269 5,348
------- ------- -------
Net earnings $12,686 $11,454 $ 8,946
======= ======= =======
Earnings Per Common Share
Net earnings $ 1.72 $ 1.55 $ 1.21
======= ======= =======
Average common and common equivalent shares
outstanding 7,374 7,375 7,377
</TABLE>
See Notes To Consolidated Financial Statements
4
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TREASURY STOCK
-------------------- ADDITIONAL UNREALIZED ------------------
(IN THOUSANDS EXCEPT NUMBER NUMBER PAID-IN RETAINED GAINS NUMBER
OF SHARES) OF SHARES AMOUNT CAPITAL EARNINGS (LOSSES) OF SHARES AMOUNT TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 5,974,108 $ 7,467 $ 51,455 $ 32,649 $ 229 390,540 ($ 5,604) $ 86,196
Net earnings for the year 8,946 8,946
Ten percent stock dividend 553,179 693 8,299 (9,010) (18)
Unrealized securities (losses)
net of tax effect (3,369) (3,369)
Cancellation of treasury stock (429,967) (538) (3,702) (1,924) (429,967) 6,164
Purchase of treasury stock 39,446 (560) (560)
---------- -------- -------- -------- --------- -------- -------- ---------
Balance at December 31, 1994 6,097,320 7,622 56,052 30,661 (3,140) 19 0 91,195
Net earnings for the year 11,454 11,454
Ten percent stock dividend 608,488 760 9,432 (10,212) (20)
Unrealized securities gains
net of tax effect 3,415 3,415
Purchase of treasury stock 543 (10) (10)
---------- -------- -------- -------- --------- -------- -------- ---------
Balance at December 31, 1995 6,705,808 8,382 65,484 31,903 275 562 (10) 106,034
Net earnings for the year 12,686 12,686
Ten percent stock dividend 669,352 837 13,721 (14,584) (26)
Unrealized securities (losses)
net of tax effect (680) (680)
Cancellation of treasury stock (640) (1) (6) (4) (640) 11
Purchase of treasury stock 94 (1) (1)
---------- -------- -------- -------- --------- -------- -------- ---------
Balance at December 31, 1996 7,374,520 $ 9,218 $ 79,199 $ 30,001 $ (405) 16 $ 0 $ 118,013
========== ======== ======== ======== ========= ======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements
5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 12,686 $ 11,454 $ 8,946
Adjustments to reconcile net earnings to net cash
from operating activities:
Depreciation and amortization 2,169 1,664 1,556
Amortization of securities premiums and discounts 426 387 641
Provision for loan losses 2,345 1,502 1,150
Security write down 350
Deferred income taxes 472 (390) 99
(Gain) loss on sale of securities (133) 122 32
Decrease in trading securities, net 3,671
(Increase) decrease in accrued interest receivable 29 568 (2,027)
(Increase) in other assets (138) (3,874) (764)
Increase (decrease) in other liabilities (1,147) 103 (866)
Other (increase) decrease (853) 779 (2,134)
--------- --------- ---------
Total operating adjustments 3,170 861 1,708
--------- --------- ---------
Net cash from operating activities 15,856 12,315 10,654
Cash flows from investing activities:
Net (increase) in loans (43,923) (85,528) (60,833)
Net (increase) decrease in federal funds sold (35,120) (24,950) 20,400
Available-for-sale securities:
Proceeds from maturities and principal repayments 50,740 20,772 37,699
Proceeds from sale of securities 4,688 7,848 18,764
Purchases of securities (68,114) (31,269) (67,962)
Held-to-maturity securities:
Proceeds from maturities and principal repayments 13,581 11,588 20,268
Proceeds from sale of securities 45
Purchases of securities (9,000) (22,426) (11,670)
Purchase of premises and equipment (9,365) (1,892) (1,968)
Payment of prepaid expenses (1,739)
--------- --------- ---------
Net cash (used in) investing activities (98,252) (125,812) (45,302)
--------- --------- ---------
Cash flows from financing activities:
Net increase in non-interest bearing and savings
deposits 26,326 28,094 14,536
Net increase in time deposits 53,320 44,164 54,702
Net increase (decrease) in federal funds purchased and
repurchase agreements (13,895) 34,979 (43,742)
Net increase (decrease) in commercial paper 18,121 17,563 (19,281)
Net increase (decrease) in other short-term borrowed
funds 4,679 (11,400) 2,974
Net increase (decrease) in long-term debt (200) (5,000) 47,000
Purchase of treasury stock (1) (10) (560)
Payment for fractional shares on stock dividends (26) (20) (18)
--------- --------- ---------
Net cash from financing activities 88,324 108,370 55,611
--------- --------- ---------
Net increase (decrease) in cash and due from banks 5,928 (5,127) 20,963
Cash and due from banks at beginning of year 42,006 47,133 26,170
--------- --------- ---------
Cash and due from banks at end of year $ 47,934 $ 42,006 $ 47,133
========= ========= =========
Supplemental disclosures
Cash paid during the year for:
Interest $ 30,266 $ 27,259 $ 16,147
Income taxes 7,206 7,725 5,474
Unrealized securities gains (losses) net of tax (680) 3,415 (3,369)
</TABLE>
See Notes to Consolidated Financial Statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--The Company's principal business is a bank holding
company for National City Bank of Minneapolis which is a full service national
bank offering a variety of loans, deposit programs, trust and related banking
services. The Company's principal non-bank subsidiary is Diversified Business
Credit, Inc., a commercial finance company.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its subsidiaries, after elimination of all material
intercompany transactions and balances. The preparation of the financial
statements in conformity with Generally Accepted Accounting Principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual experience could differ from those
estimates.
SECURITIES--Securities which the Company has the positive intent and ability to
hold to maturity are reported as Held-to-maturity securities. Securities in this
category are stated at cost, adjusted for amortization of premiums and accretion
of discounts over their remaining lives. Securities not classified as
held-to-maturity securities are classified as Available-for-sale securities and
are reported at fair value, with unrealized gains and losses, net of tax,
reported in a separate component of Stockholders' equity. Realized gains and
losses on disposition of securities and declines in value judged to be other
than temporary are computed on a specific identification method, and included in
earnings.
LOANS--Most of the Company's loans are to customers within Minnesota. Interest
income on loans is accrued on the basis of unpaid principal. Loan and commitment
fees are deferred and recognized over the loan and/or commitment period as a
yield adjustment on a straight-line basis. Loans are generally placed on
nonaccrual status when the collection of interest or principal has become 90
days past due or collection is otherwise considered doubtful. When a loan is
placed on nonaccrual status, interest previously accrued in the current year is
reversed against current period interest income. Interest payments received on
nonaccrual loans are generally applied against principal unless the loan is well
secured or in the process of collection.
ALLOWANCE FOR LOAN LOSSES--The provision for loan losses is based on
management's continuing evaluation of the loan portfolio, including estimates
and appraisals of collateral values, and current economic conditions. Changes in
the estimates, appraisals and evaluations might be required quickly in the event
of changing economic conditions and the economic prospects of borrowers. The
entire balance of the allowance is available to absorb losses on loans that
become uncollectible.
OTHER REAL ESTATE OWNED--Other real estate is recorded at the lower of fair
value at the time of repossession or the amount of the loan outstanding at the
time of foreclosure. When a property is acquired, the excess of the recorded
investment in the property over its estimated fair value, if any, is charged to
the allowance for loan losses. Expenses related to other real estate owned,
including reductions in value subsequent to acquisition, are reported as net
cost of other real estate owned in the Consolidated Statements of Earnings.
There was no other real estate owned in other assets at December 31, 1996 and
1995.
BANK PREMISES AND EQUIPMENT--Bank premises and equipment, including leasehold
improvements, are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are primarily computed on the
straight-line basis over the estimated useful life on the asset or lease term.
TREASURY STOCK--The Company's board of directors has authorized the repurchase
of shares from stockholders who have 100 or less shares. The board also
authorized the repurchase of larger blocks of stock, from time to time.
INCOME TAXES--Deferred income taxes are provided on all significant temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements at currently enacted tax rates.
INTEREST RATE SWAPS--The Company enters into interest rate swap transactions as
a tool to manage its interest rate risk. Income or expense on swaps designated
as hedges of assets or liabilities is recorded as an adjustment to interest
income or expense. If the hedged instrument is disposed of, the swap agreement
is marked to market with any resulting gain or loss included in the gain or loss
from the disposition. If the interest rate swap is terminated, the gain or loss
is deferred and amortized over the remaining life of the specific asset or
liability it was designated to hedge.
7
EARNINGS PER COMMON SHARE--Earnings per common share are computed by dividing
net earnings by the weighted average number of shares of common stock and common
stock equivalents outstanding during each year, as adjusted for issuance of
stock dividends.
STATEMENT OF CASH FLOWS--For purposes of the statement of cash flows, cash
equivalents includes cash and due from banks.
RECLASSIFICATIONS--Certain amounts for prior periods have been reclassified for
comparative purposes. The reclassifications had no effect on net earnings or
stockholders' equity as previously reported.
NOTE B. ESTIMATED FAIR VALUE
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments".
