SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
_X_ Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
_____ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 0-9426
NATIONAL CITY BANCORPORATION
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(Exact name of registrant as specified in its charter)
Iowa 42-0316731
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
651 Nicollet Mall
Minneapolis, Minnesota 55402-1611
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number (including area code): 612-904-8500
Securities registered pursuant to Section 12(g) of the Act:
$1.25 Par Value Common Stock
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
As of February 21, 2000, the aggregate market value of 7,652,577 shares of
voting common stock, $1.25 par value, held by non-affiliates of the registrant
was approximately $125,311,000 based upon the reported closing price on the
NASDAQ Stock Market SM. As of February 21, 2000, 8,721,712 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. [ ]
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of National City Bancorporation's Annual Report to Stockholders
for the year ended December 31, 1999 are incorporated by reference into
Parts I, II, and IV.
(2) Portions of the definitive Proxy Statement of National City Bancorporation
for the Annual Meeting of Stockholders to be held on April 19, 2000 are
incorporated by reference into Part III.
(3) Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995 Certain statements under the captions "Business," "Legal Proceedings,"
"Market for Registrant's Common Equity and Related Stockholder Matters,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-K (and documents incorporated by
reference therein) constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be identified by the use of terminology such
as "may," "will," "expect," "anticipate," "estimate," "should," or
"continue" or the negative thereof or other variations thereon or
comparable terminology. Such forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical results or from those results currently
anticipated or projected. Such factors include, among other things, the
estimated fair value of financial instruments and the adequacy of the
allowance for loan losses.
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NATIONAL CITY BANCORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1999
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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 282 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. Under state law, a bank
subsidiary of an out-of state bank holding company may establish branch
offices in Minnesota if the bank subsidiary's principal place of
business is within the state. An acquiring out-of-state bank may
maintain and operate branches within Minnesota provided the in-state
acquired bank has been in continuous operation for at least five years.
NCBC's subsidiary bank is a national bank and is, accordingly, subject
to the supervision of and examination by the Comptroller of the
Currency and the Federal Reserve System. The subsidiary bank is a
member of the Federal Deposit Insurance Corporation and, accordingly,
is subject to examination thereby.
Areas subject to regulation by federal and state authorities include
deposit reserves, investments, loans, mergers, issuance of securities,
payment of dividends, establishment of branches, and other aspects of
operations.
STATISTICAL DATA - Statistical data is presented on pages 29 through 35
of the Annual Report to Stockholders for the year ended December 31,
1999, and such statistical data is incorporated herein by reference.
ITEM 2 - PROPERTIES
NCB currently leases 95,200 square feet of space for its downtown main
office under a lease which expires in 2006. Management believes this
facility is adequate for NCB's needs.
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
does not intend to renew the lease and will make alternate arrangements
to serve customers affected by the closure.
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. Management believes this facility is
adequate for DBCI's needs.
The aggregate net rentals for all of the above described facilities
were approximately $2,534,000 in 1999.
4
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ITEM 3 - LEGAL PROCEEDINGS
NCBC is party to various legal proceedings incidental to its business.
Certain claims, suits, and complaints arising in the ordinary course of
business have been filed or are pending against NCBC. In the opinion of
management, the resulting liability, if any, arising from all such
actions will not have a material impact on NCBC's consolidated
financial position, liquidity or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the
solicitation of proxies or otherwise.
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The market for National City Bancorporation's common stock and related
stockholder matters is presented on pages 1 and 35 of the Annual Report
to Stockholders for the year ended December 31, 1999, and is
incorporated herein by reference.
PART II
ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data is presented on page 34 of the Annual Report to
Stockholders for the year ended December 31, 1999 and is incorporated
herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is presented on pages 20 through 28 of the Annual Report
to Stockholders for the year ended December 31, 1999 and is
incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are
presented in pages 23 through 25 of the Annual Report to Stockholders
for the year ended December 31, 1999 and is incorporated herein by
reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary financial
information of National City Bancorporation and subsidiaries are
presented on pages 3 through 19 and 29 through 35 of the Annual Report
to Stockholders for the year ended December 31, 1999 and are
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<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 4 of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 19, 2000, 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 5 through 8 of the Proxy
Statement for the Annual Meeting of Stockholders to be held April 19,
2000 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 to be held April 19, 2000 and is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and related transactions are presented on pages 2
through 4 of the Proxy Statement for the Annual Meeting of Stockholders
to be held April 19, 2000 and is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements, Scheduled Exhibits: The consolidated
financial statements and related notes, the independent auditor's
report thereon and supplementary data that appear on pages 3 through 19
and 29 through 35 of our Annual Report to Stockholders for the year
ended December 31, 1999 are incorporated herein by reference.
(2) Financial Statement Schedules:
All schedules are omitted, because the conditions requiring that filing
do not exist.
(3) Exhibits:
3(a) - Restated Articles of Incorporation (incorporated herein
by reference to Exhibit 3.01 of the Registrant's Registration
Statement on Form S-1, Registration No. 269057).
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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.]
10(k) - Seventh Amendment to Executive Salary Continuation
Agreement by and between NCB and Thomas J. Freed dated as of
March 9, 2000.
10(k) - Seventh Amendment to Executive Salary Continuation
Agreement by and between NCB and David L. Andreas dated as of
March 9, 2000.
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
A report on Form 8-K was filed during the quarter ended
December 31, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL CITY BANCORPORATION
Date: March 17, 2000 /s/ David L. Andreas
-----------------------------------------
David L. Andreas, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 17, 2000 /s/ David L. Andreas
-----------------------------------------
David L. Andreas, Chief Executive Officer
(Principal Executive Officer)
Date: March 17, 2000 /s/ Thomas J. Freed
-----------------------------------------
Thomas J. Freed, Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 17, 2000 /s/ David C. Malmberg
-----------------------------------------
David C. Malmberg, Chairman of the Board
Date: March 17, 2000 /s/ Wendell R. Anderson
-----------------------------------------
Wendell R. Anderson, Director
Date: March 17, 2000 /s/ Terry L. Andreas
-----------------------------------------
Terry L. Andreas, Director
Date: March 17, 2000
-----------------------------------------
Michael J. Boris, Director
Date: March 17, 2000 /s/ Marvin Borman
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Marvin Borman, Director
Date: March 17, 2000
-----------------------------------------
Sharon N. Bredeson, Director
Date: March 17, 2000 /s/ Kenneth H. Dahlberg
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Kenneth H. Dahlberg, Director
Date: March 17, 2000
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John H. Daniels, Jr., Director
Date: March 17, 2000 /s/ James B. Goetz, Sr.
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James B. Goetz, Sr., Director
Date: March 17, 2000 /s/ Esperanza Guerrero-Anderson
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Esperanza Guerrero-Anderson, Director
Date: March 17, 2000 /s/ Thomas E. Holloran
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Thomas E. Holloran, Director
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Date: March 17, 2000
-----------------------------------------
C. Bernard Jacobs, Director
Date: March 17, 2000 /s/ Walter E. Meadley, Jr.
-----------------------------------------
Walter E. Meadley, Jr., Director
Date: March 17, 2000 /s/ Robert L. Olson
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Robert L. Olson, Director
Date: March 17, 2000 /s/ Roger H. Scherer
-----------------------------------------
Roger H. Scherer, Director
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<PAGE>
NATIONAL CITY BANCORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
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SUBSEQUENTLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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
10
EXHIBIT 10(k)
SEVENTH AMENDMENT TO
EXECUTIVE SALARY CONTINUATION AGREEMENT
THIS AMENDMENT is made and entered into as of the 9th day of March,
2000, as an amendment to the Executive Salary Continuation Agreement dated June
5, 1986, (hereinafter called the "Agreement"), by and between NATIONAL CITY BANK
OF MINNEAPOLIS (hereinafter called the "Bank"), and Thomas J. Freed (hereinafter
called the "Executive"); and this Amendment supersedes the Sixth Amendment to
such Agreement, dated August 2, 1999.
WHEREAS, the Executive remains in the employ of the Bank; and both
the Bank and the Executive desire to amend the Agreement; and
WHEREAS, the Bank wishes (1) to remove the limitation on payment of
benefits under the Agreement so that the benefit under the Agreement will no
longer take into account the benefit provided under the Bank's cash balance
pension plan; and (2) to provide that the benefit under the Agreement will be
determined under a formula rather than stated as a fixed dollar amount;
NOW, THEREFORE, in consideration of the services to be performed by
the Executive in the future, as well as the mutual promises herein contained,
the parties hereto agree to amend the Agreement as follows:
1. Paragraph 1.1 of Article I (entitled "NORMAL RETIREMENT OR
DISABILITY") is hereby amended to read as follows:
1.1) Amount and Terms of Payment. For purposes of this
Paragraph 1.1, the term "normal retirement date" shall mean the date
on which the Executive attains sixty-five (65); the term "disability
retirement date" shall mean the date on which the Executive
terminates employment with the Bank due to his disability (as
defined in Paragraph 1.4); and "base salary" shall include any base
salary paid by the Bank, any of its subsidiaries and its parent
company. In consideration of the Executive's remaining employed by
the Bank until his normal retirement date or, if earlier, his
disability retirement date (the "applicable date"), the Bank agrees
that from and after the Executive's normal retirement date, subject
to the following sentence of this Paragraph 1.1, the Bank shall
thereafter pay to the Executive an annual amount equal to 50% (fifty
percent) of the Executive's base salary as of the December 31st
coinciding with or immediately preceding the applicable date, for a
period of fifteen (15) years from and after the Executive's normal
retirement date, payable in equal monthly installments commencing
with the first day of the first month following the Executive's
normal retirement date. However, if the Executive remains employed
by the Bank after his normal retirement date, payment of the annual
dollar amount that would have been payable upon his retirement at
his normal retirement date shall be deferred, shall commence with
the first day of the first month following the date of his actual
retirement from the active service of the Bank (without any
adjustment for that delay or any change in his base salary after the
December 31st coinciding with or immediately preceding his normal
retirement date) and shall be payable in the same manner and for the
same period of time as provided
<PAGE>
in the preceding sentence.
