SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended September 30, 1999 Commission file number 09426
NATIONAL CITY BANCORPORATION
(Exact name of registrant as specified in its charter)
Iowa 42-0316731
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
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
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Indicate by check mark whether the registrant (1) has filed all reports
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
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As of September 30, 1999, 8,756,817 shares of $1.25 par value common
stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1)National City Bancorporation's Quarterly Report to Stockholders for
the quarter ended September 30, 1999, is incorporated by reference and made a
part of Part I of Form 10-Q.
<PAGE>
NATIONAL CITY BANCORPORATION
INDEX
Part I Financial Statements
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The following data is incorporated by reference from National City
Bancorporation's Quarterly Report to Stockholders filed as Exhibit 1:
Consolidated Balance Sheets - September 30, 1999 and December 31, 1998.
Consolidated Statements of Earnings - Three and nine months ended
September 30, 1999 and 1998.
Consolidated Statements of Cash Flows - Nine months ended September 30, 1999 and
1998 are set forth on page 2 of this report.
Consolidated Statements of Earnings and Comprehensive Income - Three and nine
months ended September 30, 1999 and 1998 are set forth on page 3 of this report
Notes to Consolidated Financial Statements are included in this report appearing
on page 4.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is presented on pages 5 through 10 of this report.
Part II. Other Information
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Part II items requiring a response are included on page 11 of this report.
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NATIONAL CITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
(In Thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $12,542 $12,234
Adjustments to reconcile net earnings to net cash from operating
activities:
Depreciation and amortization 2,081 2,177
Amortization of securities premiums and discounts 261 432
Provision for loan losses 2.970 820
Decrease in accrued income receivable 384 81
(Increase) decrease in other assets (846) 2,839
Increase (decrease) in other liabilities (771) 113
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Total operating adjustments 4,079 6,462
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Net cash from operating activities 16,621 18,696
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Cash flows from investing activities:
Net (increase) in loans (67,656) (95,992)
Net (increase) decrease in federal funds sold 2,880 (26,385)
Available-for-sale securities:
Proceeds from maturities and principal repayments 34.654 48,501
Purchases of securities (33,146) (52,114)
Held-to-maturity securities:
Proceeds from maturities and principal repayments 10,728 14,157
Purchases of securities (17,396) (21,743)
Purchase of premises and equipment (901) (1,381)
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Net cash from (used in) investing activities (70,837) (134,957)
-------------------------
Cash flows from financing activities:
Net (decrease) in non-interest bearing and savings deposits (30,474) (2,845)
Net increase in time deposits 72,447 21,874
Net increase in federal funds purchased and repurchase agreements 2,878 53,081
Net (decrease) in commercial paper (60,082) (23,283)
Net increase in other borrowed funds 27,991 4,170
Net increase in long-term debt 37,000 72,000
Purchase of treasury stock (1,422) (598)
Payment for fractional shares on stock dividends (40)
Payment for cash dividends (6,311)
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Net cash from (used in) financing activities 42,027 124,359
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Net increase (decrease) in cash and due from banks (12,189) 8,098
Cash and due from banks at beginning of year 52,271 52,847
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Cash and due from banks at end of period $40,082 $60,945
=========================
Supplemental disclosures
Cash paid during the year for:
Interest $29,315 $24,926
Income taxes 7,686 8,537
Unrealized securities (losses) net of tax (1,874) 765
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 22,960 $ 22,485 $ 64,950 $63,440
Total interest expense (as amended) 10,231 9,959 28,197 27,961
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Net interest income (as amended) 12,729 12,526 36,753 35,479
Provision for loan losses 1,111 535 2,970 820
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Net interest income after provision for loan losses 11,618 11,991 33,783 34,659
Total noninterest income 3,647 2,177 8,483 7,264
Total noninterest expense 7,045 7,146 21,612 21,715
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Earnings from operations before taxes 8,220 7,022 20,654 20,208
Applicable income taxes 3,197 2,759 8,112 7,974
