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, 1997
_____ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 0-9426
NATIONAL CITY BANCORPORATION
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(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 20, 1998, the aggregate market value of 6,764,301 shares of
voting common stock, $1.25 par value, held by non-affiliates of the registrant
was approximately $213,075,500 based upon the reported closing price on the
NASDAQ Stock Market(SM). As of February 20, 1998, 8,057,478 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]
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of National City Bancorporation's Annual Report to Stockholders
for the year ended December 31, 1997 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 22, 1998 are
incorporated by reference into Part III.
<PAGE>
NATIONAL CITY BANCORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
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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. 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 usual and customary banking services
including without limitation: 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 trade service products, such as
letters of credit, bankers acceptances, international collections and
foreign exchange.
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
are able to enter the Minnesota market following the June, 1997 change
in banking regulations (See Supervision & Regulation). 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 272 employees,
none of whom are represented by a collective bargaining organization.
<PAGE>
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 and the United States and, to a lesser
extent, by those of 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, effective June 1, 1997, federal law permits 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 examination by the Comptroller of the
Currency and the Federal Reserve System. The subsidiary bank is a
member of the Federal Deposit Insurance Corporation and, accordingly,
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,
1997, 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 14,067 square feet of space in downtown Minneapolis. This
lease expires in the year 2002.
The aggregate net rentals for all of the above described facilities
were approximately $2,478,000 in 1997.
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.
<PAGE>
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
amount 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 from March 16, 1996, or (ii) the fair market value of the space.
NCB will pay its pro rata share of taxes when due. NCB has the right to
contest real estate taxes against the premises if the landlord fails to
do so. NCB pays normal operating expenses which includes a cap on
management fees and exclusions that are generally consistent with other
large office tenant leases.
DBCI relocated its offices to the Dain Bosworth Plaza, at 60 South
Sixth Street in September, 1997. DBCI entered into a five year lease
commencing September, 1, 1997, to occupy 14,067 square feet in the new
location. The effective annual base rent per square foot is $21.31 for
the five years. The annual cost for the five years will be
approximately $242,000 per year. In addition, DBCI paid all leasehold
improvements which cost approximately $108,000. DBCI has two options of
five years each to extend the lease term at the then current fair
market rents for office space. DBCI will pay its pro rata share of
taxes when due. DBCI will have the right to contest real estate taxes
against the premises if the landlord fails to do so. DBCI will pay
normal operating expenses which will include exclusions that are
generally consistent with other 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 NCBC's consolidated
financial position, liquidity or 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, 1997, and is
incorporated herein by reference.
<PAGE>
PART II
ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data is presented on page 30 of the Annual Report to
Stockholders for the year ended December 31, 1997 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 is presented on pages 18 through 24 of the Annual Report
to Stockholders for the year ended December 31, 1997 and is
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 17 and 30 through 31 of the Annual Report
to Stockholders for the year ended December 31, 1997 and are
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of National City Bancorporation
are presented on pages 4 through 7 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 22, 1998, and 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 and Secretary and Chief
Financial Officer effective July, 16, 1997. 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.
Mr. Robert L. Olson has been President, Chief Executive
Officer and director of Diversified Business Credit, Inc.
since 1985.
ITEM 11 - EXECUTIVE COMPENSATION
Executive compensation is set forth on pages 7 through 10 of the Proxy
Statement for the Annual Meeting of Stockholders to be held April 22,
1998 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 2 through 6 of the Proxy Statement for the Annual
Meeting of Stockholders to be held April 22, 1998 and is incorporated
herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and related transactions are presented on page 9
through 10 of the Proxy Statement for the Annual Meeting of
Stockholders to be held April 22, 1998 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, 1997, are incorporated by reference in Item
8:
Independent Auditors' Report
Consolidated balance sheets - December 31, 1997 and 1996
Consolidated statements of earnings - years ended December 31,
1997, 1996 and 1995
Consolidated statements of stockholders' equity - years ended
December 31, 1997, 1996 and 1995
Consolidated statements of cash flows - years ended December
31, 1997, 1996 and 1995
Notes to consolidated financial statements
<PAGE>
(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(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(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.
[Incorporated herein by reference to Exhibit 10(i) to the 1996
Form 10-K.]
10(j) - Employment Agreement, dated December 4, 1997, by and
between DBCI and Robert L. Olson.
11 - Computation of Basic 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, 1997.
<PAGE>
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 18, 1998 /S/David L. Andreas
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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 18, 1998 /S/David L. Andreas
---------------------------------------
David L. Andreas, Chairman of the Board of Directors
(Principal Executive Officer)
Date: March 18, 1998 /S/Thomas J. Freed
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Thomas J. Freed, Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 18, 1998 /S/Wendell R. Anderson
---------------------------------------
Wendell R. Anderson, Director
Date: March 18, 1998
---------------------------------------
L.W. Andreas, Director
Date: March 18, 1998
---------------------------------------
Terry L. Andreas, Director
Date: March 18, 1998 /S/Marvin Borman
---------------------------------------
Marvin Borman, Director
Date: March 18, 1998
---------------------------------------
Kenneth H. Dahlberg, Director
Date: March 18, 1998
---------------------------------------
John H. Daniels, Jr., Director
Date: March 18, 1998 /S/Thomas E. Holloran
---------------------------------------
Thomas E. Holloran, Director
Date: March 18, 1998
---------------------------------------
C. Bernard Jacobs, Director
Date: March 18, 1998 /S/David C. Malmberg
---------------------------------------
David C. Malmberg, Director
Date: March 18, 1998 /S/Walter E. Meadley, Jr.
---------------------------------------
Walter E. Meadley, Jr., Director
Date: March 18, 1998 /S/Roger H. Scherer
---------------------------------------
Roger H. Scherer, Director
<PAGE>
NATIONAL CITY BANCORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
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SUBSEQUENTLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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(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(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. [Incorporated
herein by reference to Exhibit 10(i) to the 1996 Form 10-K.]
10(j) Employment Agreement, dated December 4, 1997, by and between
DBCI and Robert L. Olson.
11 Computation of Basic 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
EXHIBIT 10j
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into as of the 4th day of December,
1997, between DIVERSIFIED BUSINESS CREDIT, INC. ("DBCI") and NATIONAL CITY
BANCORPORATION ("NCB") (hereafter collectively referred to as "Employer") and
ROBERT L. OLSON (hereafter referred to as "Employee").
1. Employment. Commencing January 1, 1998, Employer shall employ
Employee as Chief Executive officer and President of DBCI for a period of two
(2) years (initial term).
2. Option. Upon the expiration of the original two (2) year term
hereof, Employee shall have the option to extend the term of this Agreement for
an additional two (2) year period (option term). This option shall be
automatically exercised unless Employee gives Employer notice of his intent not
to exercise the option prior to the expiration of the initial term hereof.
3. Duties. During the initial term, and option term, if exercised,
Employee shall serve DBCI to the best of his ability as Chief Executive Officer
and President of DBCI. Employee shall devote his full time, energy and skill to
such employment during normal business hours, except during periods of vacation
or disability. Employee shall not perform any services for other persons except
with the prior, written consent of Employer and Employee shall not at any time
or in any way compete with the Employer or be employed by or associated with any
individual, firm, company or business which in any way competes with the
Employer. Employee shall report directly to the Chairman of the Board of
Directors of NCB, or the Chairman's designee, or the Board's designee. In no
event shall Employee be required to relocate outside the Minneapolis-St. Paul
metropolitan area, nor be required to perform duties outside of such area for
extended periods of time.
<PAGE>
4. Authority. Employee shall have final authority over all hiring and
terminating of DBCI personnel with the concurrence of the Chairman of the Board
of Directors of NCB, or the Chairman's designee, or the Board's designee,
subject to compliance with applicable law.
5. Board of Directors. Employee shall be elected to the Board of
Directors of DBCI while he is an employee of DBCI for each year during the
initial term of this Agreement, and the option term, if exercised.
6. Base Salary. Employee shall receive an annual base salary of Two
Hundred Eighty Thousand Dollars ($280,000.00) per year, paid in equal
semi-monthly installments. In no event shall Employee's annual base salary be
decreased in any year from the annual base salary existing in any prior year,
but the base salary shall be reviewed annually for increases.
7. Bonus.
(a) Annual Amount. Employee shall be paid a bonus equal to
five percent (5%) of the combined pretax profits of DBCI for each
fiscal year of DBCI, or portion thereof, during which Employee is
employed under this Agreement. "Pretax profits" shall be calculated and
determined as provided in paragraph (b) of this Section 7. In no event
shall the bonus, if any, due Employee under this Section 7 exceed an
amount equal to two hundred percent (200%) of the annual base salary
paid to Employee in the fiscal year of DBCI with respect to which the
bonus is calculated.
(b) Calculation of Profits (Losses). Pre-tax profits of DBCI
shall be determined in accordance with generally accepted accounting
principles, except, with respect to the treatment of losses on loans
and loss carry forwards which, for purposes of this Agreement alone,
shall not be equal to bad debt reserves established by DBCI, but, in
lieu, shall be determined as provided in this paragraph (b) of this
Section 7. "Losses on loans" shall be the aggregate amount of any
unpaid loan balances, principal and interest, reflected on the books of
DBCI which are determined for the year under consideration to be
uncollectible in whole or in part in the opinion of the Board of
Directors of DBCI. In exercising their judgment and discretion, the
Board of Directors will consider all pertinent evidence relating to an
indebtedness, including the value of the collateral, if any, securing
the debt, the financial condition of the debtor and whether legal
action will, in all probability, not result in the satisfaction of any
judgment obtained. If such calculation results in combined pretax
losses, such combined pretax losses shall be carried forward to
subsequent years in either the initial term or the option term.
<PAGE>
(c) The following hypothetical illustrates the intended
operation and effect of paragraphs (a) and (b) of this Section 7.
(i) Assume that, for the fiscal year under
consideration, DBCI has income before taxes and provision for
loan losses of $1,100,000.