2. Paragraph 1.2 (entitled "Continuation of Payment to Beneficiary")
of Article I is hereby amended by deleting the phrase "the sum of sixty-three
thousand seven hundred twenty-five dollars ($63,725) per annum" and inserting in
its place the phrase "the annual payment amount described in Paragraph 1.1."
3. Paragraph 1.3 of Article I is hereby amended to read as follows:
1.3) Limitation on Payment. Effective July 1, 1999, there is no
limitation on the annual payment amount specified in Paragraph 1.1.
4. Paragraph 2.4 of Article II (entitled "EARLY RETIREMENT") is
hereby amended to read as follows:
2.4) Limitation on Payment. Effective July 1, 1999, there is no
limitation on the annual accrued benefit payment amount (whether
determined from Column I or Column II of Schedule A or as it might
otherwise be adjusted pursuant to Paragraph 2.2).
5. Paragraph 3.1 (entitled "Amount and Terms of Payment") of Article
III (entitled "DEATH BENEFIT") is hereby amended by deleting the phrase "the sum
of sixty-three thousand seven hundred twenty-five dollars ($63,725) per annum"
and inserting in its place the phrase "an annual amount equal to 50% (fifty
percent) of the Executive's base salary (as described in Paragraph 1.1) as of
the December 31 immediately preceding the earlier of (a) the date of death of
the Executive while in the employ of the Bank or (b) the date of the termination
of service with the Bank by the Executive due to disability (as hereinafter
defined),".
6. Schedule A of the Agreement is hereby deleted in its entirety and
replaced by the attached Amended Schedule A, dated as of the date hereof.
7. All of terms and conditions of the Agreement remain unchanged and
are hereby affirmed by the Bank and the Executive.
[SIGNATURE PAGE FOLLOWS]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
to the Agreement as of the date first above written.
NATIONAL CITY BANK OF MINNEAPOLIS
By /s/ David L. Andreas
------------------------------------------------
As its President and Chief Executive Officer
ATTEST:
/s/ Thomas J. Freed "BANK"
- ------------------------------------
Secretary
/s/ Thomas J. Freed
--------------------------------------------------
Printed Name: Thomas J. Freed
"EXECUTIVE"
3
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SCHEDULE A
TO SALARY CONTRIBUTION AGREEMENT
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Column I
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Annual Accrued Benefit Payment Amount Payable at Age Sixty-five (or Death)
After Early Retirement
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Such annual amount shall be determined by accumulating the existing Theoretical
Reserve (as defined below), as of the date of termination of the Executive's
employment, until the date the Executive attains age 65 at ten percent (10%)
annual interest (compounded monthly). The resulting accumulated balance is then
annuitized for a period of fifteen (15) years at the same annual interest rate
(compounded monthly). The resulting annual accrued benefit payment amount is
paid monthly for a period of fifteen (15) years, commencing at age 65.
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Column II
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Reduced Annual Accrued Benefit Payment Amount Payable Immediately Upon
Early Retirement
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Such annual amount shall be equal to the existing Theoretical Reserve (as
defined below), as of the date early payments are approved to begin to the
Executive, annuitized for a period of fifteen (15) years at ten percent (10%)
annual interest (compounded monthly). The resulting reduced annual accrued
benefit payment is paid monthly for a period of fifteen (15) years, commencing
as of the date early payments are approved to begin.
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DEFINITIONS
"Theoretical Reserve" means the dollar amount that would be
available in a reserve fund if, for each year from the original effective date
of this Salary Continuation Agreement (the "Agreement"), the Bank made a
Theoretical Contribution (as defined below) to the reserve fund on the
Executive's behalf.
"Theoretical Contribution" means, for any year during which the
Agreement is in effect, is a contribution assumed to be made by the Bank and
determined by using the individual level premium funding method, from the age at
which the Executive was first covered by the Agreement until the Executive
attains age sixty-five (65), to fund the Executive's entire anticipated benefit
under the Agreement, assuming the Executive remains employed by the Bank during
that period. The calculation of the Theoretical Contribution as of any date
applies from the effective date of the Agreement until the Executive attains age
sixty-five (65) years, based on the benefit due under Paragraph 1.1 of the
Agreement, determined using the Executive's base salary as of that date.
4
EXHIBIT 10(l)
SEVENTH AMENDMENT TO
EXECUTIVE SALARY CONTINUATION AGREEMENT
THIS AMENDMENT is made and entered into as of the 9th day of March,
2000, as an amendment to the Executive Salary Continuation Agreement dated June
5, 1986, (hereinafter called the "Agreement"), by and between NATIONAL CITY BANK
OF MINNEAPOLIS (hereinafter called the "Bank"), and David L. Andreas
(hereinafter called the "Executive"); and this Amendment supersedes the Sixth
Amendment to such Agreement, dated August 2, 1999.
WHEREAS, the Executive remains in the employ of the Bank; and both
the Bank and the Executive desire to amend the Agreement; and
WHEREAS, the Bank wishes (1) to remove the limitation on payment of
benefits under the Agreement so that the benefit under the Agreement will no
longer take into account the benefit provided under the Bank's cash balance
pension plan; and (2) to provide that the benefit under the Agreement will be
determined under a formula rather than stated as a fixed dollar amount;
NOW, THEREFORE, in consideration of the services to be performed by
the Executive in the future, as well as the mutual promises herein contained,
the parties hereto agree to amend the Agreement as follows:
1. Paragraph 1.1 of Article I (entitled "NORMAL RETIREMENT OR
DISABILITY") is hereby amended to read as follows:
1.1) Amount and Terms of Payment. For purposes of this
Paragraph 1.1, the term "normal retirement date" shall mean the date
on which the Executive attains sixty-five (65); the term "disability
retirement date" shall mean the date on which the Executive
terminates employment with the Bank due to his disability (as
defined in Paragraph 1.4); and "base salary" shall include any base
salary paid by the Bank, any of its subsidiaries and its parent
company. In consideration of the Executive's remaining employed by
the Bank until his normal retirement date or, if earlier, his
disability retirement date (the "applicable date"), the Bank agrees
that from and after the Executive's normal retirement date, subject
to the following sentence of this Paragraph 1.1, the Bank shall
thereafter pay to the Executive an annual amount equal to 50% (fifty
percent) of the Executive's base salary as of the December 31st
coinciding with or immediately preceding the applicable date, for a
period of fifteen (15) years from and after the Executive's normal
retirement date, payable in equal monthly installments commencing
with the first day of the first month following the Executive's
normal retirement date. However, if the Executive remains employed
by the Bank after his normal retirement date, payment of the annual
dollar amount that would have been payable upon his retirement at
his normal retirement date shall be deferred, shall commence with
the first day of the first month following the date of his actual
retirement from the active service of the Bank (without any
adjustment for that delay or any change in his base salary after the
December 31st coinciding with or immediately preceding his normal
retirement date) and shall be payable in the same manner and for the
same period of time as provided
<PAGE>
in the preceding sentence.
2. Paragraph 1.2 (entitled "Continuation of Payment to Beneficiary")
of Article I is hereby amended by deleting the phrase "the sum of one-hundred
thirty-five thousand eight hundred twenty-eight dollars ($135,828) per annum"
and inserting in its place the phrase "the annual payment amount described in
Paragraph 1.1."
3. Paragraph 1.3 of Article I is hereby amended to read as follows:
1.3) Limitation on Payment. Effective July 1, 1999, there is no
limitation on the annual payment amount specified in Paragraph 1.1.
4. Paragraph 2.4 of Article II (entitled "EARLY RETIREMENT") is
hereby amended to read as follows:
2.4) Limitation on Payment. Effective July 1, 1999, there is no
limitation on the annual accrued benefit payment amount (whether
determined from Column I or Column II of Schedule A or as it might
otherwise be adjusted pursuant to Paragraph 2.2).
5. Paragraph 3.1 (entitled "Amount and Terms of Payment") of Article
III (entitled "DEATH BENEFIT") is hereby amended by deleting the phrase "the sum
of one-hundred thirty-five thousand eight hundred twenty-eight dollars
($135,828) per annum" and inserting in its place the phrase "an annual amount
equal to 50% (fifty percent) of the Executive's base salary (as described in
Paragraph 1.1) as of the December 31 immediately preceding the earlier of (a)
the date of death of the Executive while in the employ of the Bank or (b) the
date of the termination of service with the Bank by the Executive due to
disability (as hereinafter defined),".
6. Schedule A of the Agreement is hereby deleted in its entirety and
replaced by the attached Amended Schedule A, dated as of the date hereof.
7. All of terms and conditions of the Agreement remain unchanged and
are hereby affirmed by the Bank and the Executive.
[SIGNATURE PAGE FOLLOWS]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
to the Agreement as of the date first above written.