DECEMBER 31, 1996
----------------------
CARRYING ESTIMATED
(IN THOUSANDS) AMOUNT FAIR VALUE
- --------------------------------------------------------
ASSETS:
Cash and due from banks $ 47,934 $ 47,934
Federal funds sold and resale
agreements 60,120 60,120
Available-for-sale securities 133,190 133,190
Held-to-maturity securities 31,505 31,812
Loans 587,993 591,324
LIABILITIES:
Deposits 519,631 519,997
Federal funds purchased and
repurchase agreements 96,640 96,640
Commercial paper and
other short-term funds 109,473 109,473
Long-term debt 47,920 49,268
OFF-BALANCE SHEET UNREALIZED GAINS:
Interest rate swap agreements 1,347
DECEMBER 31, 1995
----------------------
CARRYING ESTIMATED
(IN THOUSANDS) AMOUNT FAIR VALUE
- --------------------------------------------------------
ASSETS:
Cash and due from banks $ 42,006 $ 42,006
Federal funds sold and resale
agreements 25,000 25,000
Available-for-sale securities 122,043 122,043
Held-to-maturity securities 36,126 36,487
Loans 543,979 548,522
LIABILITIES:
Deposits 439,985 441,040
Federal funds purchased and
repurchase agreements 110,535 110,535
Commercial paper and
other short-term funds 86,673 86,673
Long-term debt 48,120 51,183
OFF-BALANCE SHEET UNREALIZED GAINS:
Interest rate swap agreements 3,288
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgement is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amount the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
CASH AND DUE FROM BANKS--The carrying value of cash and due from banks
approximates estimated fair value.
FEDERAL FUNDS SOLD, RESALE AGREEMENTS, FEDERAL FUNDS PURCHASED, AND
REPURCHASE AGREEMENTS--The carrying value of these instruments approximates
estimated fair value.
SECURITIES--Estimated fair values of securities are based primarily on quoted
market prices or dealer quotes. If quoted market price is not available, fair
value is estimated using quoted market prices for securities with similar
characteristics.
LOANS--Approximately 84% of the loans outstanding have variable rate pricing.
Management segregates all loans into appropriate risk categories. For that
portion of the portfolio for which there are no known credit concerns,
management believes that the risk factor embedded in the pricing of loans
results in a fair valuation of such loans at their carrying value. For that
portion of the portfolio with an element of credit concern, the level of credit
adjustment required in the marketplace approximates the valuation allowance for
loan losses.
DEPOSITS--The fair value of non-interest bearing deposits and savings accounts
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the rates currently
offered in the marketplace for deposits of similar remaining maturities.
COMMERCIAL PAPER AND OTHER BORROWED FUNDS--These short term borrowings generally
mature in less than 90 days and carrying value is a reasonable estimate of fair
value.
LONG-TERM DEBT--The fair value of long-term debt is estimated using the rates
currently available on debt with similar terms and similar remaining maturities.
INTEREST RATE SWAP AGREEMENTS--The fair value is the estimated amount that the
Company would receive or pay to execute a new agreement with terms identical to
those remaining on the current agreement, considering current interest rates.
8
COMMITMENTS TO EXTEND CREDIT, STANDBY AND COMMERCIAL LETTERS OF CREDIT, AND
ACCEPTANCE PARTICIPATIONS ACQUIRED--The majority of the Company's commitment
agreements and letters of credit contain variable interest rates and
counterparty credit deterioration clauses. Therefore, the carrying value of the
Company's commitments to extend credit and letters of credit approximates fair
value.
NOTE C. LOANS
The following loans were outstanding:
DECEMBER 31,
---------------------
(IN THOUSANDS) 1996 1995
- -------------------------------------------------
Commercial & Industrial $389,718 $379,290
Real estate:
Construction 10,444 16,089
Residential mortgage 40,323 32,125
Non-residential mortgage 76,086 68,504
Loans to individuals for
personal expenditures 56,973 33,966
Other 22,960 22,607
-------- --------
$596,504 $552,581
======== ========
At December 31, 1996 and 1995, receivables from and standby letters of credit
issued on behalf of commercial real estate developers and investors were
approximately $77 million and $72 million, respectively.
An analysis of the allowance for loan losses is presented below:
YEAR ENDED DECEMBER 31,
-----------------------------
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------
Balance at beginning
of period $ 8,602 $7,946 $ 8,006
Provision charged to
operating expense 2,345 1,502 1,150
Charge-offs (2,552) (951) (1,372)
Recoveries 116 105 162
------- ------ -------
Balance at end of period $ 8,511 $8,602 $ 7,946
======= ====== =======
In the opinion of management, the allowance for loan losses is adequate to
provide for known and estimated exposures in the loan portfolio.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standard No. 114, "Accounting by Creditors for Impairment of a Loan." At
December 31, 1996, the Company had 4 impaired commercial loans totalling
$1,017,000 compared with 2 loans totalling $2,409,000 at December 31, 1995.
Management has allocated $280,000 of the Allowance for Loan Losses to these
loans. Impaired loans averaged $3,976,000 and $581,000 during 1996 and 1995,
respectively. Interest payments received on impaired loans are generally applied
against principal unless the loan is well secured or in the process of
collection. Non-accrual, impaired, renegotiated and loans past due 90 days or
more were $3,217,000 and $3,858,000 at December 31, 1996 and 1995, respectively.
Gross interest income would have been increased by approximately $426,000,
$311,000, and $103,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, had such loans been current and in accordance with original terms.
Nonperforming status is not necessarily an indication of probable loss.
Loans to principal officers and directors of the Company and its subsidiaries
aggregated approximately $8,822,000 and $8,431,000 at December 31, 1996 and
1995, respectively. New loans and repayments during 1996 were $749,000 and
$358,000, respectively. In the opinion of management, all such loans are made at
normal interest rates and terms.
NOTE D. BANK PREMISES AND EQUIPMENT
DECEMBER 31,
------------------
(IN THOUSANDS) 1996 1995
- -----------------------------------------------
Assets, at cost:
Land $ 183 $ 183
Buildings 885 885
Leasehold improvements 2,452 3,386
Construction in progress 1,113
Equipment 15,681 9,901
------- -------
19,201 15,468
Accumulated depreciation:
Buildings 500 476
Leasehold improvements 616 3,378
Equipment 6,287 7,302
------- -------
7,403 11,156
------- -------
$11,798 $ 4,312
======= =======
NOTE E. DEPOSITS
Approximately $143,727,000 and $74,325,000 of interest bearing time deposits
were in denominations of $100,000 or more at December 31, 1996 and 1995,
respectively. The scheduled maturities of time deposits at December 31, 1996 are
summarized as follows:
LESS THAN $100,000
(IN THOUSANDS) $100,000 OR MORE
- ----------------------------------------
3 months or less $13,177 $ 77,605
3 - 6 months 14,336 37,572
6 - 12 months 24,534 3,381
1 - 2 years 28,210 2,129
2 - 3 years 6,766 1,801
3 - 5 years 6,691 1,139
over 5 years 174 20,100
------- --------
$93,888 $143,727
======= ========
9
NOTE F. SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased, securities sold under
agreements to repurchase, treasury tax and loan deposits and commercial paper.
Federal funds purchased generally mature the day following the date of purchase,
while securities sold under agreements to repurchase generally mature within 30
days from the various dates of sale. The Company had unsecured lines of credit
available in the amount of $140,000,000, $115,000,000, and $80,000,000 at
December 31, 1996, 1995 and 1994, respectively.
There were no borrowings under the lines on these dates. The lines contain
covenants which require the Company to maintain certain levels of capitalization
and maintain debt to capitalization ratios within prescribed limits. The
following information relates to aggregate short-term borrowings:
DECEMBER 31,
----------------------------------
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------
Maximum amount out-
standing at any month end:
Federal funds & repurchase $137,883 $122,722 $117,506
Commercial paper 109,079 91,464 84,988
Other 20,391 20,853 51,077
Daily average amount
outstanding:
Federal funds & repurchase 116,973 113,245 100,339
Commercial paper 95,950 77,426 79,365
Other 6,967 8,350 23,747
Weighted average interest
rate for full year:
Federal funds & repurchase 4.83% 5.33% 3.74%
Commercial paper 6.09% 6.49% 4.80%
Other 5.37% 7.34% 5.75%
Outstanding at year-end:
Federal funds and repurchase 96,640 110,535 75,556
Commercial paper 98,107 79,986 62,423
Other 11,366 6,687 18,087
Weighted average interest rate
on debt outstanding
as of December 31:
Federal funds & repurchase 5.36% 5.17% 5.03%
Commercial paper 6.11% 6.12% 5.91%
Other 5.11% 5.16% 5.46%
NOTE G. LONG-TERM DEBT
DECEMBER 31,
------------------
(IN THOUSANDS) 1996 1995
- ------------------------------------------------------
Diversified Business Credit, Inc.
Senior Notes
Series A, 8.18%, due 1999 $23,000 $23,000
Series B, 8.45%, due 2001 24,000 24,000
Federal Home Loan Bank
Advances, 5.26% to 5.38%,
due 1997 through 1998 920 1,120
------- -------
Total $47,920 $48,120
======= =======
The Company has entered into interest rate swap agreements to effectively
convert the Senior Notes to floating rate instruments. The weighted average
effective interest rate for the Senior Notes, including the effects of the
related swap agreements, is the one month LIBOR rate plus 102 basis points,
6.63% at December 31, 1996.
The Senior Notes are unsecured and are unconditionally guaranteed by the parent
company. The Senior Notes include covenants which require Diversified Business
Credit, Inc. and the parent company to maintain certain levels of capitalization
and maintain debt to capitalization ratios within prescribed limits.