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Net Earnings 5,023 4,263 12,542 12,234
Other comprehensive income, before tax:
Unrealized gain (loss) on investments in securities (37) 1,165 (3,148) 1,286
Applicable income tax (15) 472 (1,274) 521
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Other comprehensive income, net of tax (22) 693 (1,874) 765
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Comprehensive Income $5,001 $4,956 $10,668 $12,999
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</TABLE>
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The Consolidated Balance Sheet as of September 30, 1999, the
Consolidated Statements of Earnings for the three-month and nine-month periods
ended September 30, 1999 and 1998, the Consolidated Statements of Cash Flows for
the nine-month periods then ended September 30, 1999 and 1998 and the
Consolidated Statements of Earnings and Comprehensive Income for the three-month
and nine-month periods then ended September 30, 1999 and 1998 have been prepared
by the Company, without audit. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations, cash
flows and comprehensive income for the periods ended September 30, 1999 and
1998, respectively, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's December 31, 1998 annual report to shareholders. The results of
operations for the period ended September 30, 1999 are not necessarily
indicative of the operating results for the full year. The Company has filed
Form 8-K on November 15, 1999 indicating that certain restatements of prior
periods will be made on Form 10-K/A.
4
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NATIONAL CITY BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS:
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Net earnings for the third quarter ended September 30, 1999 were
$5,023,000 compared with $4,263,000 in the third quarter of 1998. Basic earnings
per share was $ .57 for the third quarter of 1999, compared with earnings per
share of $ .48 in the third quarter of 1998. Net earnings in the third quarter
of 1999 in comparison with the same period last year, were affected by a state
income tax refund with an after-tax effect of approximately $769,000. Without
the tax refund, net income would have been $4,254,000 or $.49 per share for the
third quarter and $11,773,000 or $1.34 per share for the nine months. Earnings
information is summarized below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------- --------------------- -----------------------
Third Quarter Nine Months
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $5,023 $4,263 $12,542 $12,234
Earnings per share $ .57 $ .48 $ 1.43 $ 1.38
Return on average equity 11.94% 11.96% 11.24% 11.92%
Return on average assets 1.65% 1.67% 1.58% 1.69%
- ---------------------------------------------------------- ---------- ---------- ----------- -----------
</TABLE>
Net interest income for the third quarter was $12,729,000 compared with
$12,526,000 in the third quarter of 1998. Fluctuations in net interest income
can result from changes in the volume of assets and liabilities as well as
changes in interest rates. The following table summarizes variances in net
interest income attributed to changes in balance sheet volumes and interest
rates:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME* CHANGE FROM THIRD QUARTER 1998
Resulting from:
Interest On: Total Rates Volumes
----- ----- -------
<S> <C> <C> <C>
Total Earning Assets $ 496 $(1,091) $1,587
Total Interest Bearing Liabilities 272 (600) 872
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Change in Net Interest Income $ 224 $ (491) $ 715
=======================================
<CAPTION>
NET INTEREST INCOME* CHANGE FROM NINE MONTHS 1998
Resulting from:
Interest On: Total Rates Volumes
----- ----- -------
<S> <C> <C> <C>
Total Earning Assets $1,539 $(4,429) $5,968
Total Interest Bearing Liabilities 236 (2,711) 2,947
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Change in Net Interest Income $1,303 $(1,718) $3,021
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*on a fully taxable equivalent basis
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</TABLE>
5
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The tax equivalent net interest margin for the quarter was 5.06 percent
compared with 5.26 percent for the same period last year. The yield on earning
assets has declined in 1999 due to a general decline in interest rates and
increased competition. In the same period, the rate paid on interest bearing
liabilities has not declined as much, due to both increased funding costs and
changes in the funding mix. Funding costs increased at the Company's commercial
finance subsidiary, Diversified Business Credit, Inc. (DBCI). During the quarter
DBCI issued $70 million in long-term debt in a private placement. The note
issuance increased the subsidiary's cost of funds, and correspondingly improved
liquidity by extending the maturity of funding sources. We continue to face
strong competition for loans in our market niche. Notwithstanding the
competitive environment, loans increased by 8.4 percent over December 31, 1998.