NATIONAL CITY BANK OF MINNEAPOLIS
By /s/ David C. Malmberg
------------------------------------------------
As its: Chairman of the Board
ATTEST:
/s/ Thomas J. Freed "BANK"
- --------------------------------
Secretary
/s/ David L. Andreas
--------------------------------------------------
Printed Name: David L. Andreas
"EXECUTIVE"
3
<PAGE>
SCHEDULE A
TO SALARY CONTRIBUTION AGREEMENT
- --------------------------------------------------------------------------------
Column I
- --------------------------------------------------------------------------------
Annual Accrued Benefit Payment Amount Payable at Age Sixty-five (or Death)
After Early Retirement
- --------------------------------------------------------------------------------
Such annual amount shall be determined by accumulating the existing Theoretical
Reserve (as defined below), as of the date of termination of the Executive's
employment, until the date the Executive attains age 65 at ten percent (10%)
annual interest (compounded monthly). The resulting accumulated balance is then
annuitized for a period of fifteen (15) years at the same annual interest rate
(compounded monthly). The resulting annual accrued benefit payment amount is
paid monthly for a period of fifteen (15) years, commencing at age 65.
- --------------------------------------------------------------------------------
Column II
- --------------------------------------------------------------------------------
Reduced Annual Accrued Benefit Payment Amount Payable Immediately Upon
Early Retirement
- --------------------------------------------------------------------------------
Such annual amount shall be equal to the existing Theoretical Reserve (as
defined below), as of the date early payments are approved to begin to the
Executive, annuitized for a period of fifteen (15) years at ten percent (10%)
annual interest (compounded monthly). The resulting reduced annual accrued
benefit payment is paid monthly for a period of fifteen (15) years, commencing
as of the date early payments are approved to begin.
- --------------------------------------------------------------------------------
DEFINITIONS
"Theoretical Reserve" means the dollar amount that would be
available in a reserve fund if, for each year from the original effective date
of this Salary Continuation Agreement (the "Agreement"), the Bank made a
Theoretical Contribution (as defined below) to the reserve fund on the
Executive's behalf.
"Theoretical Contribution" means, for any year during which the
Agreement is in effect, is a contribution assumed to be made by the Bank and
determined by using the individual level premium funding method, from the age at
which the Executive was first covered by the Agreement until the Executive
attains age sixty-five (65), to fund the Executive's entire anticipated benefit
under the Agreement, assuming the Executive remains employed by the Bank during
that period. The calculation of the Theoretical Contribution as of any date
applies from the effective date of the Agreement until the Executive attains age
sixty-five (65) years, based on the benefit due under Paragraph 1.1 of the
Agreement, determined using the Executive's base salary as of that date.
4
NATIONAL CITY BANCORPORATION AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF BASIC EARNINGS PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
Net earnings applicable to common stock $16,627 $15,664 $13,722
Weighted average common shares outstanding* 8,766,727 8,855,348 8,901,415
Basic earnings per share $1.90 $1.77 $1.54
*Adjusted for stock dividends
EXHIBIT 13
NATIONAL CITY BANCORPORATION
1999 ANNUAL REPORT
[GRAPHICS OMITTED]
<PAGE>
This year's annual report cover was designed by Minneapolis College of Art and
Design (MCAD) senior graphic design student, Rosie Gatto. She divides her
academic program time between design and professinal practice at the college's
in-house design studio, MCAD DesignWorks. Rosie will gain a BFA in Graphic
Design from MCAD in the spring of 2000. After graduation, Rosie hopes to secure
a junior design position at a Twin Cities studio. Regarding her objectives for
the concept and design of this annual report cover, says Gatto, "I worked with
forms and colors established in National City Bancorporation's identity system.
Colors and shapes call attention to the photograph which illustrates the
importance of personalized, business to business relationships at National City
Bancorporation."
A program of the college's design division, MCAD DesignWorks is committed to
providing professional opportunities to outstanding students of graphic design,
illustration, advertising and interactive multimedia. The studio offers
professional practice opportunities to students and provides creative solutions
to Minnesota's non-profit and business communities.
National City Bancorporation's work with DesignWorks is one of the many ways we
support MCAD, an internationally recognized non-profit, accredited college of
art and design. Our community benefits when businesses and community leaders
support arts and education. We are all richer for these relationships.
For more information about MCAD DesignWorks call Pamela Arnold, Coordinator, at
(612) 874-3767, or e-mail: [email protected].
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998
- ----------------------------------------------------------------------
For the Year
Net interest income $ 49,377 $ 47,552
Net earnings 16,627 15,664
Basic earnings per share 1.90 1.77
At Year End
Total assets $1,140,180 $1,025,682
Loans 838,585 766,109
Deposits 614,308 517,494
Stockholders' equity 151,949 147,288
Book value per share 17.39 16.71
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Report to Stockholders 2
Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 7
Report of Independent Auditors 19
Management's Discussion and Analysis of
Financial Condition and Results of Operation 20
Statistical Data 29
Selected Financial Data 34
Selected Ratios and Consolidated
Quarterly Financial Data 35
Directors and Officers 36
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.
FORM 10-K
The consolidated financial statements and related footnotes and certain other
information included in this Annual Report will be incorporated by reference in
the Company's Annual Report on Form 10-K to the Securities and Exchange
Commission. A copy of the Form 10-K report is available free of charge upon
written request to the Company, attention: David L. Andreas, President and Chief
Executive Officer, National City Bancorporation, 651 Nicollet Mall, Minneapolis,
Minnesota 55402-1611.
STOCK TRANSFER AGENT AND REGISTRAR
National City Bank of Minneapolis, Gaviidae Common, 651 Nicollet Mall,
Minneapolis, Minnesota 55402-1611.
ANNUAL MEETING
The annual meeting of Stockholders will be held in the Company's offices on the
fifth floor of Gaviidae Common, 651 Nicollet Mall, Minneapolis, Minnesota, on
Wednesday, April 19, 2000, at 11:00 a.m.
MARKET FOR COMMON STOCK
NCBC's common stock is traded on The NASDAQ Stock Market- under the symbol NCBM.
There are currently approximately 2300 registered stockholders.
[PRINTED WITH SOY INK] [RECYCLED PAPER]
----------------------------------------
This annual report is printed with soy
ink on recycled paper. All papers meet
or exceed the current E.P.A. guidelines
for recycled paper. To help our
environment, please recycle this
publication.
----------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
REPORT TO STOCKHOLDERS
To Our Stockholders:
In 1999, National City Bancorporation achieved very good results, keeping with
our commitment to deliver continuing, consistent and improved performance. We
earned $16,627,000 for the year, six percent above the prior year's record
earnings of $15,664,000. Earnings per share were $1.90, compared with $1.77 for
1998. As in 1997, earnings included a state income tax refund related to taxes
paid in prior years. The refund was $1,233,000 with an after-tax effect of
approximately $769,000. Without the tax refund, net earnings for 1999 would have
been $15,858,000, or $1.81 per share, for the 12-month period.
On a consolidated basis, net interest income growth occurred through increases
in average earning assets, despite greater funding costs. Our 1999 rate spread
was 3.84 percent, down from 3.92 percent in 1998. Last year, a larger percentage
of bank asset funding came from brokered deposits, which will continue to be an
important funding option for the bank's growth. Typically, we fund the growth of
Diversified Business Credit Inc. (DBCI), our commercial finance company, through
the sale of commercial paper. However during 1999, we restructured DBCI's
funding by raising additional long-term debt to a total of $176 million, thereby
reducing our reliance on the sale of commercial paper.
For the three years leading up to the end of 1999, we dedicated substantial time
and resources to preparing for the Y2K computer issue or "years digits" problem.
In addition to solving the narrow issue of compliance, we addressed our greater
need for system design and update to make progress on our Information Strategy
Plan (ISP). As soon as the security of our operation was assured following
year-end, we turned to accelerating our progress on completion of the ISP. This
bank project uses many of the company resources developed during the Y2K project
to design and install an integrated operating system for the company. It will
allow us to operate at an even more effective level with our customers anytime,
anywhere and in many ways, consistent with the fast-moving world of the Internet
and browser-based delivery of services and information. The bank has experienced
excellent results and customer reception with our first secured, web-delivered
treasury management tool, OptiLINK, which was introduced in early 1999. This
capability sets the standard for expanding our ability to serve our customers
without increasing our operating expense ratios.
During the fourth quarter, we addressed an issue related to restatement of prior
years' accounting for the allowance for loan losses associated with DBCI. We
amended our 1998 financial reports and incorporated appropriate changes in
operating controls, personnel responsibilities, accounting and audit procedures,
and oversight by the DBCI credit committee. Aggregate changes in the financial
statements were not required, but any change in financial reporting is material,
and we worked closely with our independent auditors and our examining regulators
to bring about a resolution.
As we enter this new millennium, we renew our focus on serving mid-sized
businesses and their owners and employees. Our continuing goals are to: provide
high-quality service at a reasonable cost, maintain a strong commitment to the
communities in which we operate, and make a difference in the well-being of
others. Through the development of innovative solutions, we will continue to be
an informed and capable source for financial services. Looking ahead, we will
consistently improve our operating results through effective use of technology,
balanced with a high level of personal service, to solve our customers'
challenges.