(ii) There is no reduction to income before taxes and
provision for loan losses as a result of loan loss reserves
established for DBCI.
(iii) Assume, however, that the Board of Directors of
DBCI determines that, for the year under consideration, unpaid
loan balances, including principal and accrued interest
reflected on the books of DBCI, in the amount of $100,000 are
uncollectible.
(iv) Income before taxes and provision for loan
losses would be reduced by the amount of $100,000, resulting
in pretax profits of $1,000,000.
(v) Under this hypothetical, Employee would be paid
five percent (5%) of pretax profits or $50,000 (5% x
$1,000,000).
(d) Short Year, Payment. If Employee's employment terminates
prior to the end of any fiscal year, the calculation of pre-tax
earnings shall be made as of the close of the fiscal quarter-annual
period immediately succeeding Employee's termination of employment. The
bonus provided for in this Section 7, if any be due, shall be paid no
later than the fifteenth (15th) day of the fourth (4th) calendar month
following the close of the fiscal year for which the bonus is
determined.
8. Fringe Benefits. Employee shall receive the use of an Employer-owned
automobile, and shall be provided a parking space in the immediate vicinity of
DBCI's main office at no cost to Employee. Employee shall receive five (5) weeks
of paid vacation per year; provided, however, no more than one week of paid
vacation may be carried over from one calendar year to the next calendar year
with the remainder of any unused vacation expiring as of the calendar year end.
Employee shall also participate in the pension and other qualified retirement
plans of Employer, in the same manner as employees of National City Bank (the
"Bank"), to wit, the Retirement Plan (defined benefit pension plan) and
Incentive Savings Plan (401-K), in all fringe benefits, perquisite and benefit
programs as made available to officers or employees of the Bank (excluding
Bank's
<PAGE>
Senior or Middle Management Incentive Compensation Plans as adopted and
effective February, 1993) and in the group term life insurance, major medical,
disability, hospitalization, dental and accident insurance plans as made
available to Bank employees.
9. Expense Account. Employee shall be reimbursed for all ordinary
expenses incurred by him in performance of his duties against presentation of
appropriate vouchers.
10. Disability. If, during the initial term or the option term, both
Employer and Employee agree Employee is prevented from carrying on his duties in
accordance with the terms of this Agreement as a result of mental or physical
illness or injury ("disability"), Employer shall continue Employee's full
compensation until the last day of the sixth calendar month following the month
during which the onset of such disability occurs. Thereafter, Employee's
compensation shall be discontinued. If the parties do not mutually concur that a
disability exists or has occurred, the determination shall be made by a
reputable practicing physician, not regularly employed or consulted by any party
hereto, appointed by the Dean of the School of Medicine of the University of
Minnesota, upon application by any party and the determination of the appointed
physician on the issue of disability shall be in writing and shall be binding
upon all of the parties. In the event the medical opinion deems Employee
disabled within the meaning of this paragraph, then the date of Employee's
disability shall be the date the written medical opinion is issued. In the event
the medical opinion determines that Employee is not disabled, then this
Employment Agreement shall remain in full force and effect. All costs related to
the issuing of the medical opinion hereunder shall be divided equally between
Employer and Employee. If Employee is found to be disabled and has unused
vacation time for the fiscal year, Employee may use any part or all thereof
before his absence will be deemed to be disability time hereunder. To the extent
that Employer carries
<PAGE>
disability insurance on Employee and pays premiums therefor, the disability
benefits received thereunder shall be paid over to the Employee, and the
compensation to be paid to Employee under this section shall be reduced by such
disability benefits. All disability benefits shall terminate at Employee's
death.
11. Events of Termination. This agreement shall terminate, prior to its
scheduled expiration as follows:
(a) by mutual agreement of the parties;
(b) upon death of Employee;
(c) upon expiration of the six-month disability period
provided for in Section 10, provided, however, that said expiration
shall not effect Employee's rights to receive disability insurance
benefits following the expiration; or
(d) the Employer may terminate this Agreement by written
notice to Employee, immediately, if: (1) Employee is convicted of a
felony; (2) Employee is determined by a court of law to have committed
a fraudulent act; or (3) Employee is determined by a court of law to
have acted dishonestly with respect to any business of Employer.
12. Nondisclosure of Proprietary Information. Except in the ordinary
course of his duties for and on behalf of Employer, unless authorized in writing
by Employer, Employee shall not disclose to any person or entity (other than
Employer or Bank) any of Employer's or Bank's trade secrets, designs, processes,
technology, marketing plans, customer lists or other information as to the
services, activities, operations or plans of Employer or Bank which is not
generally made available to the public at large, either during employment or
afterwards. All records, documents or other tangible property relating in any
way to the business of Employer which are conceived or generated by Employee or
come into his possession during his employment shall be and remain the exclusive
property of Employer, and Employee agrees promptly to return all such documents
and tangible property to Employer on termination of his employment.
<PAGE>
13. Attorney's Fees and Costs. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs, and necessary
disbursements in addition to any other relief to which he or it may be entitled.
14. Notices. Any notices to be given hereunder by either party to the
other may be effective either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested. Mailed
notices shall be addressed to the parties at the addresses appearing on the
signature page of this Agreement, but each party may change its or his address
by written notice in accordance with this paragraph. Notices delivered
personally shall be deemed communicated as of actual receipt; mailed notices
shall be deemed communicated as of three (3) days after mailing.
15. Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Employee by the Employer and contains all of the
covenants and agreements between the parties with respect to such employment in
any manner whatsoever; provided, however, nothing contained herein shall be
construed to alter, amend or modify any of the terms or provisions of that
certain agreement by and between Employee and NCB, dated June 10, 1986 and
entitled "Salary Continuation Agreement." Each party to this Employment
Agreement acknowledges that no representations, inducements, promises or
agreements, orally or otherwise, have been made by any party, or anyone acting
on behalf of any party, which are not embodied herein, and that no other
agreement, statement or promise not contained in this Agreement shall be valid
or binding. Any modification of this Agreement will be effective only if it is
in writing signed by the party to be charged.
<PAGE>
16. Partial Invalidity. If any provision in this Employment Agreement
is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remaining provisions shall nevertheless continue in full
force without being impaired or invalidated in any way.
17. Law Governing Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota.
18. Binding Effect. This Agreement is and shall be binding on the
heirs, personal representatives, legal representatives, successors and assigns
of the parties hereto.
19. Assignment. Employee may not assign this Agreement. Employer may
assign this Agreement only upon written consent of Employee.
20. Superseding Agreement. This Agreement supersedes and replaces the
Employment Agreement between DBCI, NCB and Employee dated January 1, 1996;
provided, however, said Employment Agreement dated January 1, 1996 shall
continue in effect for the remainder of the calendar year ended December 31,
1997.
EXECUTED at Minneapolis, Minnesota, the day and year first above
written.
EMPLOYEE: EMPLOYER:
DIVERSIFIED BUSINESS CREDIT, INC.
3970 Multifoods Tower
/s/ Robert L. Olson 33 South Sixth Street
- -------------------------- Minneapolis, MN 55402
Robert L. Olson
925 Crystal Lake Road
Burnsville, MN 55337 By: /s/ David L. Andreas
------------------------------
Its: Chairman
NATIONAL CITY BANCORPORATION
651 Nicollet Mall
<PAGE>
Minneapolis, MN 55402
By: /s/ David L. Andreas
------------------------------
Its: Chairman and CEO
<PAGE>
GUARANTY
National City Bank of Minneapolis hereby unconditionally guarantees the
performance by Employer of all terms, duties, obligations and conditions
(including but not necessarily limited to the payment of all Base Salary,
Bonuses and Fringe Benefits accorded to Employee) imposed upon Employer by the
foregoing Employment Agreement.
NATIONAL CITY BANK OF MINNEAPOLIS
By: /s/ David L. Andreas
------------------------------
Its: Chief Executive Officer
NATIONAL CITY BANCORPORATION AND SUBSIDIARIES
COMPUTATION OF BASIC EARNINGS PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1997 1996 1995
Net earnings applicable to common stock $14,964 $12,686 $11,454
Weighted average common shares outstanding* 8,097 8,111 8,111
Basic earnings per share $1.85 $1.56 $1.41
*Adjusted for stock dividends
1997 ANNUAL REPORT
NATIONAL CITY BANCORPORATION
<PAGE>
This year's annual report cover was designed by Minneapolis College of Art and
Design (MCAD) Senior, Ken Sakurai, who works in MCAD DesignWorks, the college's
in-house design studio. A graduate of Kanto Gakuin University, Yokahama, Japan,
Ken will graduate from MCAD in May, after which he looks forward to working in a
small or medium-size graphic design studio. Says Sakurai, "My intention here is
to depict the relationships that National City has created with their clients,
and the focus they have on customer service."
A program of the college's design division, MCAD DesignWorks is committed to
providing professional opportunities to outstanding students of graphic design,
illustration, advertising and interactive multimedia. The studio offers
professional practice opportunities to students and provides creative solutions
to Minnesota's non-profit and business communities. This project was managed by
Barsuhn Design Incorporated.
National City Bancorporation's work with DesignWorks is one of the many ways we
support MCAD, an internationally recognized, non-profit, accredited college of
art and design. Our community benefits when businesses and community leaders
support arts and education. We are all richer for these relationships.
For more information about MCAD DesignWorks
call Pamela Arnold, Coordinator, at (612) 874-3767,
or e-mail: [email protected].
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
================================================================================
(IN THOUSANDS EXCEPT PER SHARE) 1997 1996
- --------------------------------------------------------------------------------
For the Year
Net interest income $ 43,709 $ 39,247
Net earnings 14,964 12,686
Basic earnings per share 1.85 1.56
At Year End
Total assets $935,172 $900,129
Loans 666,382 596,504
Deposits 478,650 519,631
Stockholders' equity 132,927 118,013
Book value per share 16.46 14.55
================================================================================
TABLE OF CONTENTS
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Report to Stockholders 2 Statistical Data 25
Consolidated Financial Statements 3 Selected Financial Data 30
Notes to Consolidated Financial Statements 7 Selected Ratios and Consolidated
Report of Independent Auditors 17 Quarterly Financial Data 31
Management's Discussion and Analysis of Directors and Officers 32
Financial Condition and Results of Operations 18
</TABLE>
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 and 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
Wednesday, April 22, 1998, at 10:00 a.m.
