SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
_X_ Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
___ 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
- --------------------------------- -----------------------------------------
(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 22, 1999, the aggregate market value of 7,713,410 shares of
voting common stock, $1.25 par value, held by non-affiliates of the registrant
was approximately $169,695,020 based upon the reported closing price on the
NASDAQ Stock Market(SM). As of February 22, 1999, 8,781,899 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. [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the definitive Proxy Statement of National City Bancorporation
for the Annual Meeting of Stockholders held on April 21, 1999 are
incorporated into Part III.
(2) Form 10-Q for National City Bancorporation filed on November 15, 1999 is
incorporated into Item 8.
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NATIONAL CITY BANCORPORATION
FORM 10-K/A
YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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Part I
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<S> <C>
Item 1 - Business Pages 4 - 5
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Item 2 - Properties Pages 5 - 6
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Item 3 - Legal Proceedings Page 6
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Item 4 - Submission of Matters to a vote of Security Holders Page 6
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Item 5 - Market for Registrant's Common Equity Page 6
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Part II
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Item 6 - Selected Financial Data Page 42
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Item 7 - Management's Discussion and Analysis Page 28 - 36
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Item 7A - Quantitative and Qualitative Disclosures Page 31 - 32
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Item 8 - Financial Statements and Supplementary Data Pages 9 - 27 and 37 - 43
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Item 9 - Changes in and Disagreements with Accountants Page 7
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Part III
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Item 10 - Directors and Executive Officers Page 44
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Item 11 - Executive Compensation Page 44
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Item 12 - Security Ownership of Certain Beneficial Owners Page 44
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Item 13 - Certain Relationships and Related Transactions Page 44
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Part IV
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Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K Pages 44 - 45
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Signatures Page 46
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</TABLE>
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NATIONAL CITY BANCORPORATION
FORM 10-K/A
YEAR ENDED DECEMBER 31, 1998
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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
and with the officers appointed by the 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 278 employees,
none of whom are represented by a collective bargaining organization.
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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 for the year ended December 31,
1998 is presented on pages 37 through 43.
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 $2,332,000 in 1998. NCB's banking offices are
located at Gaviidae Common at 651 Nicollet Mall. NCB entered into a ten
year lease commencing March 16, 1996, to occupy approximately 95,200
square feet at this location. The effective annual base rent per square
foot is $4.98 for the first five years and $6.98 for the second five
years of the lease term. These rents are based upon NCB advancing
$3,346,608 to the landlord, which amount was used to pay for certain
base building improvements, real estate commissions, design fees
5
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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. The approximate cost per square foot related to real estate
taxes and normal operating expenses is $13.85.
DBCI is located in Dain Bosworth Plaza, at 60 South Sixth Street. DBCI
entered into a five year lease commencing September, 1, 1997, to occupy
14,067 square feet at this 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 $240,000 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. The
approximate cost per square foot related to real estate taxes and
normal operating expenses is $13.40.
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 for the year ended December 31, 1998 is presented
on pages 8 and 43.
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PART II
ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data for the five year period ended December 31,
1998 is presented on page 42.
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 for the year ended December 31, 1998 is presented on
pages 28 through 36.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk for the year
ended December 31, 1998 are presented in pages 31 and 32.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary financial
information (as amended) of National City Bancorporation and
subsidiaries for the year ended December 31, 1998 are presented on
pages 9 through 27 and 37 through 43.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
7
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FINANCIAL HIGHLIGHTS
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(IN THOUSANDS EXCEPT PER SHARE) 1998 1997
(RESTATED) (RESTATED)
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For the Year
Net interest income $ 47,552 $ 44,509
Net earnings 15,664 13,722
Basic earnings per share 1.77 1.54
At Year End
Total assets $ 1,025,682 $ 935,172
Loans 766,109 670,594
Deposits 517,494 478,650
Stockholders' equity 147,288 132,927
Book value per share 16.71 14.97
NATIONAL CITY BANCORPORATION
National City Bancorporation (NCBC) (the Company) 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.
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 was held in the Company's offices on the
fifth floor of Gaviidae Common, 651 Nicollet Mall, Minneapolis, Minnesota, on
Wednesday, April 21, 1999, at 11:00 a.m.
MARKET FOR COMMON STOCK
NCBC's common stock is traded on The NASDAQ Stock Market(SM) under the symbol
NCBM. There are currently approximately 2500 registered stockholders.
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CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
DECEMBER 31,
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(IN THOUSANDS) 1998 1997
(RESTATED) (RESTATED)
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<S> <C> <C>
ASSETS
Cash and due from banks $ 52,271 $ 52,847
Federal funds sold and resale agreements 6,100 3,740
Available-for-sale securities 133,897 141,325
Held-to-maturity securities
(market value: 1998--$41,569 and 1997--$37,861) 41,255 37,402
Loans 766,109 670,594
Less allowance for loan losses (13,785) (14,283)
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752,324 656,311
Bank premises and equipment 10,399 11,413
Accrued interest receivable 7,499 7,260
Customer acceptance liability 824 811
Other assets 21,113 24,063
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$ 1,025,682 $ 935,172
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 165,598 $ 149,624
Interest bearing 351,896 329,026
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517,494 478,650
Federal funds purchased and
repurchase agreements 98,702 104,399
Commercial paper 99,396 119,081
Other short-term borrowed funds 12,663 23,218
Acceptances outstanding 824 811
Other liabilities 10,315 9,086
Long-term debt 139,000 67,000
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Total liabilities 878,394 802,245
Stockholders' equity:
Common stock, par value $1.25,
Authorized shares: 1998--40,000,000; 1997--20,000,000
Issued: 1998--8,861,944 shares; 1997--8,110,836 shares 11,077 10,139
Additional paid-in capital 121,982 94,756
Unrealized gains net of tax effect 913 424
Retained earnings 14,470 28,464
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148,442 133,783
Less common stock in treasury at cost:
1998--45,030 shares; 1997--33,553 shares (1,154) (856)
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Total stockholders' equity 147,288 132,927
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$ 1,025,682 $ 935,172
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</TABLE>
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CONSOLIDATED STATEMENTS OF EARNINGS
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996
(RESTATED) (RESTATED) (RESTATED)
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<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 73,040 $ 66,910 $ 58,795
Interest on federal funds sold and resale agreements 1,092 1,450 804
Interest and dividends on securities:
Taxable 11,443 11,440 10,580
Exempt from federal income taxes 20
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11,443 11,440 10,600
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Total interest income 85,575 79,800 70,199
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INTEREST EXPENSE
Interest on deposits 16,393 16,281 14,980
Interest on short-term borrowed funds 15,275 15,069 11,908
Interest on long-term debt 6,355 3,941 3,261
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Total interest expense 38,023 35,291 30,149
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Net interest income 47,552 44,509 40,050
Provision for loan losses 2,890 4,819 3,148
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Net interest income after provision for loan losses 44,662 39,690 36,902
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NON-INTEREST INCOME
Service charges on deposit accounts 2,145 2,195 2,189
Fees for other customer services 1,635 1,698 1,837
Trust fees 4,641 4,801 4,605
State income tax refund 1,369
Gains on sale of securities 133
Other income 821 1,327 1,318
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9,242 11,390 10,082
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NON-INTEREST EXPENSE
Salaries and employee benefits 15,238 15,110 14,965
Net occupancy expense of bank premises 3,062 3,194 2,750
Equipment rentals, depreciation and maintenance 3,512 3,648 2,731
Other expense 6,237 6,313 5,743
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28,049 28,265 26,189
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Earnings before income taxes 25,855 22,815 20,795
Income taxes 10,191 9,093 8,109
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Net earnings $ 15,664 $ 13,722 $ 12,686
=========== =========== ===========
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BASIC EARNINGS PER SHARE $ 1.77 $ 1.54 $ 1.42
=========== =========== ===========
Average common and common equivalent shares outstanding 8,855,348 8,901,415 8,915,473
</TABLE>
See Notes To Consolidated Financial Statements
10
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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
(RESTATED) (RESTATED)
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996,
as restated 6,705,808 $ 8,382 $ 65,484 $ 33,145 $ 275 562 $ (10) $107,276
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 94 (1) (1)
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Balance at December 31, 1996,
as restated 7,374,520 9,218 79,199 31,243 (405) 16 0 119,255
Net earnings for the year 13,722 13,722
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)
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BALANCE AT DECEMBER 31, 1997,
AS RESTATED 8,110,836 10,139 94,756 28,464 424 33,553 (856) 132,927
NET EARNINGS FOR THE YEAR 15,664 15,664
TEN PERCENT STOCK DIVIDEND 804,574 1,005 27,961 (29,006) (40)
UNREALIZED SECURITIES GAINS
NET OF TAX EFFECT 489 489
CANCELLATION OF TREASURY STOCK (53,466) (67) (735) (652) (53,466) 1,454 0