Sincerely,
/s/ David C. Malmberg /s/ David L. Andreas
David C. Malmberg David L. Andreas
Chairman of the Board President and Chief Executive Officer
2
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
(IN THOUSANDS EXCEPT NUMBER OF SHARES) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 36,997 $ 52,271
Federal funds sold and resale agreements 55,655 6,100
Available-for-sale securities 135,340 133,897
Held-to-maturity securities (market value: 1999 - $45,297
and 1998 - $41,569) 46,572 41,255
Loans 838,585 766,109
Less allowance for loan losses (13,883) (13,785)
---------- ----------
824,702 752,324
Bank premises and equipment 8,921 10,399
Accrued interest receivable 7,600 7,499
Customer acceptance liability 1,424 824
Other assets 22,969 21,113
---------- ----------
$1,140,180 $1,025,682
========== ==========
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 166,039 $ 165,598
Interest bearing 448,269 351,896
---------- ----------
614,308 517,494
Federal funds purchased and
repurchase agreements 89,950 98,702
Commercial paper 38,777 99,396
Other short-term borrowed funds 45,053 12,663
Acceptances outstanding 1,424 824
Other liabilities 22,719 10,315
Long-term debt 176,000 139,000
---------- ----------
Total liabilities 988,231 878,394
Stockholders' equity:
Common stock, par value $1.25, authorized 40,000,000 shares
Issued: 1999 - 8,861,944 shares; 1998 - 8,861,944 shares 11,077 11,077
Additional paid-in capital 121,982 121,982
Unrealized gains (losses) net of tax effect (1,883) 913
Retained earnings 23,735 14,470
---------- ----------
154,911 148,442
Less common stock in treasury at cost:
1999 - 125,222 shares; 1998 - 45,030 shares (2,962) (1,154)
---------- ----------
Total stockholders' equity 151,949 147,288
---------- ----------
$1,140,180 $1,025,682
========== ==========
</TABLE>
See Notes To Consolidated Financial Statements
3
<PAGE>
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 76,779 $ 73,040 $ 66,910
Interest on federal funds sold and resale agreements 691 1,092 1,450
Interest and dividends on securities:
Taxable 10,664 11,443 11,440
Exempt from federal income taxes 262
---------- ---------- ----------
10,926 11,443 11,440
---------- ---------- ----------
Total interest income 88,396 85,575 79,800
- -------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 17,043 16,393 16,281
Interest on short-term borrowed funds 12,325 15,275 15,069
Interest on long-term debt 9,651 6,355 3,941
---------- ---------- ----------
Total interest expense 39,019 38,023 35,291
---------- ---------- ----------
Net interest income 49,377 47,552 44,509
Provision for loan losses 3,480 2,890 4,819
---------- ---------- ----------
Net interest income after provision for loan losses 45,897 44,662 39,690
- -------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 2,433 2,145 2,195
Fees for other customer services 1,775 1,635 1,698
Trust fees 4,512 4,641 4,801
State income tax refund 1,233 1,369
Other income 744 821 1,327
---------- ---------- ----------
10,697 9,242 11,390
- -------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 16,379 15,238 15,110
Net occupancy expense of bank premises 3,308 3,062 3,194
Equipment rentals, depreciation and maintenance 3,531 3,512 3,648
Other expense 5,873 6,237 6,313
---------- ---------- ----------
29,091 28,049 28,265
---------- ---------- ----------
Earnings before income taxes 27,503 25,855 22,815
Income taxes 10,876 10,191 9,093
---------- ---------- ----------
Net earnings $ 16,627 $ 15,664 $ 13,722
========== ========== ==========
- -------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.90 $ 1.77 $ 1.54
========== ========== ==========
Average common and common equivalent shares outstanding 8,766,727 8,855,348 8,901,415
</TABLE>
See Notes To Consolidated Financial Statements
4
<PAGE>
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
---------------------- ADDITIONAL UNREALIZED ------------------
NUMBER PAID-IN RETAINED GAINS NUMBER
(IN THOUSANDS EXCEPT NUMBER OF SHARES) OF SHARES AMOUNT CAPITAL EARNINGS (LOSSES) OF SHARES AMOUNT TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 7,374,520 $ 9,218 $79,199 $ 31,243 $ (405) 16 $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)
--------- ------- -------- --------- --------- ------- -------- --------
Balance at December 31, 1997 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
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
Net earnings for the year 16,627 16,627
Cash dividend (7,362) (7,362)
Unrealized securities (losses)
net of tax effect (2,796) (2,796)
Purchase of treasury stock 80,192 (1,808) (1,808)
--------- ------- -------- --------- --------- ------- -------- --------
Balance at December 31, 1999 8,861,944 $11,077 $121,982 $ 23,735 $ (1,883) 125,222 $ (2,962) $151,949
========= ======= ======== ========= ========= ======= ======== ========
</TABLE>
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
(IN THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total interest income $88,396 $85,575 $79,800
Total interest expense 39,019 38,023 35,291
------- ------- -------
Net interest income 49,377 47,552 44,509
Provision for loan losses 3,480 2,890 4,819
------- ------- -------
Net interest income after provision for loan losses 45,897 44,662 39,690
------- ------- -------
Total non-interest income 10,697 9,242 11,390
Total non-interest expense 29,091 28,049 28,265
------- ------- -------
Earnings from operations before taxes 27,503 25,855 22,815
Applicable income taxes 10,876 10,191 9,093
------- ------- -------
Net earnings 16,627 15,664 13,722
Other comprehensive income, before tax:
Unrealized gain (loss) on investments in securities (4,697) 821 1,393
Applicable income tax (1,901) 332 564
------- ------- -------
Other comprehensive income, net of tax (2,796) 489 829
------- ------- -------
Comprehensive income $13,831 $16,153 $14,551
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
(IN THOUSANDS) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 16,627 $ 15,664 $ 13,722
Adjustments to reconcile net earnings to net cash
from operating activities:
Depreciation and amortization 2,757 2,927 3,245
Amortization of securities premiums and discounts 283 579 469
Provision for loan losses 3,480 2,890 4,819
(Increase) in accrued interest receivable (101) (239) (954)
(Increase) decrease in other assets (1,856) 3,268 (4,936)
Increase in other liabilities 12,404 1,229 1,421
Other decrease (increase) 1,842 (651) (194)
---------- --------- ---------
Total operating adjustments 18,809 10,003 3,870
---------- --------- ---------
Net cash provided by operating activities 35,436 25,667 17,592
Cash flows from investing activities:
Net (increase) in loans (75,858) (98,903) (71,321)
Net (increase) decrease in federal funds sold (49,555) (2,360) 56,380
Available-for-sale securities:
Proceeds from maturities and principal repayments 37,619 64,810 27,274
Purchases of securities (44,006) (57,114) (34,476)
Held-to-maturity securities:
Proceeds from maturities and principal repayments 12,102 17,865 9,233
Purchases of securities (17,396) (21,743) (15,139)
Purchase of premises and equipment (1,279) (1,913) (2,436)
---------- --------- ---------
Net cash (used in) investing activities (138,373) (99,358) (30,485)
---------- --------- ---------
Cash flows from financing activities:
Net (decrease) increase in non-interest bearing and savings deposits (4,352) 31,333 2,151
Net increase (decrease) in time deposits 101,166 7,511 (43,132)
Net (decrease) increase in federal funds purchased
and repurchase agreements (8,752) (5,697) 7,759
Net (decrease) increase in commercial paper (60,619) (19,685) 20,974
Net increase (decrease) in other short-term borrowed funds 32,390 (10,555) 11,852
Net increase in long-term debt 37,000 72,000 19,080
Purchase of treasury stock (1,808) (1,752) (856)
Payment for fractional shares on stock dividends (40) (22)
Cash dividends paid (7,362)
---------- --------- ---------
Net cash provided by financing activities 87,663 73,115 17,806
---------- --------- ---------
Net increase (decrease) in cash and due from banks (15,274) (576) 4,913
Cash and due from banks at beginning of year 52,271 52,847 47,934
---------- --------- ---------
Cash and due from banks at end of year $ 36,997 $ 52,271 $ 52,847
========== ========= =========
Supplemental disclosures
Cash paid during the year for:
Interest $ 37,210 $ 36,306 $ 35,194
Income taxes 10,655 10,618 10,076
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS -- The Company's principal business is a bank holding
company for National City Bank of Minneapolis which is a full service national
bank offering a variety of loans, deposit programs, trust and related banking
services. The Company's principal non-bank subsidiary is Diversified Business
Credit, Inc., a commercial finance company.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the
accounts of the Company and its subsidiaries, after elimination of all material
intercompany transactions and balances.
RISKS AND UNCERTAINTIES -- The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
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 and comprehensive
income. 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 and commitment period
as a yield adjustment. Loans are generally placed on non-accrual 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 non-accrual status,
interest previously accrued and unpaid in the current year is reversed against
current period interest income. Interest payments received on non-accrual 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 or are impaired, and by applying a historical
loss experience. 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 computed on the straight-line or
double declining balance basis over the estimated useful life of the asset or
lease term.
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 remaining life
of the specific asset or liability it was designated to hedge.
7
<PAGE>
- --------------------------------------------------------------------------------
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PER SHARE CALCULATION -- Basic earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding during the
year. Average common shares outstanding are retroactively adjusted to reflect
the impact of stock dividends.
NEW ACCOUNTING PRONOUNCEMENT -- The Financial Accounting Standards Board issued
in June, 1998 SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities". As amended by SFAS No. 137, SFAS No. 133 is effective for years
beginning after June 15, 2000. SFAS No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Company expects to adopt SFAS 133 for the year ending
December 31, 2001 and is in the process of assessing its impact on the financial
statements.
- --------------------------------------------------------------------------------
NOTE B. ESTIMATED FAIR VALUE
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments"
DECEMBER 31, 1999
------------------------
CARRYING ESTIMATED
(IN THOUSANDS) AMOUNT FAIR VALUE
- -------------------------------------------------------------
ASSETS:
Cash and due from banks $36,997 $36,997
Federal funds sold and resale
agreements 55,655 55,655
Available-for-sale securities 135,340 135,340
Held-to-maturity securities 46,572 45,297
Loans-net of allowance for
loan losses 824,702 823,175
LIABILITIES:
Deposits 614,308 613,415
Federal funds purchased and
repurchase agreements 89,950 89,935
Commercial paper and other
short-term funds 83,830 83,770
Long-term debt 176,000 173,564
OFF-BALANCE SHEET UNREALIZED GAINS:
Interest rate swap agreements (2,873)
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
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgement is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amount the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
CASH AND DUE FROM BANKS -- The carrying value of cash and due from banks
approximates estimated fair value.