MARKET FOR COMMON STOCK
NCBC's common stock is traded on the over-the-counter market in the NASDAQ Stock
Market (SM) under the symbol NCBM. There are currently approximately 2,600
registered stockholders.
COMPANY INFORMATION
Current news and other information about your Company can be found on the
internet at http://www.shareholdernews.com/NCBM. The site includes our current
stock price, press releases and a link to Securities and Exchange Commission
filings.
[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
<PAGE>
================================================================================
REPORT TO STOCKHOLDERS
================================================================================
To Our Stockholders:
Over the last year, we at National City Bancorporation have been working hard to
generate consistent performance, which you will see in our financial results on
the following pages. We know it's important to you, as it is to us, that we grow
the company consistently while improving our key operating measures and reducing
variability of earnings related to risk.
Now, both subsidiaries are in new leased space, designed for customers to take
advantage of communication and information technology, creating a closer
relationship between customers and their financial teams. All of this happened
while we were increasing assets, reducing operating cost ratios, and increasing
return on your investment.
Our financial measures reflect a strong company. For the year, total assets
increased just under four percent and were $935 million at year-end. Loans grew
by twelve percent and were at an all-time high of $666 million at year-end. Both
subsidiaries accounted for these increases. Net income grew by eighteen percent
and equaled $14,964,000, or $1.85 per share in 1997, compared with $12,686,000,
and $1.56 per share in 1996. Total stockholders' equity was almost $133 million
at year-end and equaled $16.46 per share. Non-performing assets were $1.2
million, .2 percent of total loans. We increased the reserve for losses to
$10,071,000 representing 1.51 percent of total loans and 843 percent of
non-performing assets. Our operating ratio was 51.3 percent, indicating improved
efficiency over prior years.
The fourth quarter of 1997 reflected our year's performance. Net earnings were
$3,889,000 for the quarter. That equals $.48 per share, a fourteen percent
increase over the same quarter of 1996 adjusted for stock dividends.
Our focus on mid-sized businesses, their owners' financial needs, and their
employees' needs has driven us to provide highly integrated financial services
to a responsive market. Our own bank teams have developed the first
installations of Aveo(tm) kiosk banking, an innovative way for businesses to
access banking and business services in their workplaces.
We know this and other markets are ready for a financial institution that
understands and respects people who are taking risks, managing their promises,
and performing in an increasingly fast-paced global marketplace. National City
Bancorporation is proving through inventive services that we can anticipate the
needs of those companies and provide tools to enhance their access to the
financial and business marketplace. In 1998 we will continue to focus on
innovation and profitability. Thank you for your support and I welcome your
suggestions and comments as we work together into the future.
/s/ David L. Andreas
David L. Andreas
Chairman of the Board
and Chief Executive Officer
2
<PAGE>
================================================================================
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 52,847 $ 47,934
Federal funds sold and resale agreements 3,740 60,120
Available-for-sale securities 141,325 133,190
Held-to-maturity securities
(market value: 1997--$37,861 and 1996--$31,812) 37,402 31,505
Loans 666,382 596,504
Less allowance for loan losses (10,071) (8,511)
--------- ---------
656,311 587,993
Bank premises and equipment 11,413 11,798
Accrued interest receivable 7,260 6,306
Customer acceptance liability 811 787
Other assets 24,063 20,496
--------- ---------
$ 935,172 $ 900,129
========= =========
- -----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 149,624 $ 162,895
Interest bearing 329,026 356,736
--------- ---------
478,650 519,631
Federal funds purchased and
repurchase agreements 104,399 96,640
Commercial paper 119,081 98,107
Other short-term borrowed funds 23,218 11,366
Acceptances outstanding 811 787
Other liabilities 9,086 7,665
Long-term debt 67,000 47,920
--------- ---------
Total liabilities 802,245 782,116
Stockholders' equity:
Common stock, par value $1.25, Authorized 20,000,000 shares;
Issued: 1997--8,110,836 shares; 1996--7,374,520 shares 10,139 9,218
Additional paid-in capital 94,756 79,199
Unrealized gains (losses) net of tax effect 424 (405)
Retained earnings 28,464 30,001
--------- ---------
133,783 118,013
Less common stock in treasury at cost:
1997--33,553 shares; 1996--16 shares (856)
--------- ---------
Total stockholders' equity 132,927 118,013
--------- ---------
$ 935,172 $ 900,129
========= =========
</TABLE>
See Notes To Consolidated Financial Statements
3
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF EARNINGS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 66,110 $ 57,992 $ 54,952
Interest on federal funds sold and resale agreements 1,450 804 727
Interest and dividends on securities:
Taxable 11,440 10,580 9,369
Exempt from federal income taxes 20 321
-------- -------- --------
11,440 10,600 9,690
-------- -------- --------
Total interest income 79,000 69,396 65,369
- ---------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 16,281 14,980 12,950
Interest on short-term borrowed funds 15,069 11,908 11,680
Interest on long-term debt 3,941 3,261 3,638
-------- -------- --------
Total interest expense 35,291 30,149 28,268
-------- -------- --------
Net interest income 43,709 39,247 37,101
Provision for loan losses 2,134 2,345 1,502
-------- -------- --------
Net interest income after provision for loan losses 41,575 36,902 35,599
- ---------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 2,195 2,189 1,862
Fees for other customer services 1,698 1,837 1,655
Trust fees 4,801 4,605 4,839
State income tax refund 1,369
Gains (losses) on sale of securities 133 (122)
Other 1,327 1,318 943
-------- -------- --------
11,390 10,082 9,177
- ---------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 15,110 14,965 15,156
Net occupancy expense of bank premises 3,194 2,750 2,272
Equipment rentals, depreciation and maintenance 3,648 2,731 2,481
Other 6,313 5,743 6,144
-------- -------- --------
28,265 26,189 26,053
-------- -------- --------
Earnings before income taxes 24,700 20,795 18,723
Income taxes 9,736 8,109 7,269
-------- -------- --------
Net earnings $ 14,964 $ 12,686 $ 11,454
======== ======== ========
- ---------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.85 $ 1.56 $ 1.41
======== ======== ========
Average common and common equivalent shares outstanding 8,097 8,111 8,111
</TABLE>
See Notes To Consolidated Financial Statements
4
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
--------------------- ADDITIONAL UNREALIZED -----------------
NUMBER PAID-IN RETAINED GAINS NUMBER
(IN THOUSANDS EXCEPT 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, 1995 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
Net earnings for the year 14,964 14,964
Ten percent stock dividend 736,374 921 15,558 (16,500) (21)
Unrealized securities gains
net of tax effect 829 829
Cancellation of treasury stock (58) (1) (1) (58) 1 (1)
Purchase of treasury stock 33,595 (857) (857)
--------- --------- --------- --------- -------- ------ ------ ---------
Balance at December 31, 1997 8,110,836 $ 10,139 $ 94,756 $ 28,464 $ 424 33,553 $ (856) $ 132,927
========= ========= ========= ========= ======== ====== ====== =========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 14,964 $ 12,686 $ 11,454
Adjustments to reconcile net earnings to net cash
from operating activities:
Depreciation and amortization 3,245 2,169 1,664
Amortization of securities premiums and discounts 469 426 387
Provision for loan losses 2,134 2,345 1,502
Deferred income taxes (347) 472 (390)
(Gain) loss on sale of securities (133) 122
(Increase) decrease in accrued interest receivable (954) 29 568
(Increase) in other assets (3,567) (138) (3,874)
Increase (decrease) in other liabilities 1,421 (1,147) 103
Other (increase) decrease (1,216) (853) 779
--------- --------- ---------
Total operating adjustments 1,185 3,170 861
--------- --------- ---------
Net cash from operating activities 16,149 15,856 12,315
Cash flows from investing activities:
Net (increase) in loans (69,878) (43,923) (85,528)
Net (increase) decrease in federal funds sold 56,380 (35,120) (24,950)
Available-for-sale securities:
Proceeds from maturities and principal repayments 27,274 50,740 20,772
Proceeds from sale of securities 4,688 7,848
Purchases of securities (34,476) (68,114) (31,269)
Held-to-maturity securities:
Proceeds from maturities and principal repayments 9,233 13,581 11,588
Proceeds from sale of securities 45
Purchases of securities (15,139) (9,000) (22,426)
Purchase of premises and equipment (2,436) (9,365) (1,892)
Payment of prepaid expenses (1,739)
--------- --------- ---------
Net cash (used in) investing activities (29,042) (98,252) (125,812)
--------- --------- ---------
Cash flows from financing activities:
Net increase in non-interest bearing and savings deposits 2,151 26,326 28,094
Net increase (decrease) in time deposits (43,132) 53,320 44,164
Net increase (decrease) in federal funds purchased and
repurchase agreements 7,759 (13,895) 34,979
Net increase in commercial paper 20,974 18,121 17,563
Net increase (decrease) in other short-term borrowed funds 11,852 4,679 (11,400)
Net increase (decrease) in long-term debt 19,080 (200) (5,000)
Purchase of treasury stock (856) (1) (10)
Payment for fractional shares on stock dividends (22) (26) (20)
--------- --------- ---------
Net cash from financing activities 17,806 88,324 108,370
--------- --------- ---------
Net increase (decrease) in cash and due from banks 4,913 5,928 (5,127)
Cash and due from banks at beginning of year 47,934 42,006 47,133
--------- --------- ---------
Cash and due from banks at end of year $ 52,847 $ 47,934 $ 42,006
========= ========= =========
Supplemental disclosures
Cash paid during the year for:
Interest $ 35,194 $ 30,266 $ 27,259
Income taxes 10,076 7,206 7,725
Unrealized securities gains (losses) net of tax 829 (680) 3,415
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
================================================================================
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.