NOTE H. INCOME TAXES
The components of income tax expense were:
(IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------
Current:
Federal $6,080 $5,786 $3,916
State 1,557 1,873 1,333
------ ------ ------
7,637 7,659 5,249
Deferred:
Federal 357 (296) 75
State 115 (94) 24
------ ------ ------
472 (390) 99
------ ------ ------
$8,109 $7,269 $5,348
====== ====== ======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31,
----------------
(IN THOUSANDS) 1996 1995
- ---------------------------------------------------
Deferred tax assets:
Loan loss reserves $3,444 $3,481
Salary continuation plan 817 714
Loan fees 54 87
Nondeductible expenses 43 111
Unrealized losses on securities 276
Book over tax depreciation 307
------ ------
Total deferred tax assets 4,634 4,700
Deferred tax liabilities:
Retirement plan 1,059 991
Prepaid expenses 127 180
Tax over book depreciation 152
Security discounts 4 41
Unrealized gains on securities 187
------ ------
Total deferred tax liabilities 1,342 1,399
------ ------
Net deferred tax assets $3,292 $3,301
====== ======
It is more likely than not that the Company will realize the benefit of the
deferred tax assets. Therefore, no valuation allowance has been recorded for any
of the periods reported.
10
The total effective tax rate for the years ended December 31, 1996, 1995 and
1994 is different than the federal income tax rate.
The reasons for the differences are as follows:
1996 1995 1994
- ---------------------------------------------------
Federal income tax rate 35.0% 34.0% 34.0%
Tax exempt income (0.2) (0.7) (1.6)
State income taxes,
net of federal income
tax benefit 5.2 6.6 6.2
Goodwill 0.1
Cash value of life
insurance (0.8) (0.7) (0.8)
Other items (0.2) (0.4) (0.5)
---- ---- ----
Effective rate 39.0% 38.8% 37.4%
==== ==== ====
NOTE I. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding in connection with standby letters of
credit aggregating approximately $24,877,000 and $27,606,000 at December 31,
1996 and 1995, respectively.
Commercial letters of credit were $3,373,000 and $2,531,000 at December 31, 1996
and 1995, respectively. Acceptance participations acquired were $9,607,000 at
December 31, 1996 and $4,348,000 at December 31, 1995.
National City Bank has entered into a ten year lease which commenced March 16,
1996, for its new headquarters in downtown Minneapolis. The annual cost for the
first five years will be approximately $1.7 million per year and for the last
five years will be approximately $1.8 million per year. The lease provides an
option to extend the term for two consecutive five-year periods at the then
current fair market rents. The Bank will have the right to terminate the lease
or give back substantial portions of the leased premises on the sixth
anniversary of the lease term. In addition, the Bank paid for all of its
leasehold improvements, which approximated $2.0 million.
The Company was obligated under operating leases for premises and equipment with
terms of one year or more at December 31, 1996. The aggregate lease commitments
outstanding as of December 31, 1996, were $17,179,000 and for the next five
years are payable as follows:
(IN THOUSANDS)
- --------------------------
1997 $2,392
1998 2,182
1999 2,152
2000 1,970
2001 1,988
Net rental expense for the years ended December 31, 1996, 1995 and 1994, was
$2,170,000, $1,637,000, and $1,630,000, respectively.
Dividends declared by national banks that exceed retained net earnings for the
current year plus the preceding two years must be approved by the Comptroller of
the Currency. Under this formula, approximately $5,120,000 of dividends may be
paid by the Company's bank subsidiary at December 31, 1996, without such
approval, subject to continued maintenance of regulatory capital requirements.
The Company is party to various legal proceedings incidental to its business.
Certain claims, suits and complaints arising in the ordinary course of business
have been filed or are pending against the Company. In the opinion of
management, the resulting liability, if any, arising from these actions will not
be material.
NOTE J. RESTRICTIONS ON CASH BALANCES
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances on deposit with the Federal Reserve Bank. Cash balances
maintained to meet reserve requirements are not available for use by the
Company. During 1996, approximately $4,596,000 was maintained in required
reserves on a daily average basis.
NOTE K. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
The Company is a party to certain financial instruments with off-balance-sheet
risk which are entered in the normal course of business to meet the financing
needs of its customers and to reduce the Company's exposure to fluctuations in
interest rates. These financial instruments include unfunded commitments to
extend credit and interest rate swaps. These instruments involve, to varying
degrees, amounts of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheet. The contract or "notional" amounts
of those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
11
A summary of the Company's contractual or notional amounts for off-balance-sheet
activities at December 31, 1996 and 1995, is as follows:
(IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------
Credit activities:
Commitments to extend credit $292,923 $286,174
Standby letters of credit 24,877 27,606
Commercial letters of credit 3,373 2,531
Acceptance participations acquired 9,607 4,348
Other financial instrument activities:
Interest rate swap agreements $ 67,000 $ 47,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and generally
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral, obtained if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation. Collateral held varies, but may include cash,
marketable securities, accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
assure the performance of a customer to a third-party. Those standby letters of
credit are primarily issued to support customers' international business
transactions, and public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. Most standby letters
of credit expire within one year. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Company holds collateral supporting those commitments for which
collateral is deemed necessary. In most cases where collateral is held, coverage
is 100%.
Interest rate swaps involve the contractual exchange of fixed and floating rate
interest payment obligations based on a notional principal amount. The Company
enters into interest rate swap contracts to hedge its balance sheet for risk
caused by fluctuations in interest rates. The risks associated with such swaps
are the exposure to movement in interest rates (market risk) and the ability of
counterparties to meet the terms of the contract (credit risk). The use of swaps
for interest rate risk management purposes is integrated into the Company's
overall asset/liability management process.
For interest rate swap transactions, the contract or notional amounts do not
represent exposure to credit loss. The Company estimates the credit risk for
interest rate swap contracts by calculating the cost to replace all outstanding
contracts in a gain position at current market rates. At December 31, 1996 and
1995, the gain position of these contracts was $1.9 million and $3.5 million,
respectively. The Company controls the credit risk associated with swap
agreements through credit approvals and monitoring procedures. Under the terms
of certain swaps, each party may be required to pledge certain assets if the
market value of the swap exceeds an amount set forth in the swap agreement or in
the event of a change in their credit rating.
At December 31, 1996 and 1995, interest rate swaps totaling $47 million hedged
long-term debt. At December 31, 1996, swaps totaling $20 million hedged interest
bearing deposits. The Company is a receiver of fixed rate interest and a payer
of floating rate interest based on the one month LIBOR rate on all of these
swaps. The notional balances and yields by maturity date for interest rate swaps
at December 31, 1996, are as follows:
WEIGHTED WEIGHTED
NOTIONAL AVERAGE AVERAGE
AMOUNT INTEREST RATE INTEREST RATE
MATURITY DATE (IN THOUSANDS) RECEIVED PAID
- ------------------------------------------------------------------
1999 $ 23,000 7.19% 5.61%
2001 44,000 7.00% 5.57%
--------
Total $ 67,000 7.06% 5.58%
Swaps contributed to the Company's net interest income by reducing interest
expense for the years ended December 31, 1996, 1995 and 1994, by $799,000,
$564,000 and $266,000, respectively.
NOTE L. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all of its
full-time employees. The benefits are based on years of service and the
employee's compensation while employed with the Company. The Company's funding
policy is to contribute annually current service costs accrued and past service
costs amortized over a 30-year period. Contributions are intended to provide not
only for benefits attributed to service to date but also for those expected to
be earned in the future. Plan assets consist principally of equity securities
and U.S. Government and corporate bonds.
12
The following table sets forth the plan's funded status and amounts recognized
in the Company's financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$9,040 in 1996, $8,321 in 1995 and $7,756 in 1994 $ (9,222) $(8,578) $(7,926)
======== ======= =======
Projected benefit obligation for service rendered to date $(10,235) $(9,473) $(8,812)
Plan assets at fair value 13,204 12,730 11,500
-------- ------- -------
Plan assets in excess of projected benefit obligation 2,969 3,257 2,688
Unrecognized net loss from past experience different from that
assumed and effects of changes in assumptions 209 (160) 359
Unrecognized transition asset at January 1, 1986 being
recognized over 17 years (385) (446) (508)
-------- ------- -------
Prepaid pension cost included in other assets $ 2,793 $ 2,651 $ 2,539
======== ======= =======
Net pension costs include the following components:
Service cost--benefits earned during the period $ 344 $ 253 $ 575
Interest cost on projected benefit obligation 716 725 725
Actual return on plan assets (1,472) (2,364) (1,170)
Net amortization and deferral 270 1,274 75
-------- ------- -------
Net periodic pension cost $ (142) $ (112) $ 205
======== ======= =======
</TABLE>
For 1996, the discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 7.5% and 4.5%, respectively. For 1995, the rates were 7% and
4.5%. For 1994, the rates were 8.75% and 4.5%. The expected long-term rate of
return on assets was 9% for all three years.
The Company maintains a retirement savings 401(k) plan. All employees of the
Company and its subsidiaries are eligible to participate in the plan after
completing twelve months of service during which they have worked at least one
thousand hours. Matching contributions are made at the discretion of management.
Company contributions charged to operations for the years ended December 31,
1996, 1995 and 1994, were $263,000, $257,000, and $218,000, respectively.
The Company and its subsidiaries have entered into agreements to provide salary
continuation supplemental payments at retirement to certain officers. The
benefits due under these agreements are being accrued currently.