FEDERAL FUNDS SOLD, RESALE AGREEMENTS, FEDERAL FUNDS PURCHASED, AND REPURCHASE
AGREEMENTS -- The carrying value of these instruments approximates estimated
fair value.
SECURITIES -- Estimated fair values of securities are based primarily on quoted
market prices or dealer quotes. If quoted market price is not available, fair
value is estimated using quoted market prices for securities with similar
characteristics.
LOANS -- Approximately 80% 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.
8
<PAGE>
- --------------------------------------------------------------------------------
NOTE B. ESTIMATED FAIR VALUE (CONTINUED)
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 C. LOANS
The following loans were outstanding:
DECEMBER 31,
-------------------------
(IN THOUSANDS) 1999 1998
- ---------------------------------------------------------
Commercial & Industrial $570,879 $520,672
Real estate:
Construction 31,967 24,196
Residential mortgage 42,096 40,074
Non-residential mortgage 111,794 92,769
Loans to individuals for
personal expenditures 42,704 46,800
Other 39,145 41,598
-------- --------
$838,585 $766,109
======== ========
At December 31, 1999 and 1998, receivables from and standby letters of credit
issued on behalf of commercial real estate developers and investors were
approximately $131 million and $95 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.
The Company's non-bank subsidiary engages in asset-based lending and originates
loans which are dependent on the value of the borrower's underlying collateral.
Collateral typically includes accounts receivable, inventory and equipment. The
total receivables from collaterally dependent loans was $298 million and $305
million at December 31, 1999 and 1998, respectively, secured by collateral
against which the non-bank subsidiary has made advances pursuant to its loan
agreements with an estimated fair value of $366 million and $369 million,
respectively.
An analysis of the allowance for loan losses is presented below:
YEAR ENDED DECEMBER 31,
------------------------------------
(IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------
Balance at beginning
of period $13,785 $14,283 $10,111
Provision charged to
operating expense 3,480 2,890 4,819
Charge-offs (3,560) (3,444) (1,179)
Recoveries 178 56 532
------- ------- -------
Balance at end of period $13,883 $13,785 $14,283
======= ======= =======
In the opinion of management, the allowance for loan losses is adequate to
provide for known and estimated exposures in the loan portfolio at each of the
respective balance sheet dates.
At December 31, 1999, the Company had five impaired commercial loans under SFAS
No. 114 totaling $15,714,000 compared with seven loans totaling $16,736,000 at
December 31, 1998. Management has allocated $4,450,000 and $7,027,000 for 1999
and 1998, respectively, of the Allowance for Loan Losses to these loans.
Impaired loans averaged $10,621,000 and $15,147,000 during 1999 and 1998,
respectively. Interest payments received on non-accrual 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 $16,257,000 and $17,671,000 at December 31, 1999 and 1998,
respectively. Gross interest income would have been increased by approximately
$803,000, $636,000, and $95,000 for the years ended December 31, 1999, 1998 and
1997, respectively, had such loans been current and in accordance with original
terms. Interest income recognized on impaired accruing loans was approximately
$606,000, $1,273,000, and $470,000 at December 31, 1999, 1998, and 1997,
respectively. Nonperforming status is not necessarily an indication of probable
loss.
Loans carried at $85,352,000 were pledged at December 31, 1999 to secure
borrowings in the form of Federal Home Loan Bank and Federal Reserve Bank
advances. No loans were pledged at December 31, 1998.
Loans to principal officers and directors of the Company and its subsidiaries
aggregated approximately $5,653,000, $8,266,000, and $8,552,000 at December 31,
1999, 1998, and 1997, respectively. New loans and repayments during 1999 were
$5,308,000 and $7,921,000, respectively. In the opinion of management, all such
loans are made at normal interest rates and terms.
9
<PAGE>
- --------------------------------------------------------------------------------
NOTE D. BANK PREMISES AND EQUIPMENT
DECEMBER 31,
---------------------
(IN THOUSANDS) 1999 1998
- ---------------------------------------------------
Assets, at cost:
Land $ 183 $ 183
Buildings 1,296 1,229
Leasehold improvements 2,667 2,622
Equipment 18,110 17,280
------ -------
22,256 21,314
Accumulated depreciation:
Buildings 648 585
Leasehold improvements 1,298 1,060
Equipment 11,389 9,270
------ -------
13,335 10,915
------ -------
$8,921 $10,399
====== =======
- --------------------------------------------------------------------------------
NOTE E. DEPOSITS
Approximately $187,037,000 and $112,897,000 of interest bearing time deposits
were in denominations of $100,000 or more at December 31, 1999 and 1998,
respectively. The scheduled maturities of time deposits at December 31, 1999 are
summarized as follows:
LESS THAN $100,000
(IN THOUSANDS) $100,000 OR MORE
- ----------------------------------------------
3 months or less $ 26,601 $ 58,769
3 - 6 months 17,546 42,807
6 - 12 months 26,304 62,989
1 - 2 years 31,989 20,235
2 - 3 years 9,867 1,415
3 - 5 years 3,786 822
over 5 years 77
-------- --------
$116,170 $187,037
======== ========
- --------------------------------------------------------------------------------
NOTE F. 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, 1999, 1998 and 1997. 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) 1999 1998 1997
- ------------------------------------------------------------------------------
Maximum amount out-
standing at any month end:
Federal funds & repurchase $133,181 $163,128 $156,104
Commercial paper 117,584 138,323 137,714
Other 104,576 27,388 26,332
Daily average amount
outstanding:
Federal funds & repurchase 123,714 145,095 133,366
Commercial paper 75,035 115,197 118,154
Other 34,827 17,488 17,047
Weighted average interest rate
for full year:
Federal funds & repurchase 4.53% 4.91% 4.99%
Commercial paper 5.53% 6.01% 6.04%
Other 6.08% 5.40% 5.82%
Outstanding at year-end:
Federal funds & repurchase 89,950 98,702 104,399
Commercial paper 38,777 99,396 119,081
Other 45,053 12,663 23,218
Weighted average interest rate
on debt outstanding
as of December 31:
Federal funds & repurchase 3.96% 4.03% 5.43%
Commercial paper 6.06% 5.75% 5.92%
Other 5.45% 5.11% 5.33%
- --------------------------------------------------------------------------------
NOTE G. LONG-TERM DEBT
DECEMBER 31,
------------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------
Diversified Business Credit, Inc.
Senior Notes
Series A, 8.18%, due 1999 $ 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 51,000
Series G, 6.79%, due 2005 11,000 11,000
Series H, 8.36%, due 2004 70,000
Federal Home Loan Bank
Advance, 5.81%, due 2000 10,000
-------- --------
Total $176,000 $139,000
======== ========
The Company has entered into interest rate swap agreements to effectively
convert the Senior Notes to floating rate instruments. At December 31, 1999, the
weighted average effective interest rate for the Senior Notes Series B,
including the effects of the related swap agreements is the one month LIBOR rate
plus 104 basis points, or 6.86%. The weighted average effective interest rate
for the Senior Notes Series C, D, E, F, G, and H including the effects of the
related swap agreements, is the three month LIBOR rate plus 119 basis points or
7.19%.
10
<PAGE>
- --------------------------------------------------------------------------------
NOTE G. LONG-TERM DEBT (CONTINUED)
The Senior Notes are unsecured and are unconditionally guaranteed by the parent
company.
The Senior Notes include covenants which require Diversified Business Credit,
Inc. and the parent company to maintain certain levels of capitalization and
maintain debt to capitalization ratios within prescribed limits.
- --------------------------------------------------------------------------------
NOTE H. INCOME TAXES
The components of income tax expense were:
(IN THOUSANDS) 1999 1998 1997
- -------------------------------------------------------
Current:
Federal $ 8,942 7,860 8,383
State 2,223 2,013 2,079
------- ----- -----
11,165 9,873 10,462
Deferred:
Federal (219) 239 (1,027)
State (70) 79 (342)
------- ----- ------
(289) 318 (1,369)
------- ----- ------
$10,876 10,191 $9,093
======= ====== ======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31,
---------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------
Deferred tax assets:
Loan loss reserve $5,618 $5,579
Salary continuation plan 1,075 994
Loan fees 21
Nondeductible expenses 25 20
Unrealized losses on securities 1,280
------ ------
Total deferred tax assets 7,998 6,614
Deferred tax liabilities:
Retirement plan 1,334 1,256
Prepaid expenses 131 111
Tax over book depreciation 432 482
Security discounts 25 14
Unrealized gains on securities 620
------ ------
Total deferred tax liabilities 1,922 2,483
------ ------
Net deferred tax assets $6,076 $4,131
====== ======
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, 1999, 1998 and
1997 is different than the federal income tax rate. The reasons for the
differences are as follows:
1999 1998 1997
---------- ---------- ----------
Federal income tax rate 35.0% 35.0% 35.0%
Tax exempt income (0.3) (0.2) (0.1)
State income taxes, net of
federal income tax benefit 5.1 5.2 5.1
Cash value of life insurance (0.5) (0.5) (0.6)
Other items (0.1) (0.1)
---- ---- ----
Effective rate 39.2% 39.4% 39.4%
==== ==== ====
- --------------------------------------------------------------------------------
NOTE I. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding in connection with standby letters of
credit aggregating approximately $21,765,000 and $21,714,000 at December 31,
1999 and 1998, respectively. Commercial letters of credit were $2,587,000 and
$2,980,000 at December 31, 1999 and 1998, respectively. Acquired standby letters
of credit were $8,233,000 at December 31, 1999 and $11,419,000 at December 31,
1998.