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 of the asset or lease term.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company adopted in 1997 Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This standard
requires a reduction in the carrying amounts of certain impaired assets to their
estimated fair value, determined on the basis of estimated cash flows or net
realizable value. The impairments relate to assets not currently in use, assets
significantly underutilized, and assets with limited planned future use. The
Company had no impaired assets requiring adjustments in 1997.
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
<PAGE>
================================================================================
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE--In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Standards (SFAS) No. 128, "Earnings per Share".
The Company adopted SFAS No. 128 in the fourth quarter of 1997. This standard
requires dual presentation on basic and diluted earnings per share (EPS) in the
statement of earnings. Basic EPS excludes dilution, if any, and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted EPS recognizes all
potential common shares outstanding during the period, such as, outstanding
stock options. The Company had no dilutive options outstanding during 1997 and
at December 31, 1997. There was no impact on the Company's financial condition
or results of operation due to the adoption of SFAS No. 128.
STATEMENT OF CASH FLOWS--For purposes of the statement of cash flows, cash
equivalents includes cash and due from banks.
CAPITAL STRUCTURE--SFAS No. 129, "Disclosures of Information about Capital
Structure" was issued in February 1997. The Company's current disclosures
regarding capital structure were not materially different under this standard.
MARKET RISK--The Securities and Exchange Commission has adopted rules requiring
expanded disclosure or risks and policies concerning derivatives and market
risk. Adoption of these rules was required in 1997. There will be no impact on
the Company's financial condition or results of operations due to the adoption
of these rules.
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, 1997
----------------------
CARRYING ESTIMATED
(IN THOUSANDS) AMOUNT FAIR VALUE
- --------------------------------------------------------
ASSETS:
Cash and due from banks $52,847 $52,847
Federal funds sold and resale
agreements 3,740 3,740
Available-for-sale securities 141,325 141,325
Held-to-maturity securities 37,402 37,861
Loans-net of allowance for
loan losses 656,311 660,971
LIABILITIES:
Deposits 478,650 478,787
Federal funds purchased and
repurchase agreements 104,399 104,412
Commercial paper and
other short-term funds 142,299 142,331
Long-term debt 67,000 69,203
OFF-BALANCE SHEET UNREALIZED GAINS:
Interest rate swap agreements 2,013
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-net of allowance for
loan losses 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
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.
8
<PAGE>
================================================================================
NOTE B. ESTIMATED FAIR VALUE (CONTINUED)
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 82% 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.
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) 1997 1996
- ----------------------------------------------------
Commercial & Industrial $439,802 $389,718
Real estate:
Construction 10,405 10,444
Residential mortgage 43,295 40,323
Non-residential mortgage 86,762 76,086
Loans to individuals for
personal expenditures 54,987 56,973
Other 31,131 22,960
-------- --------
$666,382 $596,504
======== ========
At December 31, 1997 and 1996, receivables from and standby letters of credit
issued on behalf of commercial real estate developers and investors were
approximately $92 million and $77 million, respectively.
An analysis of the allowance for loan losses is presented below:
YEAR ENDED DECEMBER 31,
-----------------------------------
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------
Balance at beginning
of period $ 8,511 $8,602 $7,946
Provision charged to
operating expense 2,134 2,345 1,502
Charge-offs (1,106) (2,552) (951)
Recoveries 532 116 105
------- ------ ------
Balance at end of period $10,071 $8,511 $8,602
======= ====== ======
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, 1997, the Company had two impaired commercial loans totaling
$171,000 compared with four loans totaling $1,017,000 at December 31, 1996.
Management has allocated $171,000 of the Allowance for Loan Losses to these
loans. Impaired loans averaged $209,000 and $3,976,000 during 1997 and 1996,
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 $1,194,000 and $3,217,000 at December 31, 1997 and 1996, respectively.
Gross interest income would have been increased by approximately $95,000,
$426,000, and $311,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, had such loans been current and in accordance with original terms.
Nonperforming status is not necessarily an indication of probable loss.
9
<PAGE>
================================================================================
NOTE C. LOANS (CONTINUED)
Loans to principal officers and directors of the Company and its subsidiaries
aggregated approximately $8,552,000 and $8,822,000 at December 31, 1997 and
1996, respectively. New loans and repayments during 1997 were $524,000 and
$794,000, 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) 1997 1996
- -------------------------------------------------
Assets, at cost:
Land $ 183 $ 183
Buildings 1,222 885
Leasehold improvements 2,613 2,452
Equipment 16,419 15,681
------- -------
20,437 19,201
Accumulated depreciation:
Buildings 528 500
Leasehold improvements 829 616
Equipment 7,667 6,287
------- -------
9,024 7,403
------- -------
$11,413 $11,798
======= =======
================================================================================
NOTE E. DEPOSITS
Approximately $93,975,000 and $143,727,000 of interest bearing time deposits
were in denominations of $100,000 or more at December 31, 1997 and 1996,
respectively. The scheduled maturities of time deposits at December 31, 1997 are
summarized as follows:
LESS THAN $100,000
(IN THOUSANDS) $100,000 OR MORE
- ------------------------------------------
3 months or less $ 19,879 $29,960
3 - 6 months 26,356 31,431
6 - 12 months 20,997 6,914
1 - 2 years 18,082 3,691
2 - 3 years 6,637 853
3 - 5 years 8,536 21,026
over 5 years 100 100
-------- -------
$100,587 $93,975
======== =======
================================================================================
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, $140,000,000, and $115,000,000 at
December 31, 1997, 1996 and 1995, 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) 1997 1996 1995
- ----------------------------------------------------------------------
Maximum amount out-
standing at any month end:
Federal funds & repurchase $156,104 $137,883 $122,722
Commercial paper 137,714 109,079 91,464
Other 26,332 20,391 20,853
Daily average amount
outstanding:
Federal funds & repurchase 133,366 116,973 113,245
Commercial paper 118,154 95,950 77,426
Other 17,047 6,967 8,350
Weighted average interest
rate for full year:
Federal funds & repurchase 4.99% 4.83% 5.33%
Commercial paper 6.28% 6.09% 6.49%
Other 5.82% 5.37% 7.34%
Outstanding at year-end:
Federal funds and repurchase 104,399 96,640 110,535
Commercial paper 119,081 98,107 79,986
Other 23,218 11,366 6,687
Weighted average interest rate
on debt outstanding
as of December 31:
Federal funds & repurchase 5.43% 5.36% 5.17%
Commercial paper 6.04% 6.11% 6.12%
Other 5.33% 5.11% 5.16%
================================================================================
NOTE G. LONG-TERM DEBT
DECEMBER 31,
--------------------
(IN THOUSANDS) 1997 1996
- ---------------------------------------------------------
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
Series C, 7.84%, due 2007 10,000
Series D, 7.15%, due 2004 5,000
Series E, 7.22%, due 2007 5,000
Federal Home Loan Bank
Advances, 5.38% to 6.19%, due
1997 through 1998 920
------- -------
Total $67,000 $47,920
======= =======
The Company has entered into interest rate swap agreements to effectively
convert the Senior Notes to floating rate instruments. At December 31, 1997, the
weighted average effective interest rate for the Senior Notes Series A and B,
including the effects of the related swap agreements is the one month LIBOR rate
plus 102 basis points, or 7.00%. The weighted average effective interest rate
for the Senior Notes Series C, D, and E, including the effects of the related
swap agreements, is the three month LIBOR rate plus 77 basis points or 6.62%.
The Senior Notes are unsecured and are unconditionally guaranteed by the parent
company. The
10
<PAGE>
================================================================================
NOTE G. LONG-TERM DEBT (CONTINUED)
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) 1997 1996 1995
- --------------------------------------------------
Current:
Federal $8,074 $6,080 $5,786
State 2,009 1,557 1,873
------ ------ ------
10,083 7,637 7,659
Deferred:
Federal (263) 357 (296)
State (84) 115 (94)
------ ------ ------
(347) 472 (390)
------ ------ ------
$9,736 $8,109 $7,269
====== ====== ======
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) 1997 1996
- -------------------------------------------------------
Deferred tax assets:
Loan loss reserves $4,076 $3,444
Salary continuation plan 866 817
Loan fees 60 54
Nondeductible expenses 5 43
Unrealized losses on securities 276
------ ------
Total deferred tax assets 5,007 4,634
Deferred tax liabilities:
Retirement plan 1,143 1,059
Prepaid expenses 101 127
Tax over book depreciation 396 152
Security discounts 2 4
Unrealized gains on securities 288
------ ------
Total deferred tax liabilities 1,930 1,342
------ ------
Net deferred tax assets $3,077 $3,292
====== ======
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.
The total effective tax rate for the years ended December 31, 1997, 1996 and
1995 is different than the federal income tax rate.
The reasons for the differences are as follows:
1997 1996 1995
---- ---- ----
Federal income tax rate 35.0% 35.0% 34.0%
Tax exempt income (0.1) (0.2) (0.7)
State income taxes, net of federal
income tax benefit 5.1 5.2 6.6
Cash value of life insurance (0.6) (0.8) (0.7)
Other items (0.2) (0.4)
---- ---- ----
Effective rate 39.4% 39.0% 38.8%
==== ==== ====
================================================================================
NOTE I. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding in connection with standby letters of
credit aggregating approximately $19,164,000 and $24,877,000 at December 31,
1997 and 1996, respectively.
Commercial letters of credit were $3,187,000 and $3,373,000 at December 31, 1997
and 1996, respectively. Acceptance participations acquired were $7,214,000 at
December 31, 1997 and $9,607,000 at December 31, 1996.
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.
Diversified Business Credit, Inc. has entered into a five year lease which
commenced September 1, 1997, for its new headquarters in downtown Minneapolis.