PURCHASE OF TREASURY STOCK 64,943 (1,752) (1,752)
--------- ------- -------- -------- ----- ------- ------- --------
BALANCE AT DECEMBER 31, 1998 8,861,944 $11,077 $121,982 $ 14,470 $ 913 45,030 $(1,154) $147,288
========= ======= ======== ======== ===== ======= ======= ========
</TABLE>
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996
(RESTATED) (RESTATED) (RESTATED)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total interest income $ 85,575 $ 79,800 $ 70,199
Total interest expense 38,023 35,291 30,149
--------- --------- ---------
Net interest income 47,552 44,509 40,050
Provision for loan losses 2,890 4,819 3,148
--------- --------- ---------
Net interest income after provision for loan losses 44,662 39,690 36,902
--------- --------- ---------
Total noninterest income 9,242 11,390 10,082
Total noninterest expense 28,049 28,265 26,189
--------- --------- ---------
Earnings from operations before taxes 25,855 22,815 20,795
Applicable income taxes 10,191 9,093 8,109
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Net earnings 15,664 13,722 12,686
Other comprehensive income, before tax:
Unrealized gain (loss) on investments in securities 821 1,393 (1,143)
Applicable income tax 332 564 (463)
--------- --------- ---------
Other comprehensive income, net of tax 489 829 (680)
--------- --------- ---------
Comprehensive income $ 16,153 $ 14,551 $ 12,006
========= ========= =========
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</TABLE>
See Notes to Consolidated Financial Statements
11
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CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
(IN THOUSANDS) 1998 1997 1996
(RESTATED) (RESTATED) (RESTATED)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 15,664 $ 13,722 $ 12,686
Adjustments to reconcile net earnings to net cash
from operating activities:
Depreciation and amortization 2,927 3,245 2,169
Amortization of securities premiums and discounts 579 469 426
Provision for loan losses 2,890 4,819 3,148
Deferred income taxes 318 (1,369) (191)
(Gain) on sale of securities (133)
(Increase) decrease in accrued interest receivable (239) (954) 29
(Increase) decrease in other assets 2,950 (3,567) (138)
Increase (decrease) in other liabilities 1,229 1,421 (1,147)
Other (increase) (651) (194) (190)
--------- --------- ---------
Total operating adjustments 10,003 3,870 3,973
--------- --------- ---------
Net cash from operating activities 25,667 17,592 16,659
Cash flows from investing activities:
Net (increase) in loans (98,903) (71,321) (44,726)
Net (increase) decrease in federal funds sold (2,360) 56,380 (35,120)
Available-for-sale securities:
Proceeds from maturities and principal repayments 64,810 27,274 50,740
Proceeds from sale of securities 4,688
Purchases of securities (57,114) (34,476) (68,114)
Held-to-maturity securities:
Proceeds from maturities and principal repayments 17,865 9,233 13,581
Purchases of securities (21,743) (15,139) (9,000)
Purchase of premises and equipment (1,913) (2,436) (9,365)
Payment of prepaid expenses (1,739)
--------- --------- ---------
Net cash (used in) investing activities (99,358) (30,485) (99,055)
--------- --------- ---------
Cash flows from financing activities:
Net increase in non-interest bearing and savings deposits 31,333 2,151 26,326
Net increase (decrease) in time deposits 7,511 (43,132) 53,320
Net increase (decrease) in federal funds purchased and
repurchase agreements (5,697) 7,759 (13,895)
Net increase (decrease) in commercial paper (19,685) 20,974 18,121
Net increase (decrease) in other short-term borrowed funds (10,555) 11,852 4,679
Net increase (decrease) in long-term debt 72,000 19,080 (200)
Purchase of treasury stock (1,752) (856) (1)
Payment for fractional shares on stock dividends (40) (22) (26)
--------- --------- ---------
Net cash from financing activities 73,115 17,806 88,324
--------- --------- ---------
Net increase (decrease) in cash and due from banks (576) 4,913 5,928
Cash and due from banks at beginning of year 52,847 47,934 42,006
--------- --------- ---------
Cash and due from banks at end of year $ 52,271 $ 52,847 $ 47,934
========= ========= =========
Supplemental disclosures
Cash paid during the year for:
Interest $ 36,306 $ 35,194 $ 30,266
Income taxes 10,618 10,076 7,206
Unrealized securities gains (losses) net of tax 489 829 (680)
</TABLE>
See Notes to Consolidated Financial Statements
12
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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 generally deferred and recognized over the loan or commitment period as
a yield adjustment on a straight-line basis. In other circumstances fees are
recognized on a cash basis as a yield adjustment due to immateriality. 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 and unpaid 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
Company allocates the allowance for loan losses by identifying specific loans
that have a possibility of loss, and by applying a historical loss migration
analysis. 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 1998.
TREASURY STOCK--The Company's board of directors has authorized the repurchase
of shares from stockholders who have 99 or fewer 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 terminated prior to maturity, 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
13
<PAGE>
- --------------------------------------------------------------------------------
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
remaining life of the specific asset or liability it was designated to hedge.
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 1998 and
at December 31, 1998. There was no impact on the Company's financial condition
or results of operation due to the adoption of SFAS No. 128.
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.
COMPREHENSIVE INCOME--SFAS No. 130, "Reporting Comprehensive Income" was issued
in June, 1997. SFAS 130 established standardsfor reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company adopted SFAS 130 in 1998.
BUSINESS SEGMENTS--SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", was issued in June, 1997, and is effective for annual
financial statements issued for fiscal years beginning after December 15, 1997.
This statement establishes new standards for the way that public business
enterprises report information about operating segments. The Company adopted
SFAS 131 in 1998.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS--SFAS No. 132, "Pensions and Other
Postretirement Benefits", was issued by the Financial Accounting Standards Board
in February, 1998. The Company adopted SFAS 132 in 1998. The statement does not
change the recognition or measurement of pension or postretirement benefit
plans, but standardizes disclosure requirements for pensions and other
postretirement benefits.
ACCOUNTING FOR DERIVATIVES--The Financial Accounting Standards Board issued in
June, 1998 Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities", effective for years beginning after June 15, 1999. No. 133 provides
a comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company intends to adopt Statement No.
133 in year 2000 and is not expected to have a material impact.
NOTE B. CORRECTION OF AN ERROR-ALLOWANCE FOR CREDIT LOSSES
During October 1999, management of National City Bancorporation (NCBC)
identified a "special reserve" maintained as a reduction of loans receivable on
the balance sheet of NCBC's commercial finance subsidiary, Diversified Business
Credit, Inc. (DBCI). In connection with this reserve account, DBCI management
improperly reported certain information that should have been addressed in the
determination of NCBC's consolidated allowance for credit losses. After
consideration of the balance of this account at each measurement date and the
nature of certain additional information previously available only to DBCI
management, NCBC management has determined that the financial statement,
described above, be adjusted to properly reflect the consolidated financial
statements for each of the annual periods from 1996 through 1998. The effects of
the restatement on the consolidated balance sheet at December 31, 1998 and 1997,
and the consolidated statements of operations and comprehensive income and
shareholders' equity for the years ended December 31, 1998, 1997, and 1996 are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
ORIGINALLY AS ORIGINALLY AS ORIGINALLY AS
(IN THOUSANDS EXCEPT PER SHARE) REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet:
Loans $ 762,747 $ 766,109 $ 666,382 $ 670,594
Allowance for loan losses (10,423) (13,785) (10,071) (14,283)
Statement of Earnings:
Interest and fees on loans 73,090 73,040 66,110 66,910 57,992 58,795
Provision for loan losses 2,940 2,890 2,134 4,819 2,345 3,148
Net earnings 15,664 15,664 14,964 13,722 12,686 12,686
Basic earnings per share $ 1.77 $ 1.77 $ 1.68 $ 1.54 $ 1.42 $ 1.42
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
NOTE B. CORRECTION OF AN ERROR-ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Additionally, the Statement of Stockholders' Equity reflects an increase in
consolidated retained earnings of $1.2 million as of January 1, 1996.
- --------------------------------------------------------------------------------
NOTE C. 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, 1998
-----------------
CARRYING ESTIMATED
(IN THOUSANDS) AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 52,271 $ 52,271
Federal funds sold and resale
agreements 6,100 6,100
Available-for-sale securities 133,897 133,897
Held-to-maturity securities 41,255 41,569
Loans-net of allowance for
loan losses 752,324 756,573
LIABILITIES:
Deposits 517,494 518,331
Federal funds purchased and
repurchase agreements 98,702 98,702
Commercial paper and
other short-term funds 112,059 112,495
Long-term debt 139,000 144,581
OFF-BALANCE SHEET UNREALIZED GAINS:
Interest rate swap agreements 5,071
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
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgement is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amount the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. CASH AND DUE FROM BANKS--The carrying value of cash and due from banks
approximates estimated fair value.
FEDERAL FUNDS SOLD, RESALE AGREEMENTS, FEDERAL FUNDS PURCHASED, AND REPURCHASE
AGREEMENTS--The carrying value of these instruments approximates estimated fair
value.
15
<PAGE>
- --------------------------------------------------------------------------------
NOTE B. ESTIMATED FAIR VALUE (CONTINUED)
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 83% 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.
- --------------------------------------------------------------------------------
NOTE D. LOANS
The following loans were outstanding:
DECEMBER 31,
---------------------------
(IN THOUSANDS) 1998 1997
(RESTATED) (RESTATED)
- -------------------------------------------------------------------------------
Commercial & Industrial $520,672 $442,328
Real estate:
Construction 24,196 10,405
Residential mortgage 40,074 43,295
Non-residential mortgage 92,769 88,448
Loans to individuals for
personal expenditures 46,800 54,987
Other 41,598 31,131
-------- --------
$766,109 $670,594
======== ========
At December 31, 1998 and 1997, receivables from and standby letters of credit
issued on behalf of commercial real estate developers and investors were
approximately $95 million and $93 million, respectively. 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.
An analysis of the allowance for loan losses is presented below:
YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS) 1998 1997 1996
(RESTATED) (RESTATED) (RESTATED)
- -------------------------------------------------------------------------------
Balance at beginning
of period $ 14,283 $10,111 $8,602
Provision charged to
operating expense 2,890 4,819 3,148
Charge-offs (3,444) (1,179) (2,555)
Recoveries 56 532 916
------- ------- --------
Balance at end of period $13,785 $14,283 $10,111
======= ======= =======
In the opinion of management, the allowance for loan losses is adequate to
provide for known and estimated exposures in the loan portfolio.