Noninterest income for the third quarter was $3,647,000 compared with
$2,177,000 in 1998. The third quarter of 1999 included a state income tax refund
of $1,233.000. Excluding the tax refund, noninterest income increased $237,000
over the previous year. The increase occurred in all categories of noninterest
income.
Noninterest expense was $7,045,000 for the third quarter compared with
$7,146,000 for the third quarter of 1998. The Company's noninterest expense
includes charges incurred in connection with making its computer systems Year
2000 compliant as discussed below. Increases in personnel expenses and occupancy
costs were offset by decreases in other expenses, such as, advertising and
marketing expense, consulting fees, and Federal Reserve Bank service charges.
The efficiency ratio was 43.02 percent for the third quarter of 1999
compared to 48.60 percent for the same period last year. The improved efficiency
was due to the increase in noninterest income, including a state income tax
refund, a slight decrease in noninterest expense, and higher net interest
income.
YEAR 2000 COMPLIANCE:
- ---------------------
In 1997 the Company formed a project team, and with the assistance of an outside
consulting firm, assessed the effect of Year 2000 on the Company's critical
hardware and software, and on the embedded technology in its physical facilities
and automated equipment. This assessment also considered the potential effect of
Year 2000 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
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<PAGE>
remediated systems related to Year 2000 compliance. The Company estimates the
cost of its Year 2000 compliance program at approximately $1.1 million, the
majority of which has been incurred. Costs incurred to modify internal use
software are 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 has funded
the expenditures from operating earnings.
The potential effect 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 adversely affected. In addition, the Company's credit risk associated with
its borrowers may increase as a result of their individual Year 2000 issues.
However, at this time, it is not possible to quantify the potential effect of
such situations.
As of September 30, 1999, the Company had completed testing of its mission
critical business systems. A Year 2000 Business Process Continuity Plan was
developed for critical business processes to assure that service to customers
will not be impaired. This plan was tested in the third quarter using backup
power resources and alternative processing methods. 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.
ALLOWANCE FOR LOAN LOSSES:
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Net loan recoveries during the third quarter were $63,000 compared with
net loan charge-offs of $201,000 for the same period last year. The loan loss
provision was $1,111,000 for the third quarter, compared with $535,000 in the
third quarter of 1998. The provision is based on management's continuing
evaluation of the Company's loan portfolio, including estimates and appraisals
of collateral values, and current economic conditions. At September 30, 1999,
the allowance for loan losses was $13,553,000, or 1.63 percent of loans,
compared to $13,785,000 or
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1.80 percent of loans at December 31, 1998. Nonperforming assets were 2.1
million at September 30, 1999 compared with 11.5 million at December 31, 1998.
Nonperforming assets consist of loans 90 days or more past due, non-accrual
loans and restructured loans. Certain activity in the Allowance for Loan Losses
and the loan loss provision have been restated for periods prior to September
30, 1999. These restatements will be included in Form 10-K/A to be filed by the
Company prior to December 31, 1999. Activity regarding the allowance is
summarized below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------- ----------------------- ------------------------
(in thousands)
Third Quarter Nine Months
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance beginning of period $12,379 $14,433 $13,785 $14,283
Provision charge to operating expense 1,111 535 2,970 820
Less net loan charge-offs (recoveries) (63) 201 3,202 336
------- ------- ------- -------
Balance September 30 $13,553 $14,767 $13,553 $14,767
======= ======= ======= =======
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</TABLE>
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
The Company's average total assets were $ 1.045 billion for the
nine-months ended September 30, 1999, up from $ 969 million for the same period
in 1998. The majority of the increase was attributed to loans to businesses. The
Company continues to fund asset growth from various liability sources, including
interest and noninterest bearing deposits, short-term and long-term borrowings,
and retention of earnings. Short-term borrowings include commercial paper and a
bank line of credit, which are used to fund the loans of Diversified Business
Credit, Inc. (DBCI). In addition to deposits and short-term borrowings, the
Company had long-term debt of $ 176 million at September 30, 1999, in the form
of senior notes issued by DBCI and guaranteed by the Company. The notes are
rated BBB by Duff and Phelps. The Company issues commercial paper primarily in
its local market. The commercial paper is rated D2 by Duff and Phelps and F3 by
Fitch IBCA.