The annual cost for the five years will be approximately $240,000. The lease
provides an option to extend the term for two consecutive five-year periods at
the then current fair market rents.
The Company was obligated under operating leases for premises and equipment with
terms of one year or more at December 31, 1997. The aggregate lease commitments
outstanding as of December 31, 1997, were $16,269,000 and for the next five
years are payable as follows:
(IN THOUSANDS)
- ---------------------------------------------
1998 $2,430
1999 2,400
2000 2,218
2001 2,206
2002 2,155
Net rental expense for the years ended December 31, 1997, 1996, and 1995, was
$2,478,000, $2,170,000, and $1,637,000, respectively.
11
<PAGE>
================================================================================
NOTE I. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $9,011,000 of dividends may be
paid by the Company's bank subsidiary at December 31, 1997, 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 1997, approximately $6,238,000 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.
A summary of the Company's contractual or notional amounts for off-balance-sheet
activities at December 31, 1997 and 1996, is as follows:
(IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------
Credit activities:
Commitments to extend credit $262,007 $292,923
Standby letters of credit 19,164 24,877
Commercial letters of credit 3,187 3,373
Acceptance participations acquired 7,214 9,607
Other financial instrument activities:
Interest rate swap agreements $ 87,000 $ 67,000
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. Because 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.
12
<PAGE>
================================================================================
NOTE K. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
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, 1997 and
1996, the gain position of these contracts was $2.5 million and $1.9 million,
respectively. If the counterparties failed to perform according to the terms of
the contracts, the Company could incur a loss in the amount of its current gain
position. 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, 1997 and 1996, interest rate swaps totaling $67 million and $47
million, respectively, hedged long-term debt. At December 31, 1997 and 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 $67 million of these swaps and the three month LIBOR
on $20 million. The notional balances and yields by maturity date for interest
rate swaps at December 31, 1997, are as follows:
WEIGHTED WEIGHTED
NOTIONAL AVERAGE AVERAGE
AMOUNT INTEREST RATE INTEREST RATE
MATURITY DATE (IN THOUSANDS) RECEIVED PAID
- ---------------------------------------------------------------------
1999 $23,000 7.19% 5.98%
2001 44,000 7.00% 5.91%
2004 5,000 6.45% 5.81%
2007 15,000 6.84% 5.85%
-------
Total $87,000 7.06% 5.58%
Swaps contributed to the Company's net interest income by reducing interest
expense for the years ended December 31, 1997, 1996 and 1995, by $995,000,
$799,000 and $564,000, 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.
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) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $9,680
in 1997, $9,040 in 1996 and $8,321 in 1995 $ (9,830) $ (9,222) $ (8,578)
======== ======== ========
Projected benefit obligation for service rendered to date $(10,718) $(10,235) $ (9,473)
Plan assets at fair value 14,579 13,204 12,730
-------- -------- --------
Plan assets in excess of projected benefit obligation 3,861 2,969 3,257
Unrecognized net loss from past experience different from that
assumed and effects of changes in assumptions (538) 209 (160)
Unrecognized transition asset at January 1, 1986 being
recognized over 17 years (323) (385) (446)
-------- -------- --------
Prepaid pension cost included in other assets $ 3,000 $ 2,793 $ 2,651
======== ======== ========
Net pension costs include the following components:
Service cost--benefits earned during the period $ 316 $ 344 $ 253
Interest cost on projected benefit obligation 718 716 725
Actual return on plan assets (1,905) (1,472) (2,364)
Net amortization and deferral 664 270 1,274
-------- -------- --------
Net periodic pension cost $ (207) $ (142) $ (112)
======== ======== ========
</TABLE>
For 1997, the discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 7.0% and 4.5%, respectively. For 1996, the rates were 7.5% and
4.5%. For 1995, the rates were 7.0% and 4.5%. The expected long-term rate of
return on assets was 9.0% for all three years.
13
<PAGE>
================================================================================
NOTE L. EMPLOYEE BENEFIT PLANS (CONTINUED)
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,
1997, 1996 and 1995, were $271,000, $263,000, and $257,000, 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) 1997 1996
- -------------------------------------------------------------------------
ASSETS
Cash $ 15,911 $ 4,104
Investment in bank subsidiary 58,980 53,648
Investment in non-bank subsidiary 27,925 21,661
Subordinated note receivable from affiliate 8,000 8,000
Other investments 374 663
Due from affiliates 140,650 127,350
Other assets 337 751
-------- --------
$252,177 $216,177
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper $119,081 $ 98,107
Other liabilities 169 57
Stockholders' equity 132,927 118,013
-------- --------
$252,177 $216,177
======== ========
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
---------------------------------
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------
INCOME
Dividends from bank subsidiary $ 3,000 $ 3,120 $ 5,515
Interest income 9,879 7,836 6,917
Other income 239 296 208
------- ------- -------
13,118 11,252 12,640
EXPENSES
Interest expense 7,507 5,909 5,088
Other expenses 621 628 592
------- ------- -------
8,128 6,537 5,680
------- ------- -------
Earnings before taxes 4,990 4,715 6,960
Income taxes 817 652 595
------- ------- -------
4,173 4,063 6,365
Equity in undistributed net earnings of
subsidiaries 10,791 8,623 5,089
------- ------- -------
Net earnings $14,964 $12,686 $11,454
======= ======= =======
14
<PAGE>
================================================================================
NOTE M. PARENT ONLY INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 14,964 $ 12,686 $ 11,454
Adjustments to reconcile net earnings to net cash
from operating activities:
Equity in undistributed earnings of subsidiaries (10,791) (8,623) (5,089)
(Increase) decrease in other assets 726 550 (279)
Increase (decrease) in other liabilities 112 (92) (109)
--------- -------- ---------
(9,953) (8,165) (5,477)
--------- -------- ---------
Net cash from operating activities 5,011 4,521 5,977
Cash flows from investing activities:
(Advances to) affiliates (13,300) (23,195) (19,592)
Decrease in other investments 260
--------- -------- ---------
Net cash (used for) investing activities (13,300) (23,195) (19,332)
Cash flows from financing activities:
Net increase in commercial paper 20,974 18,121 17,563
Payment for fractional shares on stock dividends (22) (26) (20)
Purchase of treasury stock (856) (1) (10)
Other (34) 29
--------- -------- ---------
Net cash from financing activities 20,096 18,060 17,562
--------- ---------- ---------
Net increase (decrease) in cash 11,807 (614) 4,207
Cash at beginning of year 4,104 4,718 511
--------- ---------- ---------
Cash at end of year $ 15,911 $ 4,104 $ 4,718
========= ========== =========
Supplemental disclosures
Cash paid during the year for:
Interest $ 7,504 $ 5,465 $ 5,270
Income taxes 660 690 889
</TABLE>
================================================================================
NOTE N. SECURITIES
Securities consist of the following:
DECEMBER 31, 1997
--------------------------------------------
COST OR APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
Available-for-sale
U.S. Treasury $ 24,012 $ 13 $ 28 $ 23,997
U.S. Government agencies 9,816 28 9,844
Federal agency mortgage-backed 101,830 1,052 353 102,529
Other securities 4,955 4,955
-------- -------- -------- --------
$140,613 $ 1,093 $ 381 $141,325
======== ======== ======== ========
Held-to-maturity
Collateralized mortgage obligations $ 37,402 $ 459 $ 37,861
======== ======== ========
15
<PAGE>
================================================================================
NOTE N. SECURITIES (CONTINUED)
DECEMBER 31, 1996
--------------------------------------------
COST OR APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
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
======== ======== ======== ========
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, 1997
--------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER TEN
ONE YEAR FIVE YEARS TEN YEARS YEARS
----------------- ---------------- ---------------- ----------------
(IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $23,997 5.26%
U.S. Government agencies $ 4,655 6.05% $ 5,189 6.17%
Federal agency
mortgage-backed $13,700 5.83% $88,829 7.05%
Other securities 4,955 6.85%
------- ------- ------- -------
$28,652 5.39% $ 5,189 6.17% $13,700 5.83% $93,784 7.04%
======= ======= ======= =======
Held-to-maturity
Collateralized mortgage
obligations $ 4,478 7.21% $32,924 7.10%
======= =======
Approximate market value $ 4,526 $33,335
======= =======
DECEMBER 31, 1996
--------------------------------------------------------------------
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>
Securities carried at $137,547,000 and $115,925,000 at December 31, 1997 and
1996, 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.
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 4.2 years for agency mortgage-backed
securities and 2.6 years for collateralized mortgage obligations.
16
<PAGE>
================================================================================
REPORT OF INDEPENDENT AUDITORS
================================================================================
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, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
January 16, 1998
17
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
SUMMARY RESULTS
Net earnings for 1997 were $14,964,000 compared with $12,686,000 in 1996, up 18
percent. Basic earnings per share increased to $1.85 in 1997 compared with $1.56
in 1996.
Major factors contributing to the earnings increase in 1997 were higher net
interest income resulting from growth in loans and investments and an increase
in non-interest income, which included a state income tax refund of $1,369,000.
We accomplished this growth while holding non-interest expenses to an increase
of less than eight percent.
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 $43.8
million up from $39.3 million in 1996 and $37.4 million in 1995. 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 increased to 8.44 percent from
8.28 percent in 1996. Approximately 82 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 5.18 percent compared with 5.26 percent in 1996.
Average earning assets grew to $845 million in 1997, an increase of $98 million
or 13 percent. Average loans increased to $647 million in 1997 from $571 million
in 1996, an increase of 13 percent. Loans were 76.5 percent of total earning
assets in 1997, compared with 76.4 percent in 1996.