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.
11
<PAGE>
- --------------------------------------------------------------------------------
NOTE I. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company was obligated under operating leases for premises and equipment with
terms of one year or more at December 31, 1999. The aggregate lease commitments
outstanding as of December 31, 1999 were $14,158,000 and for the next five years
are payable as follows:
(IN THOUSANDS)
- -------------------------
2000 $2,469
2001 2,437
2002 2,342
2003 2,136
2004 2,136
Net rental expense on premises for the years ended December 31, 1999, 1998, and
1997, was $2,534,000, $2,332,000, and $2,478,000, 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 $10,668,000 of dividends may be
paid by the Company's bank subsidiary at December 31, 1999, without such
approval, subject to continued maintenance of regulatory capital requirements.
The Company is party to various legal proceedings incidental to its business.
Certain claims, suits and complaints arising in the ordinary course of business
have been filed or are pending against the Company. In the opinion of
management, the resulting liability, if any, arising from these actions will not
be material.
- --------------------------------------------------------------------------------
NOTE J. RESTRICTIONS ON CASH BALANCES
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances on deposit with the Federal Reserve Bank. Cash balances
maintained to meet reserve requirements are not available for use by the
Company. During 1999, approximately $3,208,000 was maintained in required
reserves on a daily average basis.
- --------------------------------------------------------------------------------
NOTE K. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to certain financial instruments with off-balance-sheet
risk which are entered in the normal course of business to meet the financing
needs of its customers and to manage the Company's exposure to fluctuations in
interest rates. These financial instruments include unfunded commitments to
extend credit and interest rate swaps. These instruments involve, to varying
degrees, amounts of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheet. The contract or "notional" amounts
of those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
A summary of the Company's contractual or notional amounts for off-balance-sheet
activities at December 31, 1999 and 1998, is as follows:
(IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------
Credit activities:
Commitments to extend credit $358,191 $315,391
Standby letters of credit 21,765 21,714
Commercial letters of credit 2,587 2,980
Acquired standby letters of credit 8,233 11,419
Other financial instrument activities:
Interest rate swap agreements $176,000 $129,000
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.
12
<PAGE>
- --------------------------------------------------------------------------------
NOTE K. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
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. These contracts had a loss
position of $2.9 million at December 31, 1999, and a gain position of $5.1
million at December 31, 1998. 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, 1999 and 1998, interest rate swaps totaling $176 million and
$129 million, respectively, hedged long-term debt. The Company is a receiver of
fixed rate interest and a payer of floating rate interest based on the one month
LIBOR rate on $24 million of these swaps and the three month LIBOR on $152
million. The notional balances and yields by maturity date for interest rate
swaps at December 31, 1999, are as follows:
WEIGHTED WEIGHTED
NOTIONAL AVERAGE AVERAGE
AMOUNT INTEREST RATE INTEREST RATE
MATURITY DATE (IN THOUSANDS) RECEIVED PAID
- ---------------------------------------------------------------------
2001 24,000 7.41% 5.38%
2003 51,000 5.89% 5.40%
2004 75,000 6.68% 5.67%
2005 11,000 5.93% 5.40%
2007 15,000 6.84% 5.40%
--------
Total $176,000 6.52% 5.51%
Swaps contributed to the Company's net interest income by reducing interest
expense for the years ended December 31, 1999, 1998 and 1997, by $1,593,000,
$971,000 and $995,000, respectively.
13
<PAGE>
- --------------------------------------------------------------------------------
NOTE L. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all of its
full-time employees. The benefits are based on years of service and the
employee's compensation while employed with the Company. The Company's funding
policy is to contribute annually current service costs accrued and past service
costs amortized over a 30-year period. Contributions are intended to provide not
only for benefits attributed to service to date but also for those expected to
be earned in the future. Plan assets consist principally of equity securities
and U.S. Government and corporate bonds.
The following table sets forth the plan's funded status and amounts recognized
in the Company's financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
(IN THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Projected benefit obligation:
Balance at beginning of period $ 12,033 $10,541 $ 9,457
Service cost 394 379 316
Interest cost 820 745 718
Actuarial (gain) or loss (1,128) (7) 758
Benefits paid during period (1,103) (523) (531)
-------- ------- -------
Projected benefit obligation at end of period 11,016 11,135 10,718
Plan assets at fair value:
Balance at beginning of period 15,692 14,579 13,204
Actual return on plan assets during period 1,806 1,635 1,906
Benefits paid during period (1,103) (523) (531)
-------- ------- -------
Fair value of plan assets at end of period 16,395 15,691 14,579
-------- ------- -------
Plan assets in excess of projected benefit obligation 5,379 4,556 3,861
Unrecognized prior service cost 149 (98) (107)
Unrecognized net loss or (gain) (1,902) (961) (431)
Unrecognized transition asset (200) (261) (323)
-------- ------- -------
Prepaid pension cost at end of period $ 3,426 $ 3,236 $ 3,000
======== ======= =======
Prepaid pension cost at beginning of period $ 3,236 $ 3,000 $ 2,793
Pension cost (credit) for the period (190) (236) (207)
-------- ------- -------
Prepaid pension cost at end of period $ 3,426 $ 3,236 $ 3,000
======== ======= =======
</TABLE>
For 1999, the discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 7.75% and 4.5%, respectively. For 1998, the rates were 7.5% and
4.5%. For 1997, the rates were 7.0% 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,
1999, 1998 and 1997, were $278,000, $276,000, and $271,000, 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.
14
<PAGE>
- --------------------------------------------------------------------------------
NOTE M. PARENT ONLY INFORMATION
The following financial information relates to National City Bancorporation
(parent only) operations:
BALANCE SHEETS
DECEMBER 31,
-------------------------
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------
ASSETS
Cash $ 7,290 $ 4,396
Investment in bank subsidiary 62,766 64,371
Investment in non-bank subsidiary 40,413 34,256
Subordinated note receivable from affiliate 8,000 8,000
Other investments 173 183
Due from affiliates 71,800 135,200
Other assets 392 355
-------- --------
$190,834 $246,761
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper $ 38,777 $ 99,396
Other liabilities 108 77
Stockholders' equity 151,949 147,288
-------- --------
$190,834 $246,761
======== ========
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
(IN THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiary $ 7,800 $ 3,000 $ 3,000
Interest income 8,776 10,321 9,879
Other income 162 80 239
------- ------- -------
16,738 13,401 13,118
EXPENSES
Interest expense 5,555 7,290 7,507
Other expenses 762 738 621
------- ------- -------
6,317 8,028 8,128
------- ------- -------
Earnings before taxes 10,421 5,373 4,990
Income taxes 1,166 967 817
------- ------- -------
9,255 4,406 4,173
Equity in undistributed net earnings of subsidiaries 7,372 11,258 9,549
------- ------- -------
Net earnings $16,627 $15,664 $13,722
======= ======= =======
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
NOTE M. PARENT ONLY INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
(IN THOUSANDS) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 16,627 $ 15,664 $ 13,722
Adjustments to reconcile net earnings to net cash from operating
activities:
Equity in undistributed earnings of subsidiaries (7,372) (11,258) (9,549)
(Increase) decrease in other assets (3) 198 726
Increase (decrease) in other liabilities 31 (92) 112
-------- --------- ---------
(7,344) (11,152) (8,711)
-------- --------- ---------
Net cash provided by operating activities 9,283 4,512 5,011
Cash flows from investing activities:
Payments from (advances to) affiliates 63,400 5,450 (13,300)
-------- --------- ---------
Net cash provided by (used for) investing activities 63,400 5,450 (13,300)
Cash flows from financing activities:
Net (decrease) increase in commercial paper (60,619) (19,685) 20,974
Payment for fractional shares on stock dividends (40) (22)
Cash dividends paid (7,362)
Purchase of treasury stock (1,808) (1,752) (856)
-------- --------- ---------
Net cash (used in) provided by financing activities (69,789) (21,477) 20,096
-------- --------- ---------
Net increase (decrease) in cash 2,894 (11,515) 11,807
Cash at beginning of year 4,396 15,911 4,104
-------- --------- ---------
Cash at end of year $ 7,290 $ 4,396 $ 15,911
======== ========= =========
Supplemental disclosures
Cash paid during the year for:
Interest $ 5,555 $ 7,290 $ 7,504
Income taxes 1,176 1,058 660
</TABLE>
- --------------------------------------------------------------------------------
NOTE N. SECURITIES
Securities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------------
COST OR APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury $ 4,983 $ 25 $ 4,958
U.S. Government agencies 21,944 307 21,637
Federal agency mortgage-backed 98,006 $ 68 2,153 95,921
Securities of states and political subdivisions 9,935 746 9,189
Other securities 3,635 3,635
-------- ---- ------ --------
$138,503 $ 68 $3,231 $135,340
======== ==== ====== ========
Held-to-maturity
Collateralized mortgage obligations $ 46,572 $ 21 $1,296 $ 45,297
======== ==== ====== ========
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
NOTE N. SECURITIES (CONTINUED)
<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
-------- ------ --- --------
$132,364 $1,628 $95 $133,897
======== ====== === ========
Held-to-maturity
Collateralized mortgage obligations $ 41,255 $ 314 $ 41,569
======== ====== ========
</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, 1999
-------------------------------------------------------------------------------------
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 $ 4,958 5.69%
U.S. Government agencies $6,991 5.69% 6,806 5.23% $ 7,840 6.51%
Federal agency mortgage-backed 6,376 5.82% $14,099 6.49% 75,446 6.91%
Municipal securities 991 6.14% 8,198 7.18%
Other securities 3,635 6.64%
------ ------- ------- -------
$6,991 5.69% $18,140 5.56% $15,090 6.47% $95,119 6.90%
====== ======= ======= =======
Held-to-maturity
Collateralized mortgage obligations $ 7,314 5.62% $39,258 6.32%
======= =======
Approximate market value $ 7,186 $38,111
======= =======
</TABLE>
<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
======= =======
</TABLE>
Securities carried at $140,460,000 and $124,468,000 at December 31, 1999 and
1998, 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.