The Company continues to maintain a capital position that exceeds
regulatory risk based and leverage ratio capital requirements. The required risk
based ratio is 8 percent and the required leverage ratio is 3 to 5 percent. The
following table shows the Company's capital ratios:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------- -----------------------------------
September 30,
1999 1998
---- ----
<S> <C> <C>
RISK CAPITAL RATIOS
Tier I Capital 15.5% 16.0%
Tier II Capital 16.8% 17.5%
LEVERAGE RATIO 14.0% 13.4%
- ------------------------------------------------------------------------- ----------------- -----------------
</TABLE>
8
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BUSINESS SEGMENTS:
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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. The commercial bank has a detached facility drive-up
location in downtown Minneapolis and a full service branch bank in Edina,
Minnesota. The commercial finance segment also has an 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 $3.0 million in the third
quarter of 1999 from $2.3 million in the same period of 1998. In the third
quarter of 1999, the bank had a state income tax refund with an after-tax effect
of approximately $769,000, and in the third quarter of 1998, the bank had a
one-time loan fee with an after-tax effect of approximately $300,000. The bank
has increased its net earnings from ongoing operations through the growth of its
loan portfolio and the use of low-cost funding sources, primarily deposits, and
by maintaining the level of non-interest expenses incurred.
The following table summarizes the commercial bank's performance measures:
<TABLE>
<CAPTION>
- ------------------------------------------ ---------------------------------- ----------------------------------
(in thousands)
Third Quarter Nine Months
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenue $17,352 $16,325 $47,266 $46,354
Net earnings 2,966 2,348 6,805 5,847
Total assets 775,677 772,337
Return on average equity 15.67% 14.24% 14.19% 13.01%
Efficiency ratio 58.67% 62.84% 60.81% 64.39%
- ------------------------------------------ ---------------- ----------------- ----------------- ----------------
</TABLE>
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
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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 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 $1.6 million in the
third quarter of 1999 compared with $1.5 million in the same period of 1998. Net
interest income has decreased due primarily higher funding costs for the
commercial finance segment. This is the result of a reduction in commercial
paper placements and the use of alternative funding sources, which are more
costly.
The following table summarizes the commercial finance segment's performance
measures:
<TABLE>
<CAPTION>
- ------------------------------------------ ---------------------------------- ----------------------------------
(in thousands)
Third Quarter Nine Months
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenue (as amended) $9,373 $7,900 $26,469 $24,119
Net earnings 1,637 1,547 4,611 5,396
Total assets 305,754 304,233
Return on average equity 17.44% 19.20% 17.26% 23.96%
Efficiency ratio (as amended) 23.11% 31.04% 25.44% 28.33%
- ------------------------------------------ ---------------- ----------------- ----------------- ----------------
</TABLE>
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
Form 10-Q 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
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of such laws, litigation or claims, as well as all other risks and uncertainties
described in the Company's filings.
11
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NATIONAL CITY BANCORPORATION
Part II Other Information
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Item 4. Submission of matters to a vote of security holders.
None
Item 6. Exhibits and reports of Form 8-K.
Exhibit index:
Number Description
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None
The Company has filed a report on Form 8-K on November 15, 1999.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL CITY BANCORPORATION
Dated: November 15, 1999 By: /S/David L. Andreas
-------------------- ------------------------
President & Chief Executive Officer
Dated: November 15, 1999 By: /S/Thomas J. Freed
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Secretary and Chief Financial Officer
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