16
<PAGE>
- --------------------------------------------------------------------------------
NOTE D. LOANS (CONTINUED)
At December 31, 1998, the Company had seven impaired commercial loans totaling
$16,736,000 compared with four loans totaling $14,106,000 at December 31, 1997.
Management has allocated $7,027,000 and $5,161,000 for 1998 and 1997,
respectively, of the Allowance for Loan Losses to these loans. Impaired loans
averaged $14,132,000 and $11,985,000 during 1998 and 1997, 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
$17,671,000 and $15,129,000 at December 31, 1998 and 1997, respectively. Gross
interest income would have been increased by approximately $636,000, $95,000,
and $426,000 for the years ended December 31, 1998, 1997 and 1996, respectively,
had such loans been current and in accordance with original terms. Nonperforming
status is not necessarily an indication of probable loss.
Loans to principal officers and directors of the Company and its subsidiaries
aggregated approximately $8,266,000, $8,552,000, and 8,822,000 at December 31,
1998, 1997, and 1996 respectively. New loans and repayments during 1998 were
$8,180,000 and $8,466,000, respectively. In the opinion of management, all such
loans are made at normal interest rates and terms.
- --------------------------------------------------------------------------------
NOTE E. BANK PREMISES AND EQUIPMENT
DECEMBER 31,
-----------------------
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Assets, at cost:
Land $ 183 $ 183
Buildings 1,229 1,222
Leasehold improvements 2,622 2,613
Equipment 17,280 16,419
------- -------
21,314 20,437
Accumulated depreciation:
Buildings 585 528
Leasehold improvements 1,060 829
Equipment 9,270 7,667
------- -------
10,915 9,024
------- -------
$10,399 $11,413
======= =======
- --------------------------------------------------------------------------------
NOTE F. DEPOSITS
Approximately $112,897,000 and $93,975,000 of interest bearing time deposits
were in denominations of $100,000 or more at December 31, 1998 and 1997,
respectively. The scheduled maturities of time deposits at December 31, 1998 are
summarized as follows:
LESS THAN $100,000
(IN THOUSANDS) $100,000 OR MORE
- --------------------------------------------------------------------------------
3 months or less $18,350 $63,699
3 - 6 months 20,868 25,096
6 - 12 months 21,791 5,140
1 - 2 years 11,081 16,526
2 - 3 years 7,121 846
3 - 5 years 9,842 1,590
over 5 years 91
------- --------
$89,144 $112,897
======= ========
17
<PAGE>
- --------------------------------------------------------------------------------
NOTE G. SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased, securities sold under
agreements to repurchase, treasury tax and loan deposits, Federal Home Loan Bank
advances 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 at
December 31, 1998, 1997 and 1996.
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) 1998 1997 1996
- --------------------------------------------------------------------------------
Maximum amount outstanding at any month end:
Federal funds & repurchase $163,128 $156,104 $137,883
Commercial paper 138,323 137,714 109,079
Other 27,388 26,332 20,391
Daily average amount
outstanding:
Federal funds & repurchase 145,095 133,366 116,973
Commercial paper 115,197 118,154 95,950
Other 17,488 17,047 6,967
Weighted average interest rate for full year:
Federal funds & repurchase 4.91% 4.99% 4.83%
Commercial paper 6.26% 6.28% 6.09%
Other 5.40% 5.82% 5.37%
Outstanding at year-end:
Federal funds and repurchase 98,702 104,399 96,640
Commercial paper 99,396 119,081 98,107
Other 12,663 23,218 11,366
Weighted average interest rate
on debt outstanding
as of December 31:
Federal funds & repurchase 4.03% 5.43% 5.36%
Commercial paper 5.75% 6.04% 6.11%
Other 5.11% 5.33% 5.11%
- --------------------------------------------------------------------------------
NOTE H. LONG-TERM DEBT
DECEMBER 31,
----------------------
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
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 10,000
Series D, 7.15%, due 2004 5,000 5,000
Series E, 7.22%, due 2007 5,000 5,000
Series F, 6.68%, due 2003 51,000
Series G, 6.79%, due 2005 11,000
Federal Home Loan Bank
Advance, 5.81%, due 2000 10,000
-------- -------
Total $139,000 $67,000
======== =======
The Company has entered into interest rate swap agreements to effectively
convert the Senior Notes to floating rate instruments. At December 31, 1998, 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 6.08%. The weighted average effective interest rate
for the Senior Notes Series C, D, E, F, and G including the effects of the
related swap agreements, is the three month LIBOR rate plus 80 basis points or
5.86%.
The Senior Notes are unsecured and are unconditionally guaranteed by the parent
company.
The Senior Notes include covenants which require Diversified Business Credit,
Inc. and the parent company to maintain certain levels of capitalization and
maintain debt to capitalization ratios within prescribed limits.
18
<PAGE>
- --------------------------------------------------------------------------------
NOTE I. INCOME TAXES
The components of income tax expense were:
1998 1997 1996
(IN THOUSANDS) (RESTATED) (RESTATED) (RESTATED)
- --------------------------------------------------------------------------------
Current:
Federal $ 7,860 8,383 6,612
State 2,013 2,079 1,688
------- ------- ------
9,873 10,462 8,300
Deferred:
Federal 239 (1,027) (143)
State 79 (342) (48)
------- ------- ------
318 (1,369) (191)
------- ------- ------
$10,191 9,093 $8,109
======= ======= ======
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,
-----------------------------
1998 1997
(IN THOUSANDS) (RESTATED) (RESTATED)
- --------------------------------------------------------------------------------
Deferred tax assets:
Loan loss reserves $5,579 $5,780
Salary continuation plan 994 866
Loan fees 21 60
Nondeductible expenses 20 5
------- -------
Total deferred tax assets 6,614 6,711
Deferred tax liabilities:
Retirement plan 1,256 1,143
Prepaid expenses 111 101
Tax over book depreciation 482 396
Security discounts 14 2
Unrealized gains on securities 620 288
------- -------
Total deferred tax liabilities 2,483 1,930
------- -------
Net deferred tax assets $4,131 $4,781
======= =======
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, 1998, 1997 and
1996 is different than the federal income tax rate.
The reasons for the differences are as follows:
1998 1997 1996
---- ---- ----
Federal income tax rate 35.0% 35.0% 35.0%
Tax exempt income (0.2) (0.1) (0.2)
State income taxes, net of federal
income tax benefit 5.2 5.1 5.2
Cash value of life insurance (0.5) (0.6) (0.8)
Other items (0.1) (0.2)
----- ----- -----
Effective rate 39.4% 39.4% 39.0%
===== ===== =====
19
<PAGE>
- --------------------------------------------------------------------------------
NOTE J. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding in connection with standby letters of
credit aggregating approximately $21,714,000 and $19,164,000 at December 31,
1998 and 1997, respectively.
Commercial letters of credit were $2,980,000 and $3,187,000 at December 31,
1998and 1997 respectively. Acceptance participations acquired were $11,419,000
at December 31, 1998and $7,214,000 at December 31, 1997.
National City Bank has entered into a ten year lease which commenced March 16,
1996, for its 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 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, 1998. The aggregate lease commitments
outstanding as of December 31, 1998 were $13,874,000 and for the next five years
are payable as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1999 2,410
2000 2,225
2001 2,210
2002 2,159
2003 1,998
Net rental expense for the years ended December 31, 1998, 1997, and 1996, was
$2,332,000, $2,478,000, and $2,170,000 respectively.
Dividends declared by national banks that exceed retained net earnings for the
current year plus the preceding two years must be approved by the Comptroller of
the Currency. Under this formula, approximately $12,957,000 of dividends may be
paid by the Company's bank subsidiary at December 31, 1998, 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 K. 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 1998, approximately $4,640,000 was maintained in required
reserves on a daily average basis.
- --------------------------------------------------------------------------------
NOTE L. 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.
20
<PAGE>
- --------------------------------------------------------------------------------
NOTE L. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
A summary of the Company's contractual or notional amounts for off-balance-sheet
activities at December 31, 1998 and 1997, is as follows:
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Credit activities:
Commitments to extend credit $315,391 $262,007
Standby letters of credit 21,714 19,164
Commercial letters of credit 2,980 3,187
Acceptance participations acquired 11,419 7,214
Other financial instrument activities:
Interest rate swap agreements $129,000 $ 87,000
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.
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, 1998 and
1997, the gain position of these contracts was $5.1 million and $2.0 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, 1998 and 1997, interest rate swaps totaling $129 million and $67
million, respectively, hedged long-term debt. At December 31, 1997, 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 $47 million of these swaps and the three month LIBOR on $82
million. The notional balances and yields by maturity date for interest rate
swaps at December 31, 1998, are as follows:
WEIGHTED WEIGHTED
NOTIONAL AVERAGE AVERAGE
AMOUNT INTEREST RATE INTEREST RATE
MATURITY DATE (IN THOUSANDS) RECEIVED PAID
- --------------------------------------------------------------------------------
1999 $23,000 7.19% 5.75%
2001 24,000 7.41% 5.75%
2003 51,000 5.89% 5.73%
2004 5,000 6.45% 5.71%
2005 11,000 5.93% 5.73%
2007 15,000 6.84% 5.76%
--------
Total $129,000 6.54% 5.74%
21
<PAGE>
Swaps contributed to the Company's net interest income by reducing interest
expense for the years ended December 31, 1998, 1997 and 1996, by $971,000,
$995,000 and $799,000, respectively.