NOTE M. PARENT ONLY INFORMATION
The following financial information relates to National City Bancorporation
(parent only) operations:
BALANCE SHEETS
DECEMBER 31,
---------------------
(IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------
ASSETS
Cash $ 4,104 $ 4,718
Investment in bank subsidiary 53,648 50,848
Investment in non-bank subsidiary 21,661 16,542
Subordinated note receivable from affiliate 8,000 8,000
Other investments 663 605
Due from affiliates 127,350 104,155
Other assets 751 1,301
-------- --------
$216,177 $186,169
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper $ 98,107 $ 79,986
Other liabilities 57 149
Stockholders' equity 118,013 106,034
-------- --------
$216,177 $186,169
======== ========
13
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
-----------------------------
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiary $ 3,120 $ 5,515 $ 4,796
Interest income 7,836 6,917 5,692
Other income 296 208 392
------- ------- -------
11,252 12,640 10,880
EXPENSES
Interest expense 5,909 5,088 4,572
Other expenses 628 592 674
------- ------- -------
6,537 5,680 5,246
Earnings before taxes 4,715 6,960 5,634
Income taxes 652 595 335
------- ------- -------
4,063 6,365 5,299
Equity in undistributed net earnings of subsidiaries 8,623 5,089 3,647
------- ------- -------
Net earnings $12,686 $11,454 $ 8,946
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 12,686 $ 11,454 $ 8,946
Adjustments to reconcile net earnings to net cash
from operating activities:
Equity in undistributed earnings of subsidiaries (8,623) (5,089) (3,647)
(Increase) decrease in other assets 550 (279) (611)
(Decrease) in other liabilities (92) (109) (706)
-------- -------- --------
(8,165) (5,477) (4,964)
-------- -------- --------
Net cash from operating activities 4,521 5,977 3,982
Cash flows from investing activities:
(Advances to) payments from affiliates (23,195) (19,592) 20,821
Subordinated note with affiliate (8,000)
Decrease in other investments 260 1,925
-------- -------- --------
Net cash from (used for) investing activities (23,195) (19,332) 14,746
Cash flows from financing activities:
Net increase (decrease) in commercial paper 18,121 17,563 (19,281)
Payment for fractional shares on stock dividends (26) (20) (19)
Purchase of treasury stock (1) (10) (560)
Other (34) 29 29
-------- -------- --------
Net cash from (used for) financing activities 18,060 17,562 (19,831)
-------- -------- --------
Net increase (decrease) in cash (614) 4,207 (1,103)
Cash at beginning of year 4,718 511 1,614
-------- -------- --------
Cash at end of year $ 4,104 $ 4,718 $ 511
======== ======== ========
Supplemental disclosures
Cash paid (received) during the year for:
Interest $ 5,465 $ 5,270 $ 4,635
Income taxes 690 889 (358)
</TABLE>
14
NOTE N. SECURITIES
Securities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
COST OR APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $ 24,019 $ 39 $ 155 $ 23,903
U.S. Government agencies 9,646 16 1 9,661
Federal agency mortgage-backed 95,252 511 1,092 94,671
Other securities 4,955 4,955
-------- ---- ------ --------
$133,872 $566 $1,248 $133,190
======== ==== ====== ========
Held-to-maturity
Collateralized mortgage obligations $ 31,254 $314 $ 7 $ 31,561
Other securities 251 251
-------- ---- ------ --------
$ 31,505 $314 $ 7 $ 31,812
======== ==== ====== ========
DECEMBER 31, 1995
--------------------------------------------------
Available-for-sale
U.S. Treasury $ 21,993 $ 30 $ 21,963
U.S. Government agencies 11,999 $ 19 1 12,017
Federal agency mortgage-backed 82,717 877 402 83,192
Other securities 4,871 4,871
-------- ---- ------ --------
$121,580 $896 $ 433 $122,043
======== ==== ====== ========
Held-to-maturity
Collateralized mortgage obligations $ 35,109 $401 $ 60 $ 35,450
Obligations of states and politicial subdivisions 642 13 655
Other securities 375 7 382
-------- ---- ------ --------
$ 36,126 $421 $ 60 $ 36,487
======== ==== ====== ========
</TABLE>
15
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
CONTRACTUAL MATURITIES AND MARKET VALUE
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
WITHIN AFTER ONE AFTER FIVE AFTER
ONE BUT WITHIN BUT WITHIN TEN
(IN THOUSANDS) YEAR FIVE YEARS TEN YEARS YEARS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $23,903
U.S. Government agencies $ 4,999 4,662
Federal agency mortgage-backed 7,240 $16,896 $70,535
Other securities 4,955
------- ------- ------- -------
$12,239 $28,565 $16,896 $75,490
======= ======= ======= =======
Held-to-maturity
Collateralized mortgage obligations $31,254
Other securities $ 251
------- -------
$ 251 $31,254
======= =======
Approximate market value $ 251 $31,561
======= =======
DECEMBER 31, 1995
-----------------------------------------------
Available-for-sale
U.S. Treasury $21,963
U.S. Government agencies 12,017
Federal agency mortgage-backed $10,921 $21,581 $50,690
Other securities 4,871
------- ------- ------- -------
$33,980 $10,921 $21,581 $55,561
======= ======= ======= =======
Held-to-maturity
Collateralized mortgage obligations $ 1,532 $33,577
Obligations of states and political subdivisions $ 107 $ 255 280
Other securities 375
------- ------- ------- -------
$ 107 $ 630 $ 1,812 $33,577
======= ======= ======= =======
Approximate market value $ 108 $ 645 $ 1,818 $33,916
======= ======= ======= =======
</TABLE>
Realized gains (losses) on securities sales in the years ended December 31, 1996
and 1995 were $133,000 and ($122,000), respectively. Income tax expense or
benefit on these amounts for December 31, 1996 and 1995 was $54,000 and
($49,000), respectively.
Securities carried at $115,925,000 and $127,434,000 at December 31, 1996 and
1995, respectively, were pledged to secure government, public and trust
deposits, borrowings in the form of repurchase agreements and FHLB advances and
for other purposes as required by law.
The Company retains possession of most securities sold under agreements to
repurchase. The Company takes possession of securities purchased under agreement
to resell.
16
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
National City Bancorporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of National City
Bancorporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National City
Bancorporation and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst $ Young LLP
Minneapolis, Minnesota
January 15, 1997
17
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET ITEMS (IN MILLIONS)
Securities $ 165 $ 158 $ 139 $ 141 $ 136
Loans 597 553 467 406 361
All other assets 138 90 67 67 60
Total assets 900 801 673 614 557
Total deposits 520 440 368 298 298
Short-term borrowed funds 206 198 156 216 168
Long-term debt 48 48 53 6
All other liabilities 8 9 5 8 7
Total liabilities 782 695 582 528 473
Stockholders' equity 118 106 91 86 84
INCOME AND EXPENSE ITEMS (IN THOUSANDS)
Interest and fees on loans 57,992 54,952 41,046 31,584 30,100
All other interest income 11,404 10,417 9,179 8,997 8,709
Total interest income 69,396 65,369 50,225 40,581 38,809
Interest expense on deposits 14,980 12,950 8,490 6,780 8,316
Interest expense on short-term borrowed funds 11,908 11,680 8,933 6,572 6,001
Interest expense on long-term debt 3,261 3,638 1,015 101
Total interest expense 30,149 28,268 18,438 13,453 14,317
Net interest income 39,247 37,101 31,787 27,128 24,492
Provision for loan losses 2,345 1,502 1,150 1,050 1,007
Trust fees 4,605 4,839 4,683 4,544 4,114
Gains (losses) on sale of securities 133 (122) (32) 343 1,007
All other income 5,344 4,460 5,290 7,325 7,141
All other expenses 26,189 26,053 26,284 27,151 24,838
Earnings before cumulative effect of change in
accounting principle 12,686 11,454 8,946 7,135 6,919
Cumulative effect of change in accounting
principle 204
Net earnings 12,686 11,454 8,946 7,339 6,919
PER COMMON SHARE
Earnings before cumulative effect of change in
accounting principle 1.72 1.55 1.21 0.92 0.89
Cumulative effect of change in accounting
principle 0.03
Net earnings 1.72 1.55 1.21 0.95 0.89
</TABLE>
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY RESULTS
Net earnings for 1996 were $12,686,000 compared with $11,454,000 in 1995, up 11
percent. Net earnings per share increased to $1.72 in 1996 compared with $1.55
in 1995. This increase was accomplished during a year marked by significant
change including the Bank's relocation to new quarters in Gaviidae Common, and a
redesigned organizational structure intended to refocus our efforts to improve
service to businesses, their owners and employees.
Major factors contributing to the earnings increase in 1996 were higher net
interest income resulting from growth in loans and investments and an increase
in non-interest income. We accomplished this growth as well as the relocation to
Gaviidae Common while holding non-interest expenses to an increase of less than
one percent. These positive factors were partially offset by an increase in the
provision for loan losses.
The Company has issued stock dividends in each year beginning in 1981. The
Company has not paid cash dividends.
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent basis, increased to $39.3
million up from $37.4 million in 1995 and $32.2 million in 1994. Fluctuations in
net interest income can result from changes in the volume of assets and
liabilities as well as changes in interest rates. These changes are presented in
the analysis on page 25. The average base rate decreased to 8.28 percent from
8.83 percent in 1995. Approximately 84 percent of the Company's loan portfolio
has floating interest rates that generate more income during periods of rising
rates. Net interest margin, the relationship between net interest income and
average earning assets, was 5.26 percent compared with 5.54 percent in 1995.