The general increase in interest rates during 1997 increased the cost of
interest bearing deposits and borrowed funds to 5.33 percent from 5.18 percent
in 1996, an increase of 15 basis points. While the average base rate increased
16 basis points, the average yield on earning assets, including fixed rate
securities, increased 6 basis points. As a result, interest rate spread declined
to 4.03 percent from 4.12 percent in 1996. Interest bearing time deposits of
$100,000 or more increased and averaged $113.2 million in 1997 compared with
$103.8 million in 1996. Other interest bearing deposit accounts increased
compared with last year and comprise approximately 34 percent of interest
bearing sources. Brokered deposits averaged $66.9 million in 1997 compared with
$64.8 million in 1996. While the Company's emphasis remains on 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, 1997, long-term debt totaled
$67 million. Non-interest bearing deposits increased from 1996 and averaged $118
million in 1997.
18
<PAGE>
The following table summarizes the changes in funding sources since 1995:
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
% CHANGE % CHANGE
(DAILY AVERAGES IN THOUSANDS) AMOUNT FROM 1996 AMOUNT FROM 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest bearing time deposits of $100,000 or more $113,212 9.1% $103,797 56.6%
Other interest bearing deposits 222,492 5.8 210,329 5.2
Commercial paper 119,192 24.2 95,950 23.9
Other short-term borrowed funds 149,375 20.5 123,940 1.9
Long-term debt 57,509 19.7 48,054 (5.9)
-------- --------
Total interest bearing 661,780 13.7 582,070 12.7
Non-interest bearing deposits 117,605 6.7 110,222 6.0
Other liabilities 9,069 6.3 8,533 3.4
Stockholders' equity 124,323 12.4 110,595 12.5
-------- --------
$912,777 12.5% $811,420 11.6%
======== ========
</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 credit 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
$390 million in 1996 to $440 million in 1997, an increase of 13 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 1997. 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 $55.2 million and $40.3 million at December 31, 1997, and
1996, respectively.
Loans secured by commercial real estate were approximately $97 million as of
December 31, 1997 and $86 million as of the previous year end. 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
19
<PAGE>
portfolio with apartment buildings being the largest category at 22 percent.
Commercial real estate lending activities are guided by Credit Policies,
Underwriting Guidelines, Operating Procedures, Collateral Standards and
Environmental Risk Procedures.
Loans secured by residential mortgages totaled $43 million at December 31, 1997,
up from $40 million last year. This category includes $20 million secured by
first liens on 1-4 family housing, $14 million secured by junior liens on 1-4
family housing and $9 million revolving Executive Line loans that are secured by
either first or second mortgages. The comparable 1996 amounts are $20 million
first liens, $10 million junior liens and $10 million revolving Executive Lines.
Collateral standards for residential real estate lending generally call for a
maximum 80 percent loan-to-value ratio for properties up to $300,000 and lesser
advance rates for properties above $300,000.
Loans to individuals were $55 million at December 31, 1997, compared with $57
million in 1996. These loans are 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.
Other loans were $31 million on December 31, 1997, compared with $23 million in
1996. These loans are comprised primarily of loans to owners of community banks
and bank holding companies to finance the purchase and 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 $2.1 million in 1997 compared with $2.3
million in 1996. 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 increased to $10.1 million as a result of the
lower net losses in 1997. At December 31, 1997, the reserve was 1.51 percent of
loans compared with 1.43 percent in 1996. Actual net loan losses in 1997 were
$574,000 compared with $2.4 million in 1996. Charge-offs were $1.1 million in
1997, and recoveries were $532,000. During the same period, the Company reduced
non-performing assets from $3.2 million to $1.2 million. The reserve coverage of
these assets increased from 265 percent to 843 percent.
The Company's receivables from and letters of credit issued for customers in the
real estate industry were approximately $92 million at December 31, 1997,
compared with $77 million at December 31, 1996. 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 $1.2 million at December 31, 1997, compared with $3.2
million in 1996 and $3.9 million in 1995. At the current year-end,
non-performing assets consisted of loans on non-accrual status and loans past
due 90 days or more.
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
20
<PAGE>
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. These loans are well secured and in the process
of collection. The Company had no other real estate owned at December 31, 1997
or 1996.
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 $19 million outstanding at December 31, 1997, 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 two percent shift in the absolute level of interest rates would change
the market value of equity by less than four 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 $ 531 $38 $ 72 $ 25
Securities 21 44 77 37
Other assets 40 50
----- --- ----- -----
592 82 149 112
Non-interest bearing deposits 81 35 34
Interest bearing deposits 134 100 94
Short-term borrowings 220 27
Long-term debt 47 20
Interest rate swaps 87 (67) (20)
Other liabilities and stockholders' equity 143
----- --- ----- -----
522 162 108 143
----- --- ----- -----
Repricing gap $ 70 $(80) $ 41 $ (31)
Cumulative gap 70 (10) 31 0
Cumulative gap as a percent of assets 8% (1)% 3% 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
21
<PAGE>
a declining rate 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.
The following table provides information about the Company's derivative
financial instruments and other financial instruments used for purposes other
than trading that are sensitive to changes in interest rates. For loans,
securities, and liabilities with contractual maturities, the table presents
principal cash flows and related weighted-average interest rates by contractual
maturities as well as the Company's historical experience of the impact of
interest rate fluctuations on the prepayment of residential and home equity
loans and mortgage-backed securities. For core deposits (e.g., non-interest
bearing checking, interest bearing checking and savings, savings and money
market deposits) that have no contractual maturity, the table presents principal
cash flows and, as applicable, related weighted-average interest rates based on
the Company's historical experience, management's judgment, and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.
<TABLE>
<CAPTION>
FAIR VALUE
AS OF
(IN MILLIONS) 1998 1999 2000 2001 2002 THEREAFTER TOTAL 12/31/97
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate loans $ 40 $ 15 $ 9 $ 21 $ 13 $ 25 $ 123 $126
Average interest rate 7.89% 8.66% 8.99% 9.09% 8.83% 9.08% 8.61%
Variable interest rate loans 501 5 5 4 4 13 533 535
Average interest rate 10.19% 8.81% 8.99% 9.00% 9.14% 8.97% 10.09%
Fixed interest rate securities 55 25 18 16 15 37 166 167
Average interest rate 6.17% 6.82% 6.98% 6.98% 6.97% 6.93% 6.67%
Variable interest rate securities 2 1 1 1 1 7 13 13
Average interest rate 6.78% 6.73% 6.73% 6.73% 6.73% 6.81% 6.78%
Other interest bearing assets 4 4 4
Average interest rate 5.80% 5.80%
RATE SENSITIVE LIABILITIES:
Non-interest bearing checking 116 9 9 9 9 150 150
Interest bearing checking & savings 100 9 8 8 8 134 134
Average interest rate 4.15% 1.50% 1.35% 1.35% 1.35% 3.45%
Time deposits 134 23 7 24 5 195 195
Average interest rate 5.87% 6.06% 6.09% 6.45% 6.34% 5.99%
Fixed interest rate borrowings 247 23 24 20 314 316
Average interest rate 5.42% 8.18% 8.45% 7.51% 5.99%
RATE SENSITIVE DERIVATIVE FINANCIAL
INSTRUMENTS:
Interest rate swaps 23 44 20 87 2
Average pay rate 5.87% 5.97% 6.06%
Average receive rate 6.99% 6.92% 6.74%
</TABLE>
NON-INTEREST INCOME
Total non-interest income was $11.4 million, up from $10.1 million in 1996, and
$9.2 million in 1995. Increases resulted primarily from trust fees and a state
income tax refund. The Bank realized no gains or losses on the sale of
investment securities in 1997 compared with gains of $133,000 in 1996, and
losses of $122,000 in 1995. The table below summarizes the major components of
non-interest income:
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------
Trust income $4,801 $4,605 $4,839
Service charges on deposit accounts 2,195 2,189 1,862
Mortgage banking fees 204 514 399
Sale of financial services and investment products 292 383 291
State income tax refund 1,369
Securities gains (losses) 133 (122)
Letter of credit commissions 558 374 389
Other 1,971 1,884 1,519
------- ------- ------
$11,390 $10,082 $9,177
======= ======= ======
22
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense totaled $28.3 million in 1997, compared with $26.2 million
in 1996 and $26.1 million in 1995. Higher net occupancy expenses resulted from
increased costs related to the relocation of the Company and its subsidiaries.
Equipment cost increases are a result of continued investment in technology and
equipment by the Company. Fees and assessments were higher in 1997 resulting
primarily from an increase in attorney fees of $150,000 and consulting fees of
$117,000. The table below summarizes the major components of non-interest
expense:
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------
Salaries and employee benefits $15,110 $14,965 $15,156
Net occupancy 3,194 2,750 2,272
Equipment 3,648 2,731 2,481
Fees and assessments 1,539 1,102 1,771
Advertising and marketing 909 844 511
Other 3,865 3,797 3,862
------- ------- -------
$28,265 $26,189 $26,053
======= ======= =======
The Company's noninterest expense for 1997 includes charges incurred in
connection with making its computer systems year 2000 compliant. The Company
expects to continue incurring charges related to this project through the year
2000, however, none of these costs are expected to materially impact its results
of operations in any one year. In addition, a significant portion of these costs
are not expected to be incremental to the Company but instead will constitute a
reassignment of existing internal systems technology resources. The Company
believes that its plans for dealing with the year 2000 issue will result in
timely and adequate modifications of its systems and technology. Ultimately, the
potential impact of the year 2000 issue will depend not only on the corrective
measures the Company undertakes, but also on the way in which the year 2000
issue is addressed by governmental agencies, businesses, and other entities who
provide data to, or receive data from, the Company, or whose financial condition
or operational capability is important to the Company as borrowers, suppliers,
or customers. Therefore, the Company is communicating with these parties to
ensure they are aware of the year 2000 issue, to learn how they are addressing
it, and to evaluate any likely impact on the Company.
CAPITAL AND LIQUIDITY
Stockholders' equity was $133 million or 14.2 percent of total assets at
December 31, 1997, compared with $118 million and 13.1 percent in 1996. 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:
DECEMBER 31,
-------------------------
1997 1996
- ---------------------------------------------------------
RISK CAPITAL RATIOS
Tier I Capital 16.61% 15.97%
Total Capital 17.86% 17.12%
LEVERAGE RATIO 14.15% 13.11%
23
<PAGE>
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, seven, and ten-year
term notes in the amount of $67 million with an investment grade rating.