- --------------------------------------------------------------------------------
NOTE M. 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) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Projected benefit obligation:
Balance at beginning of period $ 10,541 $ 9,457 $ 10,051
Service cost 379 316 344
Interest cost 745 718 716
Actuarial (gain) or loss (7) 758 10
Benefits paid during period (523) (531) (886)
--------- --------- ---------
Projected benefit obligation at end of period 11,135 10,718 10,235
Plan assets at fair value:
Balance at beginning of period 14,579 13,204 12,730
Actual return on plan assets during period 1,635 1,906 1,360
Benefits paid during period (523) (531) (886)
--------- --------- ---------
Fair value of plan assets at end of period 15,691 14,579 13,204
--------- --------- ---------
Plan assets in excess of projected benefit obligation 4,556 3,861 2,969
Unrecognized prior service cost (98) (107) (116)
Unrecognized net loss or (gain) (961) (431) 325
Unrecognized transition asset (261) (323) (385)
--------- --------- ---------
Prepaid pension cost at end of period $ 3,236 $ 3,000 $ 2,793
========= ========= =========
Prepaid pension cost at beginning of period $ 3,000 $ 2,793 $ 2,651
Pension cost (credit) for the period (236) (207) (142)
--------- --------- ---------
Prepaid pension cost at end of period
$ 3,236 $ 3,000 $ 2,793
========= ========= =========
</TABLE>
For 1998, the discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 7.5% and 4.5%, respectively. For 1997, the rates were 7.0% and
4.5%. For 1996, the rates were 7.5% and 4.5%. The expected long-term rate of
return on assets was 9.0% for all three years.
The Company maintains a retirement savings 401(k) plan. All employees of the
Company and its subsidiaries are eligible to participate in the plan after
completing twelve months of service during which they have worked at least one
thousand hours. Matching contributions are made at the discretion of management.
Company contributions charged to operations for the years ended December 31,
1998, 1997 and 1996, were $276,000, $271,000, and $263,000, 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.
22
<PAGE>
- --------------------------------------------------------------------------------
NOTE N. PARENT ONLY INFORMATION
The following financial information relates to National City Bancorporation
(parent only) operations:
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
(IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 4,396 $ 15,911
Investment in bank subsidiary 64,371 58,980
Investment in non-bank subsidiary 34,256 27,925
Subordinated note receivable from affiliate 8,000 8,000
Other investments 183 374
Due from affiliates 135,200 140,650
Other assets 355 337
-------- --------
$246,761 $252,177
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper $ 99,396 $119,081
Other liabilities 77 169
Stockholders' equity 147,288 132,927
-------- --------
$246,761 $252,177
======== ========
</TABLE>
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
(IN THOUSANDS) 1998 1997 1996
(RESTATED)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiary $ 3,000 $ 3,000 $ 3,120
Interest income 10,321 9,879 7,836
Other income 80 239 296
-------- -------- --------
13,401 13,118 11,252
EXPENSES
Interest expense 7,290 7,507 5,909
Other expenses 738 621 628
-------- -------- --------
8,028 8,128 6,537
-------- -------- --------
Earnings before taxes 5,373 4,990 4,715
Income taxes 967 817 652
-------- -------- --------
4,406 4,173 4,063
Equity in undistributed net earnings of subsidiaries 11,258 9,549 8,623
-------- -------- --------
Net earnings $ 15,664 $ 13,722 $ 12,686
======== ======== ========
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
NOTE N. PARENT ONLY INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
(IN THOUSANDS) 1998 1997 1996
(RESTATED)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 15,664 $ 13,722 $ 12,686
Adjustments to reconcile net earnings to net cash
from operating activities:
Equity in undistributed earnings of subsidiaries (11,258) (9,549) (8,623)
Decrease in other assets 198 726 550
Increase (decrease) in other liabilities (92) 112 (92)
--------- --------- ---------
(11,152) (8,711) (8,165)
--------- --------- ---------
Net cash from operating activities 4,512 5,011 4,521
Cash flows from investing activities:
(Advances to) payments from affiliates 5,450 (13,300) (23,195)
--------- --------- ---------
Net cash (used for) investing activities 5,450 (13,300) (23,195)
Cash flows from financing activities:
Net increase (decrease) in commercial paper (19,685) 20,974 18,121
Payment for fractional shares on stock dividends (40) (22) (26)
Purchase of treasury stock (1,752) (856) (1)
Other (34)
--------- --------- ---------
Net cash from financing activities (21,477) 20,096 18,060
--------- --------- ---------
Net increase (decrease) in cash (11,515) 11,807 (614)
Cash at beginning of year 15,911 4,104 4,718
--------- --------- ---------
Cash at end of year $ 4,396 $ 15,911 $ 4,104
========= ========= =========
Supplemental disclosures
Cash paid during the year for:
Interest $ 7,290 $ 7,504 $ 5,465
Income taxes 1,058 660 690
</TABLE>
- --------------------------------------------------------------------------------
NOTE O. SECURITIES
Securities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
COST OR APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $ 4,969 $ 108 $ 5,077
U.S. Government agencies 17,057 84 $ 52 17,089
Federal agency mortgage-backed 107,537 1,436 43 108,930
Other securities 2,801 2,801
--------- --------- --------- ---------
$ 132,363 $ 1,628 $ 95 $ 133,897
========= ========= ========= =========
Held-to-maturity
Collateralized mortgage obligations $ 41,255 $ 314 $ 41,569
========= ========= =========
</TABLE>
24
<PAGE>
- --------------------------------------------------------------------------------
NOTE O. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------
COST OR APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $ 24,012 $ 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
======== ===== ========
</TABLE>
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, 1998
----------------------------------------------------------------------------------------
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 $ 5,077 5.69%
U.S. Government agencies $ 5,077 6.17% 12,012 5.25%
Federal agency mortgage-backed 4,368 5.82% $10,129 6.28% $94,433 6.71%
Other securities 2,801 6.56%
------- ------- ------- -------
$ 5,077 6.17% $21,457 5.47% $10.129 6.28% $97,234 6.71%
======= ======= ======= =======
Held-to-maturity
Collateralized mortgage obligations $ 2,271 7.25% $38,984 6.60%
======= =======
Approximate market value $ 2,288 $39,281
======= =======
<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
- ----------------------------------------------------------------------------------------------------------------------------------
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
======= =======
</TABLE>
Securities carried at $124,468,000 and $137,547,000 at December 31, 1998 and
1997, 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. Average yields on available-for-sale
securities is based on amortized cost.
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 3.2 years for agency mortgage-backed
securities and 2.8 years for collateralized mortgage obligations.
25
<PAGE>
- --------------------------------------------------------------------------------
NOTE P. BUSINESS SEGMENTS
The Company provides a wide range of banking and financial services and products
through its subsidiaries. The business segments are managed with a focus on
various performance objectives including net income, return on average equity,
and operating efficiency. The Company has two business segments: National City
Bank of Minneapolis (Bank) and Diversified Business Credit, Inc. (DBCI). The
Bank offers a full range of banking services to businesses and individuals
including loans, deposit services, trust services, cash management services, and
investment sales. DBCI is a commercial finance company offering asset-based
lending to businesses. The revenues, expenses, and assets of the business
segments are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
COMMERCIAL CONSOLIDATED
COMMERCIAL FINANCE COMPANY
(IN THOUSANDS) BANKING (RESTATED) OTHER* (RESTATED)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME $ 52,737 $ 32,932 $ (94) $ 85,575
INTEREST EXPENSE 24,967 16,203 (3,147) 38,023
---------- ---------- ---------- ----------
NET INTEREST INCOME 27,770 16,729 3,053 47,552
NON-INTEREST INCOME 9,002 599 (359) 9,242
---------- ---------- ---------- ----------
TOTAL REVENUE 36,772 17,328 2,694 56,794
LOAN LOSS PROVISION 640 2,250 2,890
DEPRECIATION AND AMORTIZATION EXPENSE 2,792 129 6 2,927
OTHER NON-INTEREST EXPENSE 20,383 4,330 409 25,122
---------- ---------- ---------- ----------
INCOME TAXES 5,031 4,287 873 10,191
NET INCOME $ 7,926 $ 6,332 $ 1,406 $ 15,664
========== ========== ========== ==========
TOTAL LOANS $ 461,324 $ 304,785 $ 766,109
TOTAL ASSETS 721,570 310,638 $ (6,526) 1,025,682
<CAPTION>
DECEMBER 31, 1997
-----------------
COMMERCIAL CONSOLIDATED
COMMERCIAL FINANCE COMPANY
BANKING (RESTATED) OTHER* (RESTATED)
- -----------------------------------------------------------------------------------------------------------------
Interest income $ 51,167 $ 28,692 $ (59) $ 79,800
Interest expense 24,182 13,600 (2,491) 35,291
---------- ---------- ---------- ----------
Net interest income 26,985 15,092 2,432 44,509
Non-interest income 10,729 749 (88) 11,390
---------- ---------- ---------- ----------
Total revenue 37,714 15,841 2,344 55,899
Loan loss provision 1,607 3,212 4,819
Depreciation and amortization expense 3,159 82 4 3,245
Other non-interest expense 20,683 3,928 409 25,020
---------- ---------- ---------- ----------
Income taxes 4,738 3,597 758 9,093
Net income $ 7,527 $ 5,022 $ 1,173 $ 13,722
========== ========== ========== ==========
Total loans $ 426,495 $ 244,099 $ 670,594
Total assets 693,065 246,584 $ (4,477) 935,172
<CAPTION>
DECEMBER 31, 1996
-----------------
COMMERCIAL CONSOLIDATED
COMMERCIAL FINANCE COMPANY
BANKING (RESTATED) OTHER* (RESTATED)
- -----------------------------------------------------------------------------------------------------------------
Interest income $ 46,857 $ 23,419 (77) $ 70,199
Interest expense 21,363 10,809 (2,023) 30,149
---------- ---------- ---------- ----------
Net interest income 25,494 12,610 1,946 40,050
Non-interest income 9,630 533 (81) 10,082
---------- ---------- ---------- ----------
Total revenue 35,124 13,143 1,865 50,132
Loan loss provision 1,820 1,328 3,148
Depreciation and amortization expense 2,084 78 7 2,169
Other non-interest expense 20,502 3,177 341 24,020
---------- ---------- ---------- ----------
Income taxes 4,094 3,441 574 8,109
Net income $ 6,624 $ 5,119 $ 943 $ 12,686
========== ========== ========== ==========
Total loans $ 397,934 $ 202,386 $ 600,320
Total assets 699,515 206,811 $ (6,197) 900,129
</TABLE>
*Other includes parent only and consolidating eliminations
26
<PAGE>
- --------------------------------------------------------------------------------
The Bank has experienced increased net interest income related primarily to a
growth in loans, while containing growth in non-interest expense. The Bank
received a state tax refund in 1997 of $1,369,000 which was included in
non-interest income. DBCI has also experienced higher net interest income
related to loan growth.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
National City Bancorporation
We have audited the accompanying consolidated balance sheets of National City
Bancorporation and subsidiaries as of December 31, 1998 and 1997 (as restated),
and the related consolidated statements of income, shareholders' equity,
comprehensive income and cash flows for each of the three years in the period
ended December 31, 1998 (as restated). 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 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 at December 31, 1998 and 1997 (as restated), and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 (as restated), in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 15, 1999
27
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
SUMMARY RESULTS
Net earnings for 1998 were $15,664,000 compared with $13,722,000 in 1997, up 14
percent. Basic earnings per share increased to $1.77 in 1998 compared with $1.54
in 1997. The net earnings for 1997 include a state income tax refund, related to
taxes paid in prior years, of $1,369,000 with a net earnings effect of
approximately $850,000. Without regard for the 1997 tax refund, earnings for
1998 increased 22 percent.