Average earning assets grew to $747 million in 1996, an increase of $73 million
or 11 percent. Average loans increased to $571 million in 1996 from $510 million
in 1995, an increase of 12 percent. Loans were 76.4 percent of total earning
assets in 1996, up from 75.7 percent in 1995.
The general decline in interest rates during 1996 decreased the cost of interest
bearing deposits and borrowed funds to 5.18 percent from 5.47 percent in 1995, a
decrease of 29 basis points. While the average base rate decreased 55 basis
points, the average yield on earning assets, including fixed rate securities,
decreased 44 basis points. As a result, interest rate spread declined to 4.12
percent from 4.27 percent in 1995. Interest bearing time deposits of $100,000 or
more increased significantly and averaged $103.8 million in 1996. Other interest
bearing deposit accounts increased compared with last year and comprise
approximately 36 percent of interest bearing sources. The largest component of
the increase represents a greater use of brokered deposits in the Bank. Brokered
deposits averaged $64.8 million in 1996 compared with $58.7 million in 1995.
While the Company's emphasis remains increasing funding from direct deposits,
the brokered deposit market is an important funding option. Commercial paper
proceeds are used to fund the loans of the Company's commercial finance
subsidiary, Diversified Business Credit, Inc. (DBCI). Long-term debt is issued
by DBCI, and National City Bank (Bank) borrows from the Federal Home Loan Bank.
At December 31, 1996, long-term debt totaled $47.9 million. Non-interest bearing
deposits increased from 1995 and averaged $110 million in 1996.
19
The following table summarizes the changes in funding sources since 1994:
<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
% CHANGE % CHANGE
(DAILY AVERAGES IN THOUSANDS) AMOUNT FROM 1995 AMOUNT FROM 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest bearing time deposits of $100,000 or more $103,797 56.6% $ 66,277 (6.8)%
Other interest bearing deposits 210,329 5.2 199,980 26.3
Commercial paper 95,950 23.9 77,426 (2.4)
Other short-term borrowed funds 123,940 1.9 121,595 (2.0)
Long-term debt 48,054 (5.9) 51,052 180.1
-------- --------
Total interest bearing 582,070 12.7 516,330 14.4
Non-interest bearing deposits 110,222 6.0 103,945 .8
Other liabilities 8,533 3.4 8,250 38.4
Stockholders' equity 110,595 12.5 98,350 11.9
-------- --------
$811,420 11.6% $726,875 12.1%
======== ========
</TABLE>
CREDIT RISK MANAGEMENT
The responsibility for credit administration rests with the credit committees of
each subsidiary's board of directors. The credit committees determine applicable
policies and credit approval authorities used in the Company. Management
monitors compliance with credit standards. Lending officers are responsible for
applying credit standards and the Company uses a rating system to assess and
monitor the credit risk associated with loans. Detecting negative trends at the
earliest possible stage is essential in managing risk of loan loss to the
Company and assisting the borrowing customer. A diligent follow-up process is
used to monitor, communicate and correct weaknesses that are revealed.
The Bank has established a risk management function that is responsible for
assessing credit risk associated with new loans and lines of credit as well as
monitoring credit risk factors on an ongoing basis. The Bank uses an independent
review procedure to monitor compliance with its credit granting process. The
review includes an assessment of credit policy application and the accuracy of
the loan rating system. The review of credit process covers all lending industry
segments on a schedule determined by assessment of risk. Management and the
Examining and Audit Committee of the Board of Directors are informed directly of
the results of the reviews. DBCI monitors collateral values and related credit
risks through its staff of field auditors.
The largest loan category is commercial and industrial loans, which grew from
$379 million in 1995 to $390 million in 1996, an increase of 3 percent.
Management monitors loan concentrations by industry segment to develop a diverse
mix of credits. Industry Credit Exposure Guidelines are established and managed
based on the current and anticipated economic conditions and the perceived risk
profile of an industry. The Company's ability to manage the credit risk within
an industry is also considered. Geographically, a high percentage of the
commercial and industrial loans originate from the Minneapolis/St. Paul
metropolitan area that has seen moderate to strong growth in most industry
sectors in 1996. Those industry sectors showing signs of weakness are targeted
by management for slow or no growth in credit facilities. Underwriting
Guidelines including profitability, cash flow, leverage, collateral, guarantee
and monitoring standards are applicable for the bulk of the commercial and
industrial loans. The Bank also purchases loans from correspondent banks.
Purchased loans were $40.3 million and $37.3 million at December 31, 1996, and
1995, respectively.
Loans secured by commercial real estate were approximately $86 million as of
December 31, 1996 and 1995. Included in this total is approximately $10 million
of construction financing. The Company makes commercial real estate loans for
owner occupied real estate (commercial and industrial borrowers), as well as to
commercial real estate developers and investors. A diversification of property
types is maintained within the commercial real estate portfolio with office and
warehouse facilities to manufacturers or distributors being the largest category
at 26%. Commercial real estate lending activities are guided by Credit Policies,
Underwriting Guidelines, Operating Procedures, Collateral Standards and
Environmental Risk Procedures.
20
Loans secured by residential mortgages totaled $40 million at December 31, 1996,
up from $32 million last year. This category includes $20 million secured by
first liens on 1-4 family housing, $10 million secured by junior liens on 1-4
family housing and $10 million revolving Executive Line loans that are secured
by either first or second mortgages. The comparable 1995 amounts are $14 million
first liens, $7 million junior liens and $11 million revolving Executive Lines.
Collateral standards for residential real estate lending generally call for a
maximum 80% loan-to-value ratio for properties up to $300,000 and lesser advance
rates for properties above $300,000.
Loans to individuals were $57 million at December 31, 1996, up 68% from $34
million in 1995. This higher growth percentage is in line with management's
strategy for greater loan diversification. Growth continues to come from a
variety of sources including loans to higher net-worth individuals in which
smaller loan amounts are typically unsecured and where larger amounts are
normally secured by marketable securities or home equity. The Company has
experienced a low level of loss in the residential mortgage and loans to
individuals categories. This resulted from a combination of favorable economic
conditions in the Twin Cities over the past several years and the effective
performance of credit risk management functions. Growth also occurred in home
improvement loans to individuals referred through various contractors.
Other loans were $23 million on December 31, 1996, and 1995. These loans are
comprised primarily of loans to owners of other community banks to finance the
purchase and capital expansion of those banks. The management of risks related
to bank stock loans includes specific underwriting guidelines, periodic reviews
performed by experienced consultants or bank staff, receipt and analysis of
quarterly financial data and frequent calls with bank ownership and management.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $2.3 million in 1996 up from $1.5 million in
1995. Management determines an appropriate provision based on its evaluation of
the adequacy of the allowance for loan losses in relationship to a continuing
review of problem loans, including estimates and appraisals of collateral
values, prior loss experience, and current economic conditions. Changes in these
estimates, appraisals and evaluations might be required quickly in the event of
changing economic conditions and the economic prospects of borrowers. Management
uses a system of risk grading to establish monthly assessments of the portfolio
and reviews the adequacy of the valuation allowance for loan losses quarterly.
The allowance for Loan Losses decreased slightly to $8.5 million as a result of
the higher net losses in 1996. At December 31, 1996, the reserve was 1.43
percent of loans compared with 1.56 percent in 1995. Actual net loan losses in
1996 were $2.4 million compared with $846,000 in 1995. Charge-offs were $2.5
million in 1996, and recoveries were $116,000. The largest single loss of $1.5
million was in the commercial loan portfolio of the Bank. During the same
period, the Company reduced non-performing assets from $3.9 million to $3.2
million. The reserve coverage of these assets increased from 223 percent to 265
percent.
The Company's receivables from and letters of credit issued for customers in the
real estate industry were approximately $77 million at December 31, 1996,
compared with $72 million at December 31, 1995. The credit risk associated with
these loans is subject to changes in real estate market values. The properties
held as collateral are primarily in the state of Minnesota.
NON-PERFORMING ASSETS
Non-performing assets were $3.2 million at December 31, 1996, compared with $3.9
million in 1995 and $6.2 million in 1994. At the current year-end,
non-performing assets consisted primarily of loans on non-accrual status.
Non-accrual loans are loans on which the accrual of interest ceases when the
collection of principal or interest is determined to be doubtful by management.
It is the Company's policy to cease the accrual of interest when principal or
interest payments are delinquent 90 days or more. Any unpaid amounts previously
accrued in the current year are reversed from income, and thereafter interest is
recognized only when payments are received. Nonperforming loans include loans on
which principal payments are contractually delinquent 90 days or more and
interest is still being accrued.
21
These loans are well secured and in the process of collection. Other real estate
owned includes assets acquired in partial or full satisfaction of loan
obligations or "in-substance" foreclosures. These assets are classified as other
assets and are recorded at the lower of fair value or the amount of the loan
outstanding at the time of foreclosure. The Company had no other real estate
owned at December 31, 1996 or 1995.
In addition to non-accrual loans and accruing loans 90 days or more past due,
there were real estate-construction and commercial business loans with an
aggregate principal balance of $18 million outstanding at December 31, 1996, to
borrowers who are currently experiencing financial difficulties. Although these
loans are adequately secured by commercial real estate or other corporate
assets, management has concerns regarding the ability of such borrowers to
continue meeting existing loan repayment terms. Accordingly, these loans may be
subject to future modifications of their terms or may become non-performing.
Management is monitoring the performance and classification of such loans and
the financial condition of these borrowers and has considered the risk
associated with these loans in determining the adequacy of the allowance for
loan losses.