Available-for-sale securities provide liquidity through scheduled maturities and
the cash convertibility of these assets at market value. At December 31, 1997,
the market value of available-for-sale securities exceeded amortized cost by
$712,000. At December 31, 1996, the market value was less than amortized cost by
$682,000. 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
52 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, 1997. In 1997, net cash provided from operating activities
increased to $16.1 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 1997, net
cash used in investing activities decreased by $69.2 million. The reduction
reflects lower fed funds sold and investment portfolio purchases as compared
with the prior year. Cash provided from financing activities decreased by $70.5
million in 1997 reflecting reduced brokered deposits. Increased funding sources
included commercial paper, federal funds purchased and repurchase agreements,
other short-term borrowings, and long-term debt.
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.
1996 VERSUS 1995
The major factors contributing to the earnings increase were higher net interest
income and non-interest income, partially offset by higher non-interest expense.
Net interest income increased to $39.3 million, up six percent. The increase
resulted from a higher volume of earning assets despite a decrease in net
interest margin. Excluding gains and losses on sale of securities, non-interest
income increased $650,000 resulting from increased service charge income on
deposit accounts, and mortgage financing activity. Non-interest expense
increased $136,000 from 1995 reflecting higher occupancy, equipment, and
advertising and marketing expenses related to the relocation of the Company to
new quarters in 1996, offset by a reduction in attorney fees and FDIC insurance
premiums.
24
<PAGE>
================================================================================
CHANGE IN INTEREST INCOME AND EXPENSE
================================================================================
<TABLE>
<CAPTION>
YEAR-ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 OVER 1996 1996 OVER 1995
----------------------------------- -----------------------------------
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>
Earned on:
Funds sold $ 646 $ 646 $ 77 $ (68) $ 145
Taxable securities 860 $ 172 688 1,211 395 816
Tax-exempt securities (27) (27) (440) 4 (444)
Loans 8,107 425 7,682 3,001 (3,614) 6,615
------ ------ ------ ------ -------- ------
Total earning assets 9,586 597 8,989 3,849 (3,283) 7,132
Interest Paid on:
Savings deposits 364 66 298 756 145 611
Time deposits 909 230 679 1,254 (577) 1,831
Other deposits 28 3 25 20 7 13
Short-term funds borrowed 3,161 525 2,636 228 (997) 1,225
Long-term debt 680 38 642 (377) (163) (214)
------ ------ ------ ------ -------- ------
Total interest bearing liabilities 5,142 862 4,280 1,881 (1,585) 3,466
------ ------ ------ ------ -------- ------
Increase (decrease) in net interest income $4,444 $ (265) $4,709 $1,968 $ (1,698) $3,666
====== ====== ====== ====== ======== ======
</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.
================================================================================
SECURITIES
================================================================================
DECEMBER 31,
CARRYING VALUE OF SECURITIES ---------------------------
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------
Available-for-sale
U.S. Treasury $ 23,997 $ 23,903 $ 21,963
U.S. Government agencies 9,844 9,661 12,017
Federal agency mortgage-backed 102,529 94,671 83,192
Other securities 4,955 4,955 4,871
-------- -------- --------
$141,325 $133,190 $122,043
======== ======== ========
Held-to-maturity
Collateralized mortgage obligations $ 37,402 $ 31,254 $ 35,109
Obligations of states and political subdivisions 642
Other securities 251 375
-------- -------- --------
$ 37,402 $ 31,505 $ 36,126
======== ======== ========
25
<PAGE>
================================================================================
DISTRIBUTION OF ASSETS, LIABILITIES
AND STOCKHOLDERS' EQUITY
================================================================================
1997
--------------------------------
INTEREST
(DAILY AVERAGES IN THOUSANDS AND ON A FULLY AVERAGE INCOME/ AVERAGE
TAXABLE EQUIVALENT BASIS) BALANCE EXPENSE RATE
- --------------------------------------------------------------------------------
ASSETS
Federal funds sold and resale agreements $ 26,268 $ 1,450 5.52%
Securities:
Taxable 171,981 11,440 6.65
Tax-exempt
-------- -------
Total securities 171,981 11,440 6.65
Loans 646,734 66,169 10.23
-------- -------
Total earning assets 844,983 79,059 9.36
Cash and due from banks 39,733
Other assets 28,061
--------
$912,777
========
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Savings $ 92,338 $ 3,710 4.02%
Time 209,737 12,163 5.80
Other 33,629 408 1.21
-------- -------
Total 335,704 16,281 4.85
Short-term borrowed funds 268,567 15,069 5.61
Long-term debt 57,509 3,941 6.85
-------- -------
Total interest bearing liabilities 661,780 35,291 5.33
Non-interest bearing deposits 117,605
Other liabilities 9,069
Stockholders' equity 124,323
--------
$912,777
========
-------
Net interest income and interest rate spread $43,768 4.03
=======
Net interest margin 5.18
Fees on loans included above $ 2,408
=======
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
<PAGE>
1996 1995
------------------------------------ ------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- --------------------------------------------------------------------------------
$ 14,561 $ 804 5.52% $ 12,134 $ 727 5.99%
161,473 10,580 6.55 148,543 9,369 6.31
170 27 15.88 3,428 467 13.62
-------- ------- -------- -------
161,643 10,607 6.56 151,971 9,836 6.47
571,159 58,062 10.17 509,899 55,061 10.80
-------- ------- -------- -------
747,363 69,473 9.30 674,004 65,624 9.74
37,245 34,412
26,812 18,459
-------- --------
$811,420 $726,875
======== ========
- --------------------------------------------------------------------------------
$ 84,778 $ 3,346 3.95% $ 68,598 $ 2,590 3.78%
197,808 11,254 5.69 167,200 10,000 5.98
31,540 380 1.20 30,459 360 1.18
-------- ------- -------- -------
314,126 14,980 4.77 266,257 12,950 4.86
219,890 11,908 5.42 199,021 11,680 5.87
48,054 3,261 6.79 51,052 3,638 7.13
-------- ------- -------- -------
582,070 30,149 5.18 516,330 28,268 5.47
110,222 103,945
8,533 8,250
110,595 98,350
-------- --------
$811,420 $726,875
======== ========
------- -------
$39,324 4.12 $37,356 4.27
======= =======
5.26 5.54
$ 2,326 $ 2,135
======= =======
27
<PAGE>
================================================================================
LOAN PORTFOLIO ANALYSIS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
TYPES OF LOANS ---------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $439,802 $389,718 $379,290 $304,913 $286,359
Real estate:
Construction 10,405 10,444 16,089 16,582 23,651
Residential mortgage 43,295 40,323 32,125 25,828 32,421
Non-residential mortgage 86,762 76,086 68,504 62,731 13,079
Loans to individuals for personal expenditures 54,987 56,973 33,966 27,272 25,474
Other loans 31,131 22,960 22,607 29,727 25,236
-------- -------- -------- -------- --------
$666,382 $596,504 $552,581 $467,053 $406,220
======== ======== ======== ======== ========
</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, 1997:
AFTER ONE AFTER
WITHIN BUT WITHIN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
- --------------------------------------------------------------------------------
Commercial and industrial $348,617 $ 84,612 $ 6,573 $439,802
Real estate construction 72 3,799 6,534 10,405
-------- -------- -------- --------
$348,689 $ 88,411 $ 13,107 $450,207
======== ======== ======== ========
Loans with predetermined interest rates $ 3,246 $ 28,533 $ 7,494 $ 39,273
Loans with floating interest rates 345,443 59,878 5,613 410,934
-------- -------- -------- --------
$348,689 $ 88,411 $ 13,107 $450,207
======== ======== ======== ========
The following table summarizes nonperforming assets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 320 $ 1,329 $ 1,314 $ 6,193 $ 9,175
Impaired non-accrual loans 171 1,017 2,409
Loans past due 90 days or more as to
interest or principal 703 871 135 8
------- ------- ------- ------- -------
Nonperforming loans $ 1,194 $ 3,217 $ 3,858 $ 6,201 $ 9,175
======= ======= ======= ======= =======
Percent of total loans 0.2% 0.5% 0.7% 1.3% 2.3%
</TABLE>
The gross interest income that would have been recorded in 1997 had
nonperforming assets remained current and in accordance with original terms, is
approximately $97,000. The amount of interest included in income was $2,000.
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.