The major factors contributing to the earnings increase in 1998 was higher net
interest income resulting from growth in loans and a lower provision for loan
losses. We accomplished this growth while decreasing non-interest expenses.
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 $47.6
million up from $44.6 million in 1997 and $40.1 million in 1996. 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 37. The average base rate decreased to 8.35 percent from
8.44 percent in 1998. Approximately 83 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 5.15 percent compared with 5.26 percent in 1997.
Average earning assets grew to $926 million in 1998, an increase of $78 million
or 9 percent. Average loans increased to $724 million in 1998 from $650 million
in 1997, an increase of 11 percent. Loans were 78.2 percent of total earning
assets in 1998, compared with 76.6 percent in 1997.
The general decrease in interest rates during 1998 had no effect on the cost of
interest bearing deposits and borrowed funds which remained constant at 5.33
percent. The lower cost of short-term funds was offset by a higher volume and
cost of long-term debt. Time deposits are slower to reprice because of their
longer maturities. While the average base rate decreased 9 basis points, the
average yield on earning assets, including fixed rate securities, decreased 17
basis points. As a result, interest rate spread declined to 3.92 percent from
4.09 percent in 1997. Interest bearing time deposits of $100,000 or more
decreased and averaged $59.5 million in 1998 compared with $51.8 million in
1997. Other interest bearing deposit accounts increased $4.8 million compared
with last year and comprise approximately 31 percent of interest bearing
sources. Brokered deposits averaged $59 million in 1998 compared with $66.9
million in 1997. 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, 1998, long-term debt totaled $139 million. Detail
information about long-term debt is presented in Note H to the financial
statements. Non-interest bearing deposits increased from 1997 and averaged
$130.8 million in 1998.
28
<PAGE>
The following table summarizes the changes in funding sources since 1996:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
% CHANGE % CHANGE
(DAILY AVERAGES IN THOUSANDS) AMOUNT FROM 1997 AMOUNT FROM 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest bearing time deposits of $100,000 or more $ 59,528 14.9% $ 51,811 (19.7)%
Brokered deposits 58,987 (11.8) 66,865 (28.5)
Other interest bearing deposits 221,779 2.2 217,028 39.0
Commercial paper 115,197 (3.4) 119,192 24.2
Other short-term borrowed funds 162,583 8.8 149,375 20.5
Long-term debt 94,994 65.2 57,509 19.7
-------- --------
Total interest bearing 713,068 7.8 661,780 13.7
Non-interest bearing deposits 130,761 11.2 117,605 6.7
Other liabilities 10,118 11.6 9,069 6.3
Stockholders' equity 139,725 12.4 124,323 12.4
-------- --------
$993,672 8.9% $912,777 12.5%
======== ========
</TABLE>
CREDIT RISK MANAGEMENT
The responsibility for credit administration rests with the credit committees of
each subsidiary. 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. Additionally, 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
$442 million in 1997 to $521 million in 1998, an increase of 18 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. A high percentage of the commercial and
industrial loans originate from the Minneapolis/St. Paul metropolitan area.
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
$66.5 million and $55.2 million at December 31, 1998, and 1997, respectively.
Loans secured by commercial real estate were approximately $117 million as of
December 31, 1998 and $99 million as of the previous year end. Included in this
total is approximately $24.2 million of construction financing. The Company
makes commercial real estate loans for owner occupied real estate (commercial
and industrial borrowers), as well as to commercial real estate developers and
investors. A diversification of property types is maintained within the
commercial real estate portfolio with apartment buildings being the largest
category at 19 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 $40 million at December 31, 1998,
compared with $43 million last year. This category includes $16 million secured
by first liens on 1-4 family housing, $16 million secured by junior liens on 1-4
family housing and $8 million revolving Executive Line loans that are secured by
either first or second mortgages. The
29
<PAGE>
comparable 1997 amounts are $20 million first liens, $14 million junior liens
and $9 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 $47 million at December 31, 1998, compared with $55
million in 1997. 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 $42 million on December 31, 1998, compared with $31 million in
1997. 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 $2.9 million in 1998 compared with $4.8
million in 1997. 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 engages in a detailed review of loans showing weakness
based on established criteria. A system of risk grading is used to establish
monthly assessments of the portfolio and such assessments are the basis for a
quarterly review of the allowance for loan losses. The Summary of Loan Loss
Experience presented on page 41 shows the changes in the percentage from 1994 to
1998.
The allowance for loan losses was $13.8 million in 1998. At December 31, 1998,
the reserve was 1.80 percent of loans compared with 2.13 percent in 1997. Actual
net loan losses in 1998 were $3.4 million compared with $647,000 in 1997.
Charge-offs were $3.4 million in 1998, and recoveries were $56,000. The method
used and assumptions made in the determination of the provision and allowance
for loan losses is consistent for all periods presented in the Company's
financial statements.
The Company experienced a higher level of loss in 1998 than in the previous four
years as presented in the Summary of Loan Loss Experience on page 41. The losses
occurred in the commercial lending portfolio of DBCI and, accordingly, increased
the Company's percent of net loan charge-offs to average loans to .47 percent
compared with .10 percent in 1997. The remaining balance of the loans continues
to have a negative affect on income and are included in non-accrual loans. The
loans involved are being reduced through a process of collateral liquidation.
The allocation of the allowance for loan losses for 1998 presented on page 41
reflects a greater amount for commercial and industrial loans than in the
previous years presented.
NON-PERFORMING ASSETS
Non-performing assets were $17.7 million at December 31, 1998, compared with
15.1 million in 1997 and $11.0 million in 1996. At the current year-end,
non-performing assets consisted of loans on non-accrual status, impaired loans,
restructured loans, and loans past due 90 days or more.
In addition to non-accrual loans and accruing loans 90 days or more past due,
there were loans with an aggregate principal balance of $13.7 million
outstanding at December 31, 1998, to borrowers who are currently experiencing
financial difficulties. This compares with $15.1 million at December 31, 1997.
Although these loans are adequately
30
<PAGE>
secured by commercial real estate or other 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.
Non-accrual loans are loans on which the accrual of interest ceases when the
collection of principal or interest is determined to be doubtful by management.
It is the Company's policy to cease the accrual of interest when principal or
interest payments are delinquent 90 days or more. Any unpaid amounts previously
accrued in the current year are reversed from income, and thereafter interest is
recognized only when payments are received. Restructured loans are loans on
which the Company, for economic or legal reasons related to a borrower's
financial difficulties, grants a concession to the borrower that it would not
otherwise consider. 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 acquired in foreclosure at December
31, 1998 or 1997.