INTEREST RATE RISK MANAGEMENT
Because of the rate sensitivity of financial instruments, fluctuations in
interest rates expose the Company to potential gains and losses resulting from
changes in the fair value of the instruments. The objective of interest rate
risk management is to control exposure of net interest income to risks
associated with interest rate movements. The Company actively manages its
interest rate risk position. The tools used to measure interest rate risk
include gap analysis and a market valuation model that measures interest rate
risk from an economic perspective. Significant assumptions required in the use
of these tools include prepayment risks and the timing of changes in deposit
rates compared with changes in money market rates.
The market value of each asset and liability is calculated in the market
valuation model by computing the present value of all cash flows generated. In
each case, the cash flows are discounted by a market interest rate chosen to
reflect as closely as possible the characteristics of the given asset or
liability. As of the reporting date, this internal valuation model indicates
that a 2 percent shift in the absolute level of interest rates would change the
market value of equity by less than 4 percent. This represents a relatively risk
neutral position from an economic perspective.
The following table summarizes the Company's repricing gap for various time
intervals.
<TABLE>
<CAPTION>
WITHIN 3 MONTHS 1 YEAR MORE THAN
(IN MILLIONS) 3 MONTHS TO 1 YEAR TO 5 YEARS 5 YEARS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $494 $ 36 $ 52 $ 14
Securities 16 28 82 39
Other assets 103 36
---- ---- ---- ----
613 64 134 89
Non-interest bearing deposits 126 6 31
Interest bearing deposits 166 97 94
Short-term borrowings 198 8
Long-term debt 48
Interest rate swaps 67 (67)
Other liabilities and stockholders' equity 126
---- ---- ---- ----
557 111 106 126
---- ---- ---- ----
Repricing gap $ 56 $(47) $ 28 $(37)
Cumulative gap 56 9 37 0
Cumulative gap as a percent of assets 6% 1% 4% 0%
</TABLE>
As indicated by the Gap table, assets reprice slightly faster than liabilities
as of the reporting date. With this balance sheet position, which is typical for
the Company, interest margins are projected to increase slightly in an
environment of rising short-term rates and decline slightly in a declining rate
22
environment. A lower interest rate environment is preferable for the Company
from a credit perspective, however, as there is less pressure on customers to
meet variable rate debt servicing obligations.
NON-INTEREST INCOME
Total non-interest income was $10.1 million, up from $9.2 million in 1995 and
$9.9 million in 1994. Increases resulted primarily from mortgage refinancing
activity, service charges on deposit accounts, sales of financial services and
investment products and loan prepayment fees. The Bank realized gains of
$133,000 on the sale of investment securities in 1996 compared with losses of
$122,000 in 1995, and losses of $32,000 in 1994. The table below summarizes the
major components of non-interest income:
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------
Trust income $ 4,605 $4,839 $4,683
Service charges on deposit accounts 2,189 1,862 2,113
Mortgage banking fees 514 399 775
Sale of financial services and investment products 383 291 579
Securities gains (losses) 133 (122) (32)
Letter of credit commissions 374 389 333
Other 1,884 1,519 1,490
------- ------ ------
$10,082 $9,177 $9,941
======= ====== ======
NON-INTEREST EXPENSE
Non-interest expense totaled $26.2 million in 1996, compared with $26.1 million
in 1995 and $26.3 million in 1994. Lower personnel expense reflects a reduction
in the Company's staff and lower accruals for performance based incentive
compensation at the Bank. Fees and assessments were lower in 1996 resulting
primarily from a reduction in attorney fees of $170,000 and lower FDIC insurance
premiums by $416,000. The table below summarizes the major components of
non-interest expense:
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------
Salaries and employee benefits $14,965 $15,156 $15,325
Net occupancy 2,750 2,272 2,476
Equipment 2,731 2,481 2,228
Fees and assessments 1,102 1,771 2,626
Advertising and marketing 844 511 345
Other 3,797 3,862 3,284
------- ------- -------
$26,189 $26,053 $26,284
======= ======= =======
CAPITAL AND LIQUIDITY
Stockholders' equity was $118 million or 13.1 percent of total assets at
December 31, 1996, compared with $106 million and 13.2 percent in 1995. The
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weighting and other factors. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. The Office of the
Comptroller of the Currency has categorized the Company as well capitalized
under existing regulatory guidelines. The required risk based ratio for capital
adequacy purposes is eight percent and the required leverage ratio is four
percent. A well capitalized company under prompt corrective action provisions
must maintain a risk based ratio of ten percent and a leverage ratio of five
percent. The table below states the Company's capital ratios:
23
DECEMBER 31,
----------------
1996 1995
- ----------------------------------------
RISK CAPITAL RATIOS
Tier I Capital 15.97% 16.04%
Total Capital 17.12% 17.34%
LEVERAGE RATIO 13.11% 13.23%
Liquidity is the ability to raise funds in all market environments to meet the
commitments of the Company. Liquidity is available through the management of
liabilities and from various asset sources. It is the policy of the Company to
rely primarily on managed liabilities, but to recognize the potential need for
asset liquidity in meeting liquidity requirements. Liability sources include
large denomination certificates of deposit and borrowing as federal funds
purchased, repurchase agreements, and Federal Home Loan Bank advances in the
bank subsidiary. The sale of commercial paper as well as back up lines of credit
available to the parent Company provide additional sources of liquidity. The
Bank's holding of short-term money market investments such as federal funds sold
and securities purchased under agreements to resell enhances asset liquidity.
The Company issues commercial paper to finance the loans of DBCI. The Company's
commercial paper has an independent rating and is backed by supporting lines of
credit of $140 million. DBCI has original maturity five and seven-year term
notes in the amount of $47 million with an investment grade rating. DBCI is in
the process of obtaining additional term funding of $10 million to provide for
future growth.
Available-for-sale securities provide liquidity through scheduled maturities and
the cash convertibility of these assets at market value. At December 31, 1996,
the market value of available-for-sale securities was less than amortized cost
by $682,000. At December 31, 1995, the market value exceeded amortized cost by
$463,000. Held-to-maturity securities provide liquidity through scheduled
maturities. The majority of the securities are readily marketable. Management
has structured the loan portfolio to provide additional liquidity with at least
55 percent of total loans having scheduled maturities within one year.
Cash flows from operations and changes in the balance sheet also affect
liquidity. The Consolidated Statement of Cash Flows on page 6 shows the
component changes in the Company's cash position for the three years ending
December 31, 1996. In 1996, net cash provided from operating activities
increased to $15.9 million. Investing activities reflect loan originations and
principal repayments as well as activity in short-term money market investments,
the investment portfolio and investment in premises and equipment. In 1996, net
cash used in investing activities decreased by $27.6 million. The reduction
reflects lower loan growth as compared with the prior year and the increased
investment in premises and equipment in connection with the move to new
quarters. Cash provided from financing activities decreased by $20 million in
1996 reflecting reduced funding needs. Increased funding sources included
deposits and commercial paper with a corresponding lower use of federal funds
purchased and repurchase agreements.
The Company is not aware of any current recommendations by regulatory
authorities which if they were to be implemented would have a material effect on
liquidity, capital resources or operations.
1995 VERSUS 1994
The major factors contributing to the earnings increase were higher net interest
income and lower non-interest expense, partially offset by lower non-interest
income. Net interest income increased to $37.4 million, up 16 percent. The
increase resulted from a higher volume of earning assets and an increase in net
interest margin. Excluding losses on sale of securities, non-interest income
decreased $674,000 resulting from reduced mortgage financing activity and lower
fees from the sale of financial services and investment products. Non-interest
expense was down $231,000 from 1994 reflecting lower personnel expenses and a
reduction in attorney fees and FDIC insurance premiums.
24
CHANGE IN INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
YEAR-ENDED DECEMBER 31,
-----------------------------------------------------------
1996 OVER 1995 1995 OVER 1994
----------------------------- --------------------------
CHANGES CHANGES
RESULTING FROM RESULTING FROM
------------------ ----------------
(IN THOUSANDS ON A FULLY TAXABLE EQUIVALENT BASIS) TOTAL RATES VOLUME TOTAL RATES VOLUME
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Earned on:
Funds sold $ 77 $ (68) $ 145 $ (1) $ 195 $ (196)
Taxable securities 1,211 395 816 1,341 847 494
Tax-exempt securities (440) 4 (444) (171) 36 (207)
Loans 3,001 (3,614) 6,615 13,826 6,802 7,024
------ ------- ------ ------- ------ ------
Total earning assets 3,849 (3,283) 7,132 14,995 7,880 7,115
Interest Paid on:
Savings deposits 756 145 611 959 899 60
Time deposits 1,254 (577) 1,831 3,480 1,707 1,773
Other deposits 20 7 13 21 36 (15)
Short-term funds borrowed 228 (997) 1,225 2,747 2,942 (195)
Long-term debt (377) (163) (214) 2,623 795 1,828
------ ------- ------ ------- ------ ------
Total interest bearing liabilities 1,881 (1,585) 3,466 9,830 6,379 3,451
------ ------- ------ ------- ------ ------
Increase (decrease) in net interest income $1,968 $(1,698) $3,666 $ 5,165 $1,501 $3,664
====== ======= ====== ======= ====== ======
</TABLE>
In the above analysis, rate differences were computed as the change in the rate
between the current and prior period times the volume of the current year, while
the volume differences were computed as the change in volume between the current
and prior period times the prior year's rate.