28
<PAGE>
================================================================================
SUMMARY OF LOAN LOSS EXPERIENCE
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance of allowance for losses $ 8,511 $ 8,602 $ 7,946 $ 8,006 $ 7,657
Provision charged to operating expense 2,134 2,345 1,502 1,150 1,050
Charge-offs:
Commercial and industrial 825 2,059 907 850 805
Real estate (includes construction
and real estate) 125 195 153
Individuals for personal expenditures 156 298 44 172 257
Other 350
--------- --------- --------- --------- ---------
1,106 2,552 951 1,372 1,215
Recoveries:
Commercial and industrial 267 29 45 41 286
Real estate (includes construction
and real estate) 12 31 36 32 114
Individuals for personal expenditures 47 17 24 89 114
Foreign 8
Other 198 39
--------- --------- --------- --------- ---------
532 116 105 162 514
--------- --------- --------- --------- ---------
Charge-offs net of recoveries 574 2,436 846 1,210 701
--------- --------- --------- --------- ---------
Ending balance of allowance for losses $ 10,071 $ 8,511 $ 8,602 $ 7,946 $ 8,006
========= ========= ========= ========= =========
Average gross loans outstanding $ 646,734 $ 571,159 $ 509,899 $ 435,684 $ 384,685
Percent of net loan charge-offs to average loans 0.09% 0.43% 0.17% 0.28% 0.18%
Percent of allowance for losses to loans
outstanding at end of period 1.51% 1.43% 1.56% 1.70% 1.97%
</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>
1997
Amount allocated $ 1,245 $ 200 $ 300 $8,326 $10,071
Outstandings to total loans 66.00% 21.08% 8.25%
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%
</TABLE>
29
<PAGE>
================================================================================
SELECTED FINANCIAL DATA
================================================================================
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
BALANCE SHEET ITEMS (IN MILLIONS)
Securities $ 179 $ 165 $ 158 $ 139 $ 141
Loans 666 597 553 467 406
All other assets 90 138 90 67 67
Total assets 935 900 801 673 614
Total deposits 479 520 440 368 298
Short-term borrowed funds 246 206 198 156 216
Long-term debt 67 48 48 53 6
All other liabilities 10 8 9 5 8
Total liabilities 802 782 695 582 528
Stockholders' equity 133 118 106 91 86
INCOME AND EXPENSE ITEMS (IN THOUSANDS)
Interest and fees on loans 66,110 57,992 54,952 41,046 31,584
All other interest income 12,890 11,404 10,417 9,179 8,997
Total interest income 79,000 69,396 65,369 50,225 40,581
Interest expense on deposits 16,281 14,980 12,950 8,490 6,780
Interest expense on short-term borrowed funds 15,069 11,908 11,680 8,933 6,572
Interest expense on long-term debt 3,941 3,261 3,638 1,015 101
Total interest expense 35,291 30,149 28,268 18,438 13,453
Net interest income 43,709 39,247 37,101 31,787 27,128
Provision for loan losses 2,134 2,345 1,502 1,150 1,050
Trust fees 4,801 4,605 4,839 4,683 4,544
State income tax refund 1,369
Gains (losses) on sale of securities 133 (122) (32) 343
All other income 5,220 5,344 4,460 5,290 7,325
All other expenses 28,265 26,189 26,053 26,284 27,151
Earnings before cumulative effect of change in
accounting principle 14,964 12,686 11,454 8,946 7,135
Cumulative effect of change in accounting
principle 204
Net earnings 14,964 12,686 11,454 8,946 7,339
BASIC EARNINGS PER SHARE
Earnings before cumulative effect of change in
accounting principle 1.85 1.56 1.41 1.10 0.83
Cumulative effect of change in accounting
principle 0.03
Net earnings 1.85 1.56 1.41 1.10 0.86
</TABLE>
30
<PAGE>
================================================================================
SELECTED RATIOS
================================================================================
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Net earnings to average assets 1.63% 1.56% 1.57%
Net earnings to average stockholders' equity 12.01 11.40 11.52
Average stockholders' equity to average total assets 13.61 13.71 13.66
Regulatory Capital Ratios:
Tier 1 risk capital 16.61 15.97 16.04
Total risk capital 17.86 17.12 17.34
Leverage 14.15 13.11 13.23
(ratios calculated before unrealized gains or losses)
================================================================================
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
================================================================================
1997
-----------------------------------------------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER FIRST SECOND THIRD FOURTH
SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------
Interest income $ 18,407 $ 19,508 $ 20,563 $ 20,522
Interest expense 8,028 8,776 9,320 9,167
Net interest income 10,379 10,732 11,243 11,355
Provision for loan losses 790 567 502 275
Other non-interest income 2,980 2,480 3,489 2,441
Non-interest expense 7,126 6,900 7,149 7,090
Income tax expense 2,150 2,274 2,770 2,542
Net earnings 3,293 3,471 4,311 3,889
Basic earnings per share** 0.41 0.42 0.54 0.48
1996
-----------------------------------------------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER FIRST SECOND THIRD FOURTH
SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------
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
Basic earnings per share** 0.35 0.36 0.43 0.42
1997 1996
------------------ ------------------
LOW HIGH LOW HIGH
----------------------------------------
Stock Price Range**
First quarter $18 1/4 $23 $16 1/8 $18 1/4
Second quarter 19 3/4 23 7/8 17 3/4 20 1/4
Third quarter 21 1/4 28 7/8 16 18 1/4
Fourth quarter 26 1/2 30 16 3/8 18 7/8
December 31 (Closing Price) $29 7/2 $18 7/8
- -----------------
**Adjusted for stock dividends
31
<PAGE>
================================================================================
DIRECTORS
================================================================================
<TABLE>
<CAPTION>
NATIONAL CITY BANCORPORATION
<S> <C> <C> <C>
David L. Andreas Terry L. Andreas John H. Daniels, Jr.* David C. Malmberg
Chairman of the Board Chairman of the Board Partner Non-executive Chairman
and Chief Executive Officer School for Field Studies Willeke & Daniels of the Board
National City Bancorporation Beverly, Massachusetts National City Bank
Thomas E. Holloran*
Wendell R. Anderson* Marvin Borman* Professor, Graduate Programs Walter E. Meadley, Jr.
Of Counsel Partner in Management Retired Vice Chairman
Larkin, Hoffman, Maslon, Edelman, University of St. Thomas of the Board
Daly & Lindgren Ltd. Borman & Brand National City Bank
C. Bernard Jacobs
L.W. Andreas Kenneth H. Dahlberg Retired President and Roger H. Scherer*
Retired Chairman of the Board Chairman of the Board Chief Executive Officer Chairman of the Board
and Chief Executive Officer Dahlberg, Inc. National City Bancorporation Scherer Bros. Lumber Company
National City Bancorporation Retired Chairman of the Board
National City Bank *Members of the Audit Committee
NATIONAL CITY BANK OF MINNEAPOLIS
David C. Malmberg Michael J. Boris James B. Goetz Thomas E. Holloran
Non-executive Chairman Consultant President Professor, Graduate Programs
of the Board Goetz Associates in Management
National City Bank University of St. Thomas
Sharon N. Bredeson Esperanza Guerrero-Anderson
David L. Andreas President and Chief President and Chief Walter E. Meadley, Jr.
President and Executive Officer Executive Officer Retired Vice Chairman
Chief Executive Officer STAFF-PLUS Inc. Milestone Growth Fund of the Board
National City Bank National City Bank
Chairman of the Board John H. Daniels, Jr.
and Chief Executive Officer Partner
National City Bancorporation Willeke & Daniels
================================================================================
PRINCIPAL OFFICERS
================================================================================
NATIONAL CITY BANCORPORATION
David L. Andreas Thomas J. Freed
Chairman of the Board Secretary and Chief Financial Officer
and Chief Executive Officer
NATIONAL CITY BANK OF MINNEAPOLIS
David L. Andreas Timothy M. Murphy BANK OPERATIONS DIVISION FINANCIAL MANAGEMENT
President and Vice President DIVISION
Chief Executive Officer Donald W. Kjonaas
Senior Vice President Thomas J. Freed
David M. Nash and Security Officer Senior Vice President
CLIENT SERVICES DIVISION Senior Vice President and Chief Financial Officer
William J. Klein Laura J. Carlson
Executive Vice President Margrette A. Newhouse Vice President Robert A. Kramer
Vice President Vice President and Controller
Donna M. DeMatteo DeWayne A. Hoium
Vice President Daniel D. Schroeder Vice President Robert A. Steuck
Vice President Vice President
Linda M. Fifield Sherri L. Kelly
Vice President Scott D. Thorson Vice President COMPLIANCE COUNSEL
Vice President
Connie G. Weinman
Ann H. Hengel James R. Kitchen Vice President
Senior Vice President Vice President
Susan E. Martenson
Vice President
Lisa A. Ruhl
Vice President
DIVERSIFIED BUSINESS CREDIT, INC.
David L. Andreas Anthony R. Bassett Robert L. Johnson Christopher J. Schaaf
Chairman of the Board Vice President Vice President and Treasurer Vice President
Robert L. Olson William D. Farrar Bridget A. Manahan Mark W. Schwieters
President and Chief Vice President Vice President Vice President
Executive Officer
Jeffrey S. Holland Allen J. Olson Walter D. Tomaszek
Janet L. Pomeroy Vice President Vice President Vice President
Senior Vice President
</TABLE>
32
<PAGE>
NATIONAL CITY BANCORPORATION
SIXTH ON THE MALL
651 NICOLLET MALL, MINNEAPOLIS, MN 55402-1611
(612) 904-8500
CONSENT OF INDEPENDENT AUDITORS
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 16, 1998, with respect to the
consolidated financial statements of National City Bancorporation incorporatied
by reference in its Annual Report (Form 10-K) for the year ended December 31,
1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 52,847
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,740
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 141,325
<INVESTMENTS-CARRYING> 37,402
<INVESTMENTS-MARKET> 37,861
<LOANS> 666,382
<ALLOWANCE> 10,071
<TOTAL-ASSETS> 935,172
<DEPOSITS> 478,650
<SHORT-TERM> 246,698
<LIABILITIES-OTHER> 9,897
<LONG-TERM> 67,000
0
0
<COMMON> 10,139
<OTHER-SE> 122,788
<TOTAL-LIABILITIES-AND-EQUITY> 935,172
<INTEREST-LOAN> 66,110
<INTEREST-INVEST> 11,440
<INTEREST-OTHER> 1,450
<INTEREST-TOTAL> 79,000
<INTEREST-DEPOSIT> 16,281
<INTEREST-EXPENSE> 35,291
<INTEREST-INCOME-NET> 43,709
<LOAN-LOSSES> 2,134
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 28,265
<INCOME-PRETAX> 24,700
<INCOME-PRE-EXTRAORDINARY> 14,964
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,964
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.85
<YIELD-ACTUAL> 5.18
<LOANS-NON> 491
<LOANS-PAST> 703
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 19,164
<ALLOWANCE-OPEN> 8,511
<CHARGE-OFFS> 1,106
<RECOVERIES> 532
<ALLOWANCE-CLOSE> 10,071
<ALLOWANCE-DOMESTIC> 1,650
<ALLOWANCE-FOREIGN> 95
<ALLOWANCE-UNALLOCATED> 8,326
</TABLE>