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 at
December 31, 1998:
<TABLE>
<CAPTION>
WITHIN 3 MONTHS 1 YEAR MORE THAN
(IN MILLIONS) 3 MONTHS TO 1 YEAR TO 5 YEARS 5 YEARS
(RESTATED)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $ 589 $ 57 $ 84 $ 36
Securities 9 32 94 40
Other assets 9 76
----- ----- ----- -----
607 89 178 152
Non-interest bearing deposits 39 44 36 47
Interest bearing deposits 187 88 77
Short-term borrowings 197 14
Long-term debt 47 21 71
Interest rate swaps 82 (11) (71)
Other liabilities and stockholders' equity 158
----- ----- ----- -----
552 146 123 205
----- ----- ----- -----
Repricing gap $ 55 $ (57) $ 55 $ (53)
----- ----- ----- -----
Cumulative gap 55 (2) 53 0
Cumulative gap as a percent of assets 5% 0% 5% 0%
</TABLE>
As indicated by the Gap table, assets reprice slightly faster than liabilities
as of the reporting date. With this balance sheet position, which is typical for
the Company, interest margins are projected to increase slightly in an
environment of rising short-term rates and decline slightly in a declining rate
environment. A lower interest rate environment is
31
<PAGE>
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. *Has
not been adjusted *
<TABLE>
<CAPTION>
FAIR VALUE
AS OF
1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98
(IN MILLIONS) (RESTATED) (RESTATED) (RESTATED)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate loans $ 23 $ 15 $ 20 $ 16 $ 16 $ 42 $ 132 $135
Average interest rate 7.81% 8.36% 8.87% 8.48% 8.48% 8.36% 8.37%
Variable interest rate loans 550 20 7 14 14 29 634 636
Average interest rate 9.54% 7.50% 8.70% 7.68% 7.68% 8.15% 9.31%
Fixed interest rate securities 33 32 26 20 18 40 169 170
Average interest rate 6.49% 6.36% 6.02% 6.55% 6.55% 6.53% 6.41%
Variable interest rate securities 1 1 1 1 1 1 6 6
Average interest rate 5.74% 6.14% 6.74% 5.93% 5.93% 6.69% 6.27%
Other interest bearing assets 6 6 6
Average interest rate 5.00% 5.00%
RATE SENSITIVE LIABILITIES:
Non-interest bearing checking 82 9 9 9 9 47 165 165
Interest bearing checking & savings 120 9 8 8 8 153 153
Average interest rate 3.90% 1.22% 1.01% 1.01% 1.01% 3.29%
Time deposits 151 28 8 6 6 199 200
Average interest rate 5.36% 5.91% 5.85% 5.87% 5.87% 5.48%
Fixed interest rate borrowings 248 10 11 10 71 350 356
Average interest rate 5.07% 5.81% 5.64% 5.64% 6.04% 5.32%
RATE SENSITIVE DERIVATIVE FINANCIAL
INSTRUMENTS:
Interest rate swaps 23 24 51 31 129 5
Average pay rate 5.75% 5.75% 5.73% 5.74%
Average receive rate 7.19% 7.41% 5.89% 6.45%
</TABLE>
NON-INTEREST INCOME
Total non-interest income was $9.2 million, compared with $11.4 million in 1997,
and $10.1 million in 1996. 1997 included a state income tax refund related to
taxes paid in prior years and interest earned to the date of the refund.. In
1997, the bank discontinued origination of mortgage loans from its own mortgage
banking unit, and instead, accommodates customers through a referral arrangement
with another lender. The decline in mortgage fee income is offset by a decline
in corresponding salary and other expense. The Bank realized no gains or losses
on the sale of investment securities in 1998 or 1997 compared with gains of
$133,000 in 1996.
32
<PAGE>
The table below summarizes the major components of non-interest income:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust income $ 4,641 $ 4,801 $ 4,605
Service charges on deposit accounts 2,145 2,195 2,189
Mortgage banking fees 50 204 514
Sale of financial services and investment products 306 292 383
State income tax refund 1,369
Securities gains 133
Letter of credit commissions 609 558 374
Other 1,491 1,971 1,884
------- ------- -------
$ 9,242 $11,390 $10,082
======= ======= =======
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense totaled $28.0 million in 1998, compared with $28.3 million
in 1997 and $26.2 million in 1996. Several categories reflect decreases which
were offset by increases in other expense which includes various items such as
supplies, travel and entertainment, and delivery expense.
The table below summarizes the major components of non-interest expense:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $15,238 $15,110 $14,965
Net occupancy 3,062 3,194 2,750
Equipment 3,512 3,648 2,731
Fees and assessments 1,374 1,539 1,102
Advertising and marketing 742 909 844
Other 4,121 3,865 3,797
------- ------- -------
$28,049 $28,265 $26,189
======= ======= =======
</TABLE>
YEAR 2000
In 1997 the Company formed a project team, and with assistance of an outside
consulting firm, assessed the impact of Year 2000 on the Company's critical
hardware and software, on the embedded technology in its physical facilities and
automated equipment. The assessment also considered the potential impact on
customers, business partners and vendors. A Year 2000 plan was developed, which
included prioritized tasks, implementation, testing schedules, and contingency
plans. The Company has replaced or modified certain systems to ensure Year 2000
compliance. The Company has substantially completed the testing of remediated
systems related to Year 2000 compliance. The Company anticipates that the
testing of all critical systems will be completed and implementation will be
substantially completed by the end of the second quarter 1999. Any critical
application that does not test successfully by the end of the second quarter of
1999 will have an approved contingency plan implemented. The Company estimates
that the cost of its Year 2000 compliance program will approximate $1.1 million
of which the Company has incurred approximately $800,000 to date. Costs incurred
to modify internal use software will be expensed. A significant amount of the
total estimated cost represents enhancements and improvements, which will be
amortized over the estimated useful life of the enhancement or improvement. The
Company will fund the expenditures from operating earnings.
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. The
Company continues to monitor the actions of these third parties to appropriately
address their own Year 2000 issues and to evaluate any likely effect on the
Company. There is no guarantee that the systems of other companies or entities
on which the Company relies will be remediated on a timely basis, or that a
remediation or conversion will be compatible with the Company's systems. If
these issues are not adequately resolved, the Company's future business
operations and, in turn, its financial position and results of operations, could
be negatively impacted. In addition, the Company's credit risk associated with
its borrowers may increase as a result of their individual Year 2000 issues.
33
<PAGE>
Individual contingency plans have been established for mission critical business
systems to mitigate potential delays or other problems associated with new
system replacements, system remediation, or established vendor delivery dates.
The plans were developed using a standard methodology that includes trigger
dates, steps to follow, expected life of the plan and resources required.
Business continuation plans will be developed for critical business processes to
assure that service to customers will not be impaired. Federal banking
regulators have conducted special examinations of banks to determine whether
they are taking the necessary steps to prepare for Year 2000. They are closely
monitoring the progress being made by the banks to ensure that key steps are
fully completed as required by the individual bank plans.
CAPITAL AND LIQUIDITY
Stockholders' equity was $147 million or 14.3 percent of total assets at
December 31, 1998, compared with $133 million and 14.2 percent in 1997. 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 for 1998 and 1997. 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,
----------------------
1998 1997
(RESTATED) (RESTATED)
----------------------------------------------------
RISK CAPITAL RATIOS
Tier I Capital 16.33% 16.52%
Total Capital 17.58% 17.77%
LEVERAGE RATIO 14.27% 14.15%
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 $129 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, 1998,
the market value of available-for-sale securities exceeded amortized cost by
$1.5 million. At December 31, 1997, the market value exceeded amortized cost by
$712,000. Held-to-maturity securities provide liquidity through scheduled
maturities. The majority of the securities are readily marketable. Management
has structured the loan portfolio to provide additional liquidity with at least
55 percent of total loans having scheduled maturities within one year.
Cash flows from operations and changes in the balance sheet also affect
liquidity. The Consolidated Statement of Cash Flows on page 12 shows the
component changes in the Company's cash position for the three years ending
December 31, 1998. In 1998, net cash provided from operating activities
increased to $26 million. Investing activities reflect loan originations and
principal repayments as well as activity in short-term money market investments,
the investment
34
<PAGE>
portfolio and investment in premises and equipment. In 1998, net cash used in
investing activities increased by $69 million. The increase reflects increased
loan originations as compared with the prior year. Cash provided from financing
activities increased by $55 million in 1998. Increased funding sources included
non-interest bearing and savings deposits and long term debt, offset by
decreased commercial paper, federal funds purchased and repurchase agreements,
and other short-term borrowings.
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.
1997 VERSUS 1996
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 $44.5 million, up 11 percent. The increase
resulted from a higher volume of earning assets offset by a decrease in net
interest margin. Excluding gains and losses on sale of securities, non-interest
income increased $1.3 million resulting from a state income tax refund.
Non-interest expense increased $2.1 million from 1996 reflecting higher
occupancy costs related to the relocation of the Company and its subsidiaries,
continued investment in technology and equipment by the Company, and increased
attorney and consulting fees.
BUSINESS SEGMENTS
The Company has two business segments, National City Bank of Minneapolis
(commercial bank) and Diversified Business Credit, Inc. (commercial finance).
The main offices of each segment are located in the business district of
downtown Minneapolis. In addition to the main office, the commercial bank has a
drive-up location in downtown Minneapolis and a full service bank in Edina,
Minnesota. The commercial finance segment has a office in Milwaukee, Wisconsin.
The commercial bank offers the usual banking services including business,
consumer, and real estate loans, deposit and cash management services,
correspondent banking, and safe deposit. In addition, the commercial bank also
offers trust services including management of funds for individuals, the
administration of estates and trusts, and for corporations, governmental bodies,
and public authorities, paying agent services, trustee under corporate
indenture, pension and profit sharing agreements, and record keeping and
reporting for 401-K savings plans. The commercial bank originates the majority
of its business in the Minneapolis/St. Paul area.
The net income of the commercial bank increased to $7.9 million in 1998 from
$7.5 million in 1997 and $6.6 million in 1996. The net earnings of 1997 included
a state income tax refund of $1,369,000 which increased net earnings
approximately $850,000. The bank has increased its net earnings through the
growth of its loan portfolio and the use of low-cost funding sources, primarily
deposits.