25
DISTRIBUTION OF ASSETS, LIABILITIES
AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996
-------------------------------
INTEREST
(DAILY AVERAGES IN THOUSANDS AND ON A FULLY TAXABLE EQUIVALENT AVERAGE INCOME/ AVERAGE
BASIS) BALANCE EXPENSE RATE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements $ 14,561 $ 804 5.52%
Securities:
Taxable 161,473 10,580 6.55
Tax-exempt 170 27 15.88
-------- -------
Total securities 161,643 10,607 6.56
Loans 571,159 58,062 10.17
-------- -------
Total earning assets 747,363 69,473 9.30
Cash and due from banks 37,245
Other assets 26,812
--------
$811,420
========
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Savings $ 84,778 $ 3,346 3.95%
Time 197,808 11,254 5.69
Other 31,540 380 1.20
-------- -------
Total 314,126 14,980 4.77
Short-term borrowed funds 219,890 11,908 5.42
Long-term debt 48,054 3,261 6.79
-------- -------
Total interest bearing liabilities 582,070 30,149 5.18
Non-interest bearing deposits 110,222
Other liabilities 8,533
Stockholders' equity 110,595
--------
$811,420
========
-------
Net interest income and interest rate spread $39,324 4.12
=======
Net interest margin 5.26
Fees on loans included above $ 2,326
=======
</TABLE>
Average balance of non-accruing loans is included in the above analysis.
Interest income attributable to non-accruing loans has not been included in the
above analysis except as collected.
26
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
1995 1994
-------------------------------- -------------------------------
INTEREST INTEREST
(DAILY AVERAGES IN THOUSANDS AND ON A FULLY TAXABLE EQUIVALENT AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BASIS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements $ 12,134 $ 727 5.99% $ 16,608 $ 728 4.38%
Securities:
Taxable 148,543 9,369 6.31 139,933 8,028 5.74
Tax-exempt 3,428 467 13.62 5,071 638 12.58
-------- ------- -------- -------
Total securities 151,971 9,836 6.47 145,004 8,666 5.98
Loans 509,899 55,061 10.80 435,684 41,235 9.46
-------- ------- -------- -------
Total earning assets 674,004 65,624 9.74 597,296 50,629 8.48
Cash and due from banks 34,412 33,753
Other assets 18,459 17,087
-------- --------
$726,875 $648,136
======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits: $ 68,598 $ 2,590 3.78% $ 66,180 $ 1,631 2.46%
Savings 167,200 10,000 5.98 131,448 6,520 4.96
Time 30,459 360 1.18 31,882 339 1.06
Other -------- ------- -------- -------
266,257 12,950 4.86 229,510 8,490 3.70
Total 199,021 11,680 5.87 203,451 8,933 4.39
Short-term borrowed funds 51,052 3,638 7.13 18,224 1,015 5.57
Long-term debt -------- ------- -------- -------
516,330 28,268 5.47 451,185 18,438 4.09
Total interest bearing liabilities 103,945 103,091
Non-interest bearing deposits 8,250 5,963
Other liabilities 98,350 87,897
Stockholders' equity -------- --------
$726,875 $648,136
======== ========
------- -------
$37,356 4.27 $32,191 4.39
Net interest income and interest rate spread ======= =======
5.54 5.39
Net interest margin $ 2,135 $ 1,994
Fees on loans included above ======= =======
</TABLE>
27
SECURITIES
<TABLE>
<CAPTION>
CARRYING VALUE OF SECURITIES DECEMBER 31,
--------------------------------
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available-for-sale
U.S. Treasury $ 23,903 $ 21,963 $ 35,865
U.S. Government agencies 9,661 12,017 13,714
Federal agency mortgage-backed 94,671 83,192 59,632
Other securities 4,955 4,871 4,871
-------- -------- --------
$133,190 $122,043 $114,082
======== ======== ========
Held-to-maturity
Collateralized mortgage obligations $ 31,254 $ 35,109 $ 20,567
Obligations of states and political subdivisions 642 4,304
Other securities 251 375 542
-------- -------- --------
$ 31,505 $ 36,126 $ 25,413
======== ======== ========
</TABLE>
Contractual Maturities and Weighted Average Yields of Debt Securities at
December 31, 1996:
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER TEN
ONE YEAR FIVE YEARS TEN YEARS YEARS
---------------- ---------------- --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $23,903 5.32%
U.S. Government agencies $ 4,999 5.03% 4,662 6.05%
Federal agency mortgage-backed 7,240 6.69% $16,896 5.80% $70,535 7.16%
Other securities 4,955 6.85%
------- ------- ------- -------
$12,239 6.01% $28,565 5.44% $16,896 5.80% $75,490 7.14%
======= ======= ======= =======
Held-to-maturity
Collateralized mortgage obligations $31,254 7.38%
Other securities $ 251 8.85%
------- -------
$ 251 8.85% $31,254 7.38%
======= =======
Approximate market value $ 251 $31,561
======= =======
</TABLE>
The underlying collateral for collateralized mortgage obligations consists of
Federal agency mortgage-backed securities. The average life of Federal agency
mortgage-backed securities and collateralized mortgage obligations is expected
to be considerably less than the contractual maturities shown in the table
because of scheduled payments and prepayments. The estimated average lives for
these instruments depend on the level of interest rates. The estimated average
lives as of the reporting date are 4.5 years for agency mortgage-backed
securities and 2.7 years for collateralized mortgage obligations.
28
LOAN PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
TYPES OF LOANS DECEMBER 31,
--------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $389,718 $379,290 $304,913 $286,359 $259,054
Real estate:
Construction 10,444 16,089 16,582 23,651 28,656
Residential mortgage 40,323 32,125 25,828 32,421 19,827
Non-residential mortgage 76,086 68,504 62,731 13,079 10,618
Loans to individuals for personal expenditures 56,973 33,966 27,272 25,474 24,692
Other loans 22,960 22,607 29,727 25,236 18,429
-------- -------- -------- -------- --------
$596,504 $552,581 $467,053 $406,220 $361,276
======== ======== ======== ======== ========
</TABLE>
Certain loans were reclassified from Commercial and Industrial to
Non-residential mortgage in 1994. Comparable information for prior years is not
available.
Maturities and sensitivity to changes in interest rates in the commercial and
industrial and real estate construction loan portfolio are summarized below as
of December 31, 1996:
<TABLE>
<CAPTION>
AFTER ONE AFTER
WITHIN BUT WITHIN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $323,726 $61,048 $4,944 $389,718
Real estate construction 5,631 670 4,143 10,444
-------- ------- ------ --------
$329,357 $61,718 $9,087 $400,162
======== ======= ====== ========
Loans with predetermined interest rates $ 7,503 $ 7,491 $ 767 $ 15,761
Loans with floating interest rates 321,854 54,227 8,320 384,401
-------- ------- ------ --------
$329,357 $61,718 $9,087 $400,162
======== ======= ====== ========
</TABLE>
The following table summarizes nonperforming assets:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
(IN THOUSANDS) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $1,329 $1,314 $6,193 $9,175 $3,056
Impaired non-accrual loans 1,017 2,409
Loans past due 90 days or more as to
interest or principal 871 135 8 1,963
------ ------ ------ ------ ------
Nonperforming loans $3,217 $3,858 $6,201 $9,175 $5,019
====== ====== ====== ====== ======
Percent of total loans 0.5% 0.7% 1.3% 2.3% 1.4%
Other assets and real estate owned $ 500 $ 175
</TABLE>
The gross interest income that would have been recorded in 1996 had
nonperforming assets remained current and in accordance with original terms, is
approximately $453,000. The amount of interest included in income was $27,000.
It is the Company's policy to consider loans for non-accrual when they are past
due 90 days or more, unless such loans are well secured and in the process of
collection. All such loans have been reviewed by management, and where so
determined are included in the non-accrual totals above.