17
<PAGE>
- --------------------------------------------------------------------------------
NOTE N. SECURITIES (CONTINUED)
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 2.9 years for agency mortgage-backed
securities and 2.9 years for collateralized mortgage obligations.
- --------------------------------------------------------------------------------
NOTE O. 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, 1999
---------------------------------------------------------
COMMERCIAL COMMERCIAL CONSOLIDATED
(IN THOUSANDS) BANKING FINANCE OTHER* COMPANY
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 53,497 $ 35,054 $ (155) $ 88,396
Interest expense 24,470 17,846 (3,297) 39,019
-------- -------- -------- ----------
Net interest income 29,027 17,208 3,142 49,377
Non-interest income 10,509 461 (273) 10,697
-------- -------- -------- ----------
Total revenue 39,536 17,669 2,869 60,074
Loan loss provision 941 2,539 3,480
Depreciation and amortization expense 2,649 133 5 2,787
Other non-interest expense 21,230 4,675 399 26,304
Income taxes 5,701 4,165 1,010 10,876
Net earnings $ 9,015 $ 6,157 $ 1,455 $ 16,627
======== ======== ======== ==========
Total loans $540,984 $297,601 $ 838,585
Total assets 841,149 302,742 $ (3,711) 1,140,180
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------
COMMERCIAL COMMERCIAL CONSOLIDATED
(IN THOUSANDS) BANKING FINANCE OTHER* COMPANY
- ----------------------------------------------------------------------------------------------------
<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 earnings $ 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
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
NOTE O. BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------
COMMERCIAL COMMERCIAL CONSOLIDATED
(IN THOUSANDS) BANKING FINANCE OTHER* COMPANY
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 earnings $ 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
</TABLE>
*Other includes parent only and consolidating eliminations
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 state tax refunds in 1999 and 1997 of $1,233,000 and $1,369,000,
respectively, which were included in non-interest income. DBCI has also
experienced higher interest income related to loan growth, offset by an increase
in funding costs.
- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
National City Bancorporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of National City
Bancorporation and subsidiaries as of December 31, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National City
Bancorporation and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 14, 2000
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY RESULTS
Net earnings for 1999 were $16,627,000 compared with $15,664,000 in 1998, up 6
percent. Basic earnings per share increased to $1.90 in 1999 compared with $1.77
in 1998. The net earnings for 1999 include a state income tax refund, related to
taxes paid in prior years, of $1,233,000 with a net earnings effect of
approximately $769,000. Without regard for the tax refund, net earnings for 1999
increased 1 percent.
The major factors contributing to the earnings increase in 1999 were higher net
interest income resulting from growth in loans offset by an increased provision
for loan losses, associated primarily with the Company's commercial finance
subsidiary, and increased funding costs relative to rates received on earning
assets.
The Company issued stock dividends in each year from 1981 to 1998. The Company
began paying cash dividends in 1999.
NET INTEREST INCOME
Net interest income, on a fully taxable equivalent basis, increased to $49.5
million up from $47.6 million in 1998 and $44.6 million in 1997. 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 29. The average base rate decreased to 8.00 percent from
8.35 percent in 1999. Approximately 80 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 5.01 percent compared with 5.15 percent in 1998.
Average earning assets grew to $989 million in 1999, an increase of $63 million
or 7 percent. Average loans increased to $799 million in 1999 from $724 million
in 1998, an increase of 10 percent. Loans were 80.8 percent of total earning
assets in 1999, compared with 78.2 percent in 1998.
The general decrease in interest rates during 1999 resulted in a decrease in the
cost of interest bearing deposits and borrowed funds from 5.33 percent to 5.12
percent. While the average base rate and yield on interest bearing assets
decreased 29 basis points, the average cost of interest bearing liabilities
decreased 21 basis points. As a result, interest rate spread declined to 3.84
percent from 3.92 percent in 1998. Interest bearing time deposits of $100,000 or
more decreased and averaged $56.1 million in 1999 compared with $59.5 million in
1998. Other interest bearing deposit accounts increased $5.7 million compared
with last year and comprise approximately 30 percent of interest bearing
sources. Brokered deposits averaged $95.1 million in 1999 compared with $59.0
million in 1998. 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). DBCI issues
long-term debt to investors in private placement transactions. At December 31,
1999, long-term debt totaled $176 million. Detail information about long-term
debt is presented in Note G to the financial statements. Non-interest bearing
deposits increased from 1998 and averaged $133.9 million in 1999.
20
<PAGE>
The following table summarizes the changes in funding sources since 1997:
<TABLE>
<CAPTION>
1999 1998
--------------------------- -----------------------
% CHANGE % CHANGE
(DAILY AVERAGES IN THOUSANDS) AMOUNT FROM 1998 AMOUNT FROM 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest bearing time deposits of $100,000 or more $ 56,102 (5.8)% $ 59,528 14.9%
Brokered deposits 95,095 61.2 58,987 (11.8)
Other interest bearing deposits 227,460 2.6 221,779 2.2
Commercial paper 75,035 (34.9) 115,197 (3.4)
Other short-term borrowed funds 158,541 (2.5) 162,583 8.8
Long-term debt 149,565 57.4 94,994 65.2
---------- --------
Total interest bearing 761,798 6.8 713,068 7.8
Non-interest bearing deposits 133,926 2.4 130,761 11.2
Other liabilities 11,487 13.5 10,118 11.6
Stockholders' equity 147,802 5.8 139,725 12.4
---------- --------
$1,055,013 6.2% $993,672 8.9%
========== ========
</TABLE>
CREDIT RISK MANAGEMENT
The responsibility for credit administration rests with the credit committees of
each subsidiary. The credit committees, with approval by the Board of Directors,
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 Company 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
$521 million in 1998 to $571 million in 1999, an increase of 10 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
$93.4 million and $66.5 million at December 31, 1999, and 1998, respectively.
Loans secured by commercial real estate were approximately $144 million as of
December 31, 1999 and $117 million as of the previous year end. Included in this
total is approximately $32 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
21
<PAGE>
portfolio with office and warehouse 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 $42 million at December 31, 1999,
compared with $40 million last year. This category includes $12 million secured
by first liens on 1-4 family housing, $19 million secured by junior liens on 1-4
family housing and $11 million revolving Executive Line loans that are secured
by either first or second mortgages. The comparable 1998 amounts are $16 million
first liens, $16 million junior liens and $8 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 $43 million at December 31, 1999, compared with $47
million in 1998. 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 $39 million on December 31, 1999, compared with $42 million in
1998. 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 $3.5 million in 1999 compared with $2.9
million in 1998. 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 33 shows the changes in the percentage from 1995 to
1999.
The allowance for loan losses was $13.9 million at December 31, 1999 and was
1.66 percent of loans compared with 1.80 percent in 1998. Actual net loan losses
were $3.4 million in 1999 and 1998. Charge-offs were $3.6 million in 1999, and
recoveries were $178,000. 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 1999 and 1998 than in the
previous three years as presented in the Summary of Loan Loss Experience on page
33. The losses occurred in the commercial lending portfolio of DBCI. The
Company's percent of net loan charge-offs to average loans was .42 percent
compared with .47 percent in 1998. The allocation of the allowance for loan
losses is presented on pages 33 and 34.
NON-PERFORMING ASSETS
Non-performing assets were $16.3 million at December 31, 1999, compared with
$17.7 million in 1998 and $15.1 million in 1997. 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. Non-performing assets
are presented on page 32.
22
<PAGE>
In addition to loans considered non-performing, there were loans with an
aggregate principal balance of $19.2 million outstanding at December 31, 1999,
to borrowers who are currently experiencing financial difficulties. This
compares with $38.8 million at December 31, 1998. Although these loans are
adequately secured, 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. Impaired
loans are loans on which it is probable that the Company will be unable to
collect all principal and interest due according to contractual terms. To the
extent management anticipates losses on these loans, appropriate loan loss
reserve allocations have been provided. 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. Non-performing 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, 1999 or 1998.
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 simulation of future net earnings, 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 six percent. This represents a
relatively risk neutral position from an economic perspective.