The following table summarizes the commercial bank's performance measures:
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
Net interest income $ 27,770 $ 26,985 $ 25,494
Net earnings 7,926 7,527 6,624
Average assets 720,504 684,609 606,265
Average loans 446,950 418,270 386,501
Average deposits 486,590 470,206 442,101
Return on average equity 13.19% 13.16% 12.51%
Efficiency ratio 63.03% 63.22% 64.55%
The commercial finance segment specializes in providing working capital loans
secured by accounts receivable, inventory, and other marketable assets. Loans
are made on a demand basis with no fixed repayment schedule. Compared to
equity-based loans made by commercial banks and others, asset-based loans
require closer monitoring and typically interest rates earned on these loans are
higher. The commercial finance segment funds its loans through the issuance of
long-term debt in the form of Senior Notes and borrowings from the parent
company. The commercial
35
<PAGE>
finance segment originates the majority of its loans in Minnesota with
approximately 15 percent originated in its Wisconsin office.
The net earnings of the commercial finance segment were $6.3 million in 1998
compared with $5.0 million in 1997 and $5.1 million in 1996.
The following table summarizes the commercial finance segment's performance
measures:
1998 1997 1996
(IN THOUSANDS) (RESTATED) (RESTATED) (RESTATED)
- --------------------------------------------------------------------------------
Net interest income $ 16,729 $ 15,092 $ 12,610
Net earnings 6,332 5,022 5,119
Average assets 278,737 233,260 188,825
Average loans 277,162 231,370 185,458
Return on average equity 20.59% 25.90% 27.44%
Efficiency ratio 25.73% 25.31% 24.77%
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this annual
report to stockholders and other material filed or to be filed by the Company
with the Securities and Exchange Commission (as well as information included in
oral statements or other written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities as well as
other capital spending, financing sources and the effects of regulation and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect actual results in the future and,
accordingly, such results may differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to development and
construction activities, dependence on existing management, leverage and debt
service (including sensitivity to fluctuations in interest rates), domestic or
global economic conditions, changes in federal or state tax laws or the
administration of such laws, litigation or claims, as well as all other risks
and uncertainties described in the Company's filings.
36
<PAGE>
================================================================================
CHANGE IN INTEREST INCOME AND EXPENSE
================================================================================
<TABLE>
<CAPTION>
YEAR-ENDED DECEMBER 31,
-----------------------
1998 OVER 1997 (RESTATED) 1997 OVER 1996 (RESTATED)
------------------------- -------------------------
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 $ (358) $ (59) $ (299) $ 646 $ 646
Taxable securities 3 (577) 580 860 $ 172 688
Tax-exempt securities (27) (27)
Loans 6,165 (1,512) 7,677 8,104 109 7,995
------- ------- ------- ------- ------- -------
Total earning assets 5,810 (2,148) 7,958 9,583 281 9,302
Interest Paid on:
Savings deposits 573 186 387 364 66 298
Time deposits (1) (143) 142 (436) 172 (608)
Brokered deposits (468) (14) (454) 1,345 63 1,282
Other deposits 8 3 5 28 3 25
Short-term funds borrowed 206 (311) 517 3,161 525 2,636
Long-term debt 2,414 (155) 2,569 680 38 642
------- ------- ------- ------- ------- -------
Total interest bearing liabilities 2,732 (434) 3,166 5,142 867 4,275
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income $ 3,078 $(1,714) $ 4,792 $ 4,441 $ (586) $ 5,027
======= ======= ======= ======= ======= =======
</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
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
------------
CARRYING VALUE OF SECURITIES
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available-for-sale
U.S. Treasury $ 5,077 $ 23,997 $ 23,903
U.S. Government agencies 17,089 9,844 9,661
Federal agency mortgage-backed 108,930 102,529 94,671
Other securities 2,801 4,955 4,955
-------- -------- --------
$133,897 $141,325 $133,190
======== ======== ========
Held-to-maturity
Collateralized mortgage obligations $ 41,255 $ 37,402 $ 31,254
Other securities 251
-------- -------- --------
$ 41,255 $ 37,402 $ 31,505
======== ======== ========
</TABLE>
37
<PAGE>
================================================================================
DISTRIBUTION OF ASSETS, LIABILITIES
AND STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
1998 (RESTATED)
---------------
INTEREST
AVERAGE INCOME/ AVERAGE
(DAILY AVERAGES IN THOUSANDS AND ON A FULLY TAXABLE EQUIVALENT BASIS) BALANCE EXPENSE RATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements $ 20,844 $ 1,092 5.24%
Securities:
Taxable 180,705 11,443 6.33
Tax-exempt
--------- ---------
Total securities 180,705 11,443 6.33
Loans 724,112 73,134 10.10
--------- ---------
Total earning assets 925,661 85,669 9.25
Cash and due from banks 44,819
Other assets 23,192
---------
$ 993,672
=========
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Savings $ 101,964 $ 4,283 4.20%
Time 204,296 11,694 5.72
Other 34,034 416 1.22
--------- ---------
Total 340,294 16,393 4.82
Short-term borrowed funds 277,780 15,275 5.50
Long-term debt 94,994 6,355 6.69
--------- ---------
Total interest bearing liabilities 713,068 38,023 5.33
Non-interest bearing deposits 130,761
Other liabilities 10,118
Stockholders' equity 139,725
---------
$ 993,672
=========
---------
Net interest income and interest rate spread $ 47,646 3.92
=========
Net interest margin 5.15
Fees on loans included above $ 3,281
=========
</TABLE>
Average balance of non-accruing loans is included in the above analysis.
Interest income attributable to non-accruing loans has not been included in the
above analysis except as collected.
38
<PAGE>
<TABLE>
<CAPTION>
1997 (RESTATED) 1996 (RESTATED)
--------------- ---------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
$ 26,268 $ 1,450 5.52% $ 14,561 $ 804 5.52%
171,981 11,440 6.65 161,473 10,580 6.55
170 27 15.88
--------- --------- --------- ---------
171,981 11,440 6.65 161,643 10,607 6.56
649,640 66,969 10.31 571,959 58,865 10.29
--------- --------- --------- ---------
847,889 79,859 9.42 748,163 70,276 9.39
39,733 37,245
25,155 26,012
--------- ---------
$ 912,777 $ 811,420
========= =========
- -------------------------------------------------------------------------------------------
$ 92,338 $ 3,710 4.02% $ 84,778 $ 3,346 3.95%
209,737 12,163 5.80 197,808 11,254 5.69
33,629 408 1.21 31,540 380 1.20
--------- --------- --------- ---------
335,704 16,281 4.85 314,126 14,980 4.77
268,567 15,069 5.61 219,890 11,908 5.42
57,509 3,941 6.85 48,054 3,261 6.79
--------- --------- --------- ---------
661,780 35,291 5.33 582,070 30,149 5.18
117,605 110,222
9,069 8,533
124,323 110,595
--------- ---------
$ 912,777 $ 811,420
========= =========
--------- ---------
$ 44,568 4.09 $ 40,127 4.21
========= =========
5.26 5.36
$ 2,378 $ 2,326
========= =========
</TABLE>
39
<PAGE>
================================================================================
LOAN PORTFOLIO ANALYSIS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
------------
TYPES OF LOANS
(IN THOUSANDS) 1998 1997 1996 1995 1994
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 520,672 $ 442,328 $ 393,534 $ 381,506 $ 304,913
Real estate:
Construction 24,196 10,405 10,444 16,089 16,582
Residential mortgage 40,074 43,295 40,323 32,125 25,828
Non-residential mortgage 92,769 88,448 76,086 68,504 62,731
Loans to individuals for personal
expenditures 46,800 54,987 56,973 33,966 27,272
Other loans 41,598 31,131 22,960 22,607 29,727
--------- --------- --------- --------- ---------
$ 766,109 $ 670,594 $ 600,320* $ 554,797* $ 467,053
========= ========= ========= ========= =========
</TABLE>
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, 1998 (as restated):
<TABLE>
<CAPTION>
AFTER ONE AFTER
WITHIN BUT WITHIN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 415,726 $ 92,957 $ 11,989 $ 520,672
Real estate construction 6,509 1,338 16,349 24,196
--------- --------- --------- ---------
$ 422,235 $ 94,295 $ 28,338 $ 544,868
========= ========= ========= =========
Loans with predetermined interest rates $ 12,354 $ 45,495 $ 13,068 $ 70,917
Loans with floating interest rates 409,881 48,800 15,270 473,951
--------- --------- --------- ---------
$ 422,235 $ 94,295 $ 28,338 $ 544,868
========= ========= ========= =========
</TABLE>
The following table summarizes nonperforming assets:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 696 $ 320 $ 1,329 $ 1,314 $ 6,193
Impaired loans 16,736 14,106 8,814 2,585
Restructured loans 235
Loans past due 90 days or more as to
interest or principal 4 703 871 135 8
-------- -------- -------- ------- -------
Nonperforming loans $ 17,671 $ 15,129 $ 11,014 $ 4,034 $ 6,201
======== ======== ======== ======= =======
Percent of total loans 2.3% 2.3% 1.8% 0.7% 1.3%
</TABLE>
The gross interest income that would have been recorded in 1998 had
nonperforming assets remained current and in accordance with original terms, is
approximately $667,000. The amount of interest included in income was $31,000.
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.
* Amounts differ from those previously reported in Form 8-K filed November 15,
1999.