29
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance of allowance for losses $ 8,602 $ 7,946 $ 8,006 $ 7,657 $ 7,131
Provision charged to operating expense 2,345 1,502 1,150 1,050 1,007
Charge-offs:
Commercial and industrial 2,059 907 850 805 1,388
Real estate (includes construction
and real estate) 195 153 20
Individuals for personal expenditures 298 44 172 257 324
Other 350
-------- -------- -------- -------- --------
2,552 951 1,372 1,215 1,732
Recoveries:
Commercial and industrial 29 45 41 286 1,062
Real estate (includes construction
and real estate) 31 36 32 114 159
Individuals for personal expenditures 17 24 89 114 30
Other 39
-------- -------- -------- -------- --------
116 105 162 514 1,251
-------- -------- -------- -------- --------
Charge-offs net of recoveries 2,436 846 1,210 701 481
-------- -------- -------- -------- --------
Ending balance of allowance for losses $ 8,511 $ 8,602 $ 7,946 $ 8,006 $ 7,657
======== ======== ======== ======== ========
Average gross loans outstanding $571,159 $509,899 $435,684 $384,685 $351,487
Percent of net loan charge-offs to average loans 0.43% 0.17% 0.28% 0.18% 0.14%
Percent of allowance for losses to loans
outstanding at end of period 1.43% 1.56% 1.70% 1.97% 2.12%
</TABLE>
The provision for loan losses charged to operating expenses is based upon
several factors which are evaluated by management including prior loss
experience, current and anticipated economic conditions, regular examinations by
supervisory authorities and continuing review of problem loans. For purposes of
evaluating the adequacy of the reserve, management concentrates on the major
components of the loan portfolio which are commercial loans, real estate loans
and installment loans. Commercial and real estate-construction loans are
reviewed and graded in one of several categories describing their quality, and
problem loans are monitored by senior management. Real estate and installment
loans which are considered past due are reported to management on a monthly
basis. The following is management's allocation of the valuation allowance:
<TABLE>
<CAPTION>
INDIVIDUALS
COMMERCIAL FOR PERSONAL
YEAR ENDED DECEMBER 31 AND INDUSTRIAL REAL ESTATE EXPENDITURES UNALLOCATED TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Amount allocated $1,919 $100 $300 $6,192 $8,511
Outstandings to total loans 65.33% 21.27% 9.55%
1995
Amount allocated 1,185 100 300 7,017 8,602
Outstandings to total loans 68.64% 21.12% 6.15%
1994
Amount allocated 1,619 100 300 5,927 7,946
Outstandings to total loans 65.28% 22.51% 5.84%
1993
Amount allocated 2,236 94 305 5,371 8,006
Outstandings to total loans 70.49% 17.02% 6.27%
1992
Amount allocated 2,358 108 300 4,891 7,657
Outstandings to total loans 71.71% 16.36% 6.83%
</TABLE>
30
SELECTED RATIOS
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Net earnings to average assets 1.56% 1.57% 1.37%
Net earnings to average stockholders' equity 11.40 11.52 10.01
Average stockholders' equity to average total assets 13.71 13.66 13.74
Regulatory Capital Ratios:
Tier 1 risk capital 15.97 16.04 16.83
Total risk capital 17.12 17.34 18.25
Leverage 13.11 13.23 13.84
(ratios calculated before unrealized gains or
losses)
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1996
------------------------------------------
(UNAUDITED) FIRST SECOND THIRD FOURTH
(IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $16,882 $16,741 $17,392 $18,381
Interest expense 7,182 7,238 7,539 8,190
Net interest income 9,700 9,503 9,853 10,191
Provision for loan losses 435 465 495 950
Gains on sale of securities 133
Other non-interest income 2,362 2,410 2,381 2,796
Non-interest expense 6,913 6,664 6,033 6,579
Income tax expense 1,875 1,842 2,277 2,115
Net earnings 2,839 2,942 3,429 3,476
Net earnings per share** 0.38 0.40 0.47 0.47
1995
-----------------------------------------
(UNAUDITED) FIRST SECOND THIRD FOURTH
(IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------
Interest income $14,848 $16,187 $16,839 $17,495
Interest expense 6,151 7,069 7,460 7,588
Net interest income 8,697 9,118 9,379 9,907
Provision for loan losses 75 195 762 470
(Losses) on sale of securities (122)
Other non-interest income 1,985 2,493 2,419 2,402
Non-interest expense 6,597 6,470 6,109 6,877
Income tax expense 1,478 1,905 1,908 1,978
Net earnings 2,410 3,041 3,019 2,984
Net earnings per share** 0.33 0.41 0.41 0.40
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
LOW HIGH LOW HIGH
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock Price Range**
First quarter $ 17 3/4 $ 20 $ 11 5/8 $ 13 3/4
Second quarter 19 1/2 22 1/4 13 3/8 15
Third quarter 17 1/2 20 13 3/8 17 1/2
Fourth quarter 18 20 3/4 16 3/8 21 5/8
December 31 (Closing Price) $20 3/4 $19 3/8
</TABLE>
- -----------------------
**Adjusted for stock dividends
31
DIRECTORS
NATIONAL CITY BANCORPORATION
David L. Andreas
Chairman of the Board
and Chief Executive Officer
National City Bancorporation
Wendell R. Anderson*
Of Counsel
Larkin, Hoffman,
Daly & Lindgren Ltd.
L.W. Andreas
Retired Chairman of the Board
and Chief Executive Officer
National City Bancorporation
Terry L. Andreas
Chairman of the Board
School for Field Studies
Beverly, Massachusetts
Marvin Borman*
Partner
Maslon, Edelman,
Borman & Brand
Kenneth H. Dahlberg
Chairman of the Board
Dahlberg, Inc.
John H. Daniels, Jr.*
Partner
Willeke & Daniels
Thomas E. Holloran*
Professor, Graduate Programs
in Management
University of St. Thomas
C. Bernard Jacobs
Retired President and
Chief Executive Officer
National City Bancorporation
Retired Chairman of the Board
National City Bank
David C. Malmberg
Non-executive Chairman
of the Board
National City Bank
Walter E. Meadley, Jr.
Retired Vice Chairman
of the Board
National City Bank
Roger H. Scherer*
Chairman of the Board
Scherer Bros. Lumber Company
*Members of the Audit Committee
NATIONAL CITY BANK OF MINNEAPOLIS
David C. Malmberg
Non-executive Chairman
of the Board
National City Bank
Walter E. Meadley, Jr.
Retired Vice Chairman
of the Board
National City Bank
David L. Andreas
President and
Chief Executive Officer
National City Bank
Chairman of the Board
and Chief Executive Officer
National City Bancorporation
Sharon N. Bredeson
President and Chief
Executive Officer
STAFF-PLUS Inc.
John H. Daniels, Jr.
Partner
Willeke & Daniels
James B. Goetz
President
Goetz Associates
Esperanza Guerrero-Anderson
President and Chief
Executive Officer
Milestone Growth Fund
Thomas E. Holloran
Professor, Graduate Programs
in Management
University of St. Thomas
PRINCIPAL OFFICERS
NATIONAL CITY BANCORPORATION
David L. Andreas
Chairman of the Board
and Chief Executive Officer
Thomas J. Freed
Secretary and Controller
NATIONAL CITY BANK OF MINNEAPOLIS
David L. Andreas
President and
Chief Executive Officer
CLIENT SERVICES DIVISION
William J. Klein
Executive Vice President
Donna M. DeMatteo
Vice President
Ann H. Hengel
Senior Vice President
Timothy M. Murphy
Vice President
David M. Nash
Senior Vice President
Margrette A. Newhouse
Vice President
Daniel D. Schroeder
Vice President
BANK OPERATIONS DIVISION
Donald W. Kjonaas
Senior Vice President
and Security Officer
Laura J. Carlson
Vice President
Sherri L. Kelly
Vice President
James R. Kitchen
Vice President
DeWayne A. Hoium
Vice President
Susan E. Martenson
Vice President
FINANCIAL MANAGEMENT
DIVISION
Thomas J. Freed
Senior Vice President
and Chief Financial Officer
Robert A. Kramer
Vice President and Controller
Robert B. Buck
Vice President
Robert A. Steuck
Vice President
Stephan G. Gilats
Vice President
COMPLIANCE COUNSEL
Connie G. Weinman
Vice President
HUMAN RESOURCES DEPARTMENT
Claudith M. Washington
Senior Vice President
MARKETING DEPARTMENT
Craig E. Cina
Senior Vice President
DIVERSIFIED BUSINESS CREDIT, INC.
David L. Andreas
Chairman of the Board
Robert L. Olson
President and Chief
Executive Officer
Anthony R. Bassett
Vice President
William D. Farrar
Vice President
Jeffrey S. Holland
Vice President
Robert L. Johnson
Vice President and Treasurer
Bridget A. Manahan
Vice President
Allen J. Olson
Vice President
Mark W. Schwieters
Vice President
Janet L. Pomeroy
Vice President
Walter D. Tomaszek
Vice President
32
NATIONAL CITY BANCORPORATION
SIXTH
ON THE
MALL
651
NICOLLET
MALL
MINNEAPOLIS
MINNESOTA
55402-1611
PHONE
(612) 904-8500
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 33-84638) pertaining to the National City Bancorporation Incentive
Savings Plan of our report dated January 15, 1997, with respect to the
consolidated financial statements of National City Bancorporation incorporated
by reference in its Annual Report (Form 10-K) for the year ended December 31,
1996.
ERNST & YOUNG LLP
Minneapolis, Minnesota
March 18, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 47,934
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 60,120
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 133,190
<INVESTMENTS-CARRYING> 31,505
<INVESTMENTS-MARKET> 31,812
<LOANS> 596,504
<ALLOWANCE> 8,511
<TOTAL-ASSETS> 900,129
<DEPOSITS> 519,631
<SHORT-TERM> 206,113
<LIABILITIES-OTHER> 7,665
<LONG-TERM> 47,920
0
0
<COMMON> 9,218
<OTHER-SE> 108,795
<TOTAL-LIABILITIES-AND-EQUITY> 900,129
<INTEREST-LOAN> 57,992
<INTEREST-INVEST> 10,600
<INTEREST-OTHER> 804
<INTEREST-TOTAL> 69,396
<INTEREST-DEPOSIT> 14,980
<INTEREST-EXPENSE> 30,149
<INTEREST-INCOME-NET> 39,247
<LOAN-LOSSES> 2,345
<SECURITIES-GAINS> 133
<EXPENSE-OTHER> 26,189
<INCOME-PRETAX> 20,795
<INCOME-PRE-EXTRAORDINARY> 12,686
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,686
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.72
<YIELD-ACTUAL> 5.26
<LOANS-NON> 2,346
<LOANS-PAST> 871
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 18,292
<ALLOWANCE-OPEN> 8,602
<CHARGE-OFFS> 2,552
<RECOVERIES> 116
<ALLOWANCE-CLOSE> 8,511
<ALLOWANCE-DOMESTIC> 1,830
<ALLOWANCE-FOREIGN> 189
<ALLOWANCE-UNALLOCATED> 6,492
</TABLE>