23
<PAGE>
The following table summarizes the Company's repricing gap for various time
intervals at December 31, 1999:
<TABLE>
<CAPTION>
WITHIN 3 MONTHS 1 YEAR MORE THAN
(IN MILLIONS) 3 MONTHS TO 1 YEAR TO 5 YEARS 5 YEARS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans $ 658 $ 40 $ 86 $ 41
Securities 13 27 99 43
Other assets 55 78
----- ------ ------ ------
726 67 185 162
----- ------ ------ ------
Non-interest bearing deposits 7 19 104 36
Interest bearing deposits 182 165 101
Short-term borrowings 134 40
Long-term debt 150 26
Interest rate swaps 176 (150) (26)
Other liabilities and stockholders' equity 176
----- ------ ------ ------
499 224 205 212
----- ------ ------ ------
Repricing gap $ 227 $ (157) $ (20) $ (50)
----- ------ ------ ------
Cumulative gap 227 70 50 0
Cumulative gap as a percent of assets 20% 6% 4% 0%
</TABLE>
As indicated by the Gap table, assets reprice slightly faster than liabilities
as of the reporting date. With this balance sheet position, which is typical for
the Company, interest margins are projected to increase slightly in an
environment of rising short-term rates and decline slightly in a declining rate
environment. A lower interest rate environment is preferable for the Company
from a credit perspective, however, as there is less pressure on customers to
meet variable rate debt servicing obligations.
The following table provides information about the Company's derivative
financial instruments and other financial instruments used for purposes other
than trading that are sensitive to changes in interest rates. For loans,
securities, and liabilities with contractual maturities, the table presents
principal cash flows and related weighted-average interest rates by contractual
maturities as well as the Company's historical experience of the impact of
interest rate fluctuations on the prepayment of residential and home equity
loans and mortgage-backed securities. For other rate sensitive liabilities that
have no contracted maturity (e.g., non-interest bearing checking and interest
bearing checking and savings), 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.
24
<PAGE>
<TABLE>
<CAPTION>
FAIR VALUE
AS OF
(IN MILLIONS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate loans $ 35 $ 21 $ 31 $ 16 $ 15 $ 53 $ 171 $170
Average interest rate 8.05% 8.53% 8.53% 8.36% 8.36% 8.27% 8.32%
Variable interest rate loans 548 40 20 17 17 26 668 667
Average interest rate 10.40% 8.35% 8.28% 7.52% 7.52% 7.06% 9.93%
Fixed interest rate securities 28 30 26 22 21 43 170 169
Average interest rate 6.33% 6.46% 6.45% 6.47% 6.47% 6.38% 6.42%
Variable interest rate securities 1 1 10 12 12
Average interest rate 6.81% 6.06% 5.94% 5.89%
Other interest bearing assets 56 56 56
Average interest rate 5.75% 5.75%
RATE SENSITIVE LIABILITIES:
Non-interest bearing checking 26 26 26 26 26 36 166 166
Interest bearing checking & savings 112 9 8 8 8 145 145
Average interest rate 3.63% 1.09% .92% .92% .92% 3.03%
Time deposits 235 52 11 3 2 303 302
Average interest rate 5.72% 5.99% 6.04% 5.68% 5.68% 5.77%
Fixed interest rate borrowings 174 24 51 75 26 350 347
Average interest rate 5.18% 6.75% 5.95% 6.24% 6.43% 5.72%
RATE SENSITIVE DERIVATIVE FINANCIAL
INSTRUMENTS:
Interest rate swaps 24 51 75 26 176 (3)
Average pay rate 5.38% 5.40% 5.67% 5.40%
Average receive rate 7.41% 5.89% 6.68% 6.46%
</TABLE>
NON-INTEREST INCOME
Total non-interest income was $10.7 million, compared with $9.2 million in 1998,
and $11.4 million in 1997. 1999 and 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 1999, 1998 or 1997.
The table below summarizes the major components of non-interest income:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust income $ 4,512 $4,641 $ 4,801
Service charges on deposit accounts 2,433 2,145 2,195
Mortgage banking fees 39 50 204
Sale of financial services and investment products 409 306 292
State income tax refund 1,233 1,369
Letter of credit commissions 545 609 558
Other 1,526 1,491 1,971
------- ------ -------
$10,697 $9,242 $11,390
======= ====== =======
</TABLE>
25
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense totaled $29.1 million in 1999, compared with $28.0 million
in 1998 and $28.3 million in 1997. The table below summarizes the major
components of non-interest expense:
(IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------------
Salaries and employee benefits $16,379 $15,238 $15,110
Net occupancy 3,308 3,062 3,194
Equipment 3,531 3,512 3,648
Fees and assessments 1,554 1,374 1,539
Advertising and marketing 636 742 909
Other 3,683 4,121 3,865
------- ------- -------
$29,091 $28,049 $28,265
======= ======= =======
YEAR 2000
The Company has completed replacing or modifying certain systems to ensure Year
2000 compliance. The Company estimates that the cost of its Year 2000 compliance
program was approximately $1.1 million. A significant amount of the total cost
represents enhancements and improvements, which will be amortized over the
estimated useful life of the enhancement or improvement. The Company completed
all Year 2000 readiness work. No significant disruptions resulting from the
century date change have been detected in any of its critical systems.
CAPITAL AND LIQUIDITY
Stockholders' equity was $152 million or 13.4 percent of total assets at
December 31, 1999, compared with $147 million and 14.3 percent in 1998. 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. Banking regulatory
agencies have categorized the Company as well capitalized under existing
regulatory guidelines for 1999 and 1998. The required risk based ratio for
capital adequacy purposes is eight percent and the required leverage ratio is
four percent. The table below states the Company's capital ratios:
DECEMBER 31,
-------------------------
1999 1998
- --------------------------------------------------
RISK CAPITAL RATIOS
Tier I Capital 15.40% 16.33%
Total Capital 16.65% 17.58%
LEVERAGE RATIO 13.42% 14.27%
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.
26
<PAGE>
DBCI has original maturity five, seven, and ten-year term notes in the amount of
$176 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, 1999,
the market value of available-for-sale securities was less than amortized cost
by $3.2 million. At December 31, 1998, the market value exceeded amortized cost
by $1.5 million. Held-to-maturity securities provide liquidity through scheduled
maturities. The majority of the securities are readily marketable. Management
has structured the loan portfolio to provide additional liquidity with at least
55 percent of total loans having scheduled maturities within one year.
Cash flows from operations and changes in the balance sheet also affect
liquidity. The Consolidated Statement of Cash Flows on page 6 shows the
component changes in the Company's cash position for the three years ending
December 31, 1999. In 1999, net cash provided from operating activities
increased to $35 million. Investing activities reflect loan originations and
principal repayments as well as activity in short-term money market investments,
the investment portfolio and investment in premises and equipment. In 1999, net
cash used in investing activities increased by $39 million. The increase
reflects a higher volume of federal funds sold offset by a lower volume of loan
originations as compared with the prior year. Cash provided from financing
activities increased by $15 million in 1999. Increased funding sources included
time deposits, other short-term borrowings and long term debt, offset by
decreased non-interest bearing and savings deposits and commercial paper. The
Company paid $7.4 million in cash dividends in 1999.
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.
1998 VERSUS 1997
The major factors contributing to the earnings increase were higher net interest
income and lower loan loss provision expense, partially offset by lower
non-interest income. Net interest income increased to $47.6 million, up 7
percent. The increase resulted from a higher volume of earning assets offset by
a decrease in net interest margin. Non-interest income was $9.2 million compared
with $11.4 million in 1997. 1997 included a state income tax refund of $1.4
million. Non-interest expense decreased $216,000 from 1997. Most categories of
expense decreased from the previous year, with slight increases in personnel and
other expenses, such as, supplies, travel and entertainment, and delivery
expense.
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 $9.0 million in 1999 from
$7.9 million in 1998 and $7.5 million in 1997. The non-interest income in 1999
and 1997 included state income tax refunds of $1,233,000 and $1,369,000,
respectively which increased net earnings approximately $769,000 in 1999 and
$850,000 in 1997. The bank has increased its net earnings through the growth of
its loan portfolio and the use of lower cost funding sources, primarily
deposits.
27
<PAGE>
The following table summarizes the commercial bank's performance measures:
(IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------------
Net interest income $ 29,027 $ 27,770 $ 26,985
Net earnings 9,015 7,926 7,527
Average assets 747,781 720,504 684,609
Average loans 490,553 446,950 418,270
Average deposits 528,189 486,590 470,206
Return on average equity 14.40% 13.19% 13.16%
Efficiency ratio 60.40% 63.03% 63.22%
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, asset-based loans require closer
monitoring of collateral values 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. Additional Senior Notes were issued in 1999. At December 31,
1999, 59 percent of the commercial finance segment's loans were funded by Senior
Notes, compared with 42 percent in 1998. The commercial finance segment
originates the majority of its loans in Minnesota with approximately 17 percent
originated in its Wisconsin office.
The net earnings of the commercial finance segment were $6.2 million in 1999
compared with $6.3 million in 1998 and $5.0 million in 1997. The earnings of the
commercial finance segment were negatively impacted in 1999 by a lower interest
rate spread, resulting from a decreased yield on earning assets and higher
funding costs. The commercial finance segment also experienced a higher loan
loss provision and higher non-interest expenses in 1999. The following table
summarizes the commercial finance segment's performance measures:
(IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------------
Net interest income $ 17,208 $ 16,729 $ 15,092
Net earnings 6,157 6,332 5,022
Average assets 312,783 278,737 233,260
Average loans 307,965 277,162 231,370
Return on average equity 16.88% 20.59% 20.76%
Efficiency ratio 27.21% 25.73% 25.31%
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.
28
<PAGE>
- ------------------------------------------------------------------------------
CHANGE IN INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
YEAR-ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 OVER 1998 1998 OVER 1997
----------------------------------- -------------------------------------
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 $ (401) $ (17) $ (384) $ (358) $ (59) $ (299)
Total securities (384) (125) (259) 3 (577) 580
Loans 3,667 (3,848) 7,515 6,165 (1,512) 7,677
-------- --------- -------- ------ --------- ------