40
<PAGE>
================================================================================
SUMMARY OF LOAN LOSS EXPERIENCE
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance of allowance for losses $ 14,283 $ 10,111 $ 8,602 $ 9,726* $ 8,006
Provision charged to operating expense 2,890 4,819 3,148 452 1,150
Charge-offs:
Commercial and industrial 3,252 898 2,062 1,637 850
Real estate (includes construction
and real estate) 155 125 195
Individuals for personal expenditures 37 156 298 44 172
Other 350
--------- --------- --------- --------- ---------
3,444 1,179 2,555 1,681 1,372
Recoveries:
Commercial and industrial 37 267 829 45 41
Real estate (includes construction
and real estate) 1 12 31 36 32
Individuals for personal expenditures 4 47 17 24 89
Foreign 8
Other 14 198 39
--------- --------- --------- --------- ---------
56 532 916 105 162
--------- --------- --------- --------- ---------
Charge-offs net of recoveries 3,388 647 1,639 1,576 1,210
--------- --------- --------- --------- ---------
Ending balance of allowance for losses $ 13,785 $ 14,283 $ 10,111 $ 8,602 $ 7,946
========= ========= ========= ========= =========
Average gross loans outstanding $ 724,112 $ 649,640 $ 571,959 $ 509,899 $ 435,684
Percent of net loan charge-offs to average loans 0.47% 0.10% 0.29% 0.31% 0.28%
Percent of allowance for losses to loans
outstanding at end of period 1.80% 2.13% 1.68% 1.55% 1.70%
</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 allowance for loan
losses:
<TABLE>
<CAPTION>
INDIVIDUALS
COMMERCIAL FOR PERSONAL
YEAR ENDED DECEMBER 31 AND INDUSTRIAL REAL ESTATE EXPENDITURES UNALLOCATED TOTAL
(RESTATED) (RESTATED) (RESTATED)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Amount allocated $ 12,628 $ 100 $ 300 $ 757 $13,785
Outstandings to total loans 67.96% 20.50% 6.11%
1997
Amount allocated 8,449 200 300 5,334 14,283
Outstandings to total loans 65.96% 21.20% 8.20%
1996
Amount allocated 6,624 100 300 3,087 10,111
Outstandings to total loans 65.55% 21.13% 9.49%
1995
Amount allocated 3,268 100 300 4,934 8,602
Outstandings to total loans 68.76% 21.04% 6.12%
1994
Amount allocated 4,595 100 300 2,951 7,946
Outstandings to total loans 65.28% 22.51% 5.84%
=========================================================================================================
</TABLE>
* The 1995 beginning balance reflects the cumulative effect of changes made to
the Allowance for Loan Losses prior to January 1, 1995.
41
<PAGE>
================================================================================
SELECTED FINANCIAL DATA
================================================================================
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET ITEMS (IN MILLIONS)
Securities $ 175 $ 179 $ 165 $ 158 $ 139
Loans 766 671 600 555 467
All other assets 85 85 137 90 67
Total assets 1,026 935 902 803 673
Total deposits 517 479 520 440 368
Short-term borrowed funds 211 246 206 198 156
Long-term debt 139 67 48 48 53
All other liabilities 12 10 9 10 5
Total liabilities 879 802 783 696 582
Stockholders' equity 147 133 119 107 91
INCOME AND EXPENSE ITEMS (IN THOUSANDS)
Interest and fees on loans 73,040 66,910 58,795 55,972 41,046
All other interest income 12,535 12,890 11,404 10,417 9,179
Total interest income 85,575 79,800 70,199 66,389 50,225
Interest expense on deposits 16,393 16,281 14,980 12,950 8,490
Interest expense on short-term borrowed funds 15,275 15,069 11,908 11,680 8,933
Interest expense on long-term debt 6,355 3,941 3,261 3,638 1,015
Total interest expense 38,023 35,291 30,149 28,268 18,438
Net interest income 47,552 44,509 40,050 38,121 31,787
Provision for loan losses 2,890 4,819 3,148 452 1,150
Trust fees 4,641 4,801 4,605 4,839 4,683
State income tax refund 1,369
Gains (losses) on sale of securities 133 (122) (32)
All other income 4,601 5,220 5,344 4,460 5,290
All other expenses 28,049 28,265 26,189 26,053 26,284
Net earnings 15,664 13,722 12,686 12,696 8,946
BASIC EARNINGS PER SHARE
Net earnings 1.77 1.54 1.42 1.42 1.01
</TABLE>
42
<PAGE>
================================================================================
SELECTED RATIOS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
(RESTATED) (RESTATED) (RESTATED)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings to average assets 1.58% 1.50% 1.56%
Net earnings to average stockholders' equity 11.26 11.01 11.40
Average stockholders' equity to average total assets 14.00 13.61 13.71
Regulatory Capital Ratios:
Tier 1 risk capital 16.33 16.52 16.06
Total risk capital 17.58 17.77 17.31
Leverage 14.27 14.15 13.22
(ratios calculated before unrealized gains or losses)
</TABLE>
================================================================================
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
================================================================================
<TABLE>
<CAPTION>
1998 (RESTATED)
----------------
(UNAUDITED) FIRST SECOND THIRD FOURTH
(IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 20,074 $ 20,881 $ 22,485 $ 22,135
Interest expense 8,875 9,127 9,959 10,062
Net interest income 11,199 11,754 12,526 12,073
Provision for loan losses 228 57 535 2,070
Other non-interest income 2,409 2,678 2,177 1,978
Non-interest expense 7,350 7,219 7,146 6,334
Income tax expense 2,379 2,836 2,759 2,217
Net earnings 3,651 4,320 4,263 3,430
Basic earnings per share* 0.41 0.49 0.48 0.39
<CAPTION>
1997* (RESTATED)
----------------
(UNAUDITED) FIRST SECOND THIRD FOURTH
(IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------
Interest income $ 18,632 $ 19,733 $ 20,788 $ 20,647
Interest expense 8,028 8,776 9,320 9,167
Net interest income 10,604 10,957 11,468 11,480
Provision for loan losses 1,015 792 727 2,285
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 1,899
Net earnings 3,293 3,471 4,311 2,647
Basic earnings per share* 0.37 0.38 0.49 0.30
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
LOW HIGH LOW HIGH
--- ---- --- ----
<S> <C> <C> <C> <C>
Stock Price Range*
First quarter $23 3/8 $29 1/2 $16 5/8 $20 7/8
Second quarter 30 35 1/4 18 21 3/4
Third quarter 24 34 1/2 19 3/8 26 1/4
Fourth quarter 23 1/2 28 24 1/8 27 3/8
December 31 (Closing Price) $26 1/4 $27
</TABLE>
- ----------------------
* Adjusted for stock dividends
43
<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 3 through 5 of the Proxy Statement for the
Annual Meeting of Stockholders held April 21, 1999, 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 Chief Executive Officer effective November 1, 1987.
Mr. Andreas served as Chairman of the Board from 1987 to 1998.
Mr. Andreas had been a Vice President and Senior Vice
President of NCBC during the five years prior to being elected
Chairman. Mr. Andreas was elected President and Chief
Executive Officer of NCB in 1994.
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 6 through 9 of the Proxy
Statement for the Annual Meeting of Stockholders held April 21, 1999
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 page 2 of the Proxy Statement for the Annual Meeting of
Stockholders held April 21, 1999 and is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and related transactions are presented on pages 2
through 5 of the Proxy Statement for the Annual Meeting of Stockholders
held April 21, 1999 and is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Item 8
(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
44
<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. 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. [Incorporated herein by
reference to Exhibit 10(j) to the 1997 Form 10-K.]
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,
1998.
45
<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 amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL CITY BANCORPORATION
Date: December 15, 1999 /s/ David L. Andreas
-----------------------------------------
David L. Andreas, Chief Executive Officer
46
<PAGE>
NATIONAL CITY BANCORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
SUBSEQUENTLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
11 Computation of Basic Earnings Per Share.
22 Subsidiaries of Registrant are listed and described
in PART I, Item 1.
23 Consent of Ernst & Young, LLP.
27 Financial Data Schedule
47
EXHIBIT 11
COMPUTATION OF BASIC EARNINGS PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net earnings applicable to common stock $15,664 $ 13,722 $12,686
Weighted average common shares outstanding* 8,855,348 8,901,415 8,915,473
Basic earnings per share $1.77 1.54 $1.42
</TABLE>
*Adjusted for stock dividends
48
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 15, 1999 included in the
Annual Report on Form 10-K of National City Bancorporation for the year ended
December 31, 1998, with respect to the consolidated financial statements, as
amended, included in this Form 10-K/A.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
December 16, 1999
49
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000069968
<NAME> NATIONAL CITY BANCORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 52,271
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 133,897
<INVESTMENTS-CARRYING> 41,255
<INVESTMENTS-MARKET> 41,569
<LOANS> 766,109
<ALLOWANCE> 13,785
<TOTAL-ASSETS> 1,025,682
<DEPOSITS> 517,494
<SHORT-TERM> 210,761
<LIABILITIES-OTHER> 10,315
<LONG-TERM> 139,000
0
0
<COMMON> 11,077
<OTHER-SE> 136,211
<TOTAL-LIABILITIES-AND-EQUITY> 1,025,682
<INTEREST-LOAN> 73,040
<INTEREST-INVEST> 11,443
<INTEREST-OTHER> 1,092
<INTEREST-TOTAL> 85,575
<INTEREST-DEPOSIT> 16,393
<INTEREST-EXPENSE> 38,023
<INTEREST-INCOME-NET> 47,552
<LOAN-LOSSES> 2,890
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 28,049
<INCOME-PRETAX> 25,855
<INCOME-PRE-EXTRAORDINARY> 25,855
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,664
<EPS-BASIC> 1.77
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 5.15
<LOANS-NON> 17,432
<LOANS-PAST> 4
<LOANS-TROUBLED> 235
<LOANS-PROBLEM> 13,741
<ALLOWANCE-OPEN> 14,283
<CHARGE-OFFS> 3,444
<RECOVERIES> 56
<ALLOWANCE-CLOSE> 13,785
<ALLOWANCE-DOMESTIC> 12,781
<ALLOWANCE-FOREIGN> 247
<ALLOWANCE-UNALLOCATED> 757
</TABLE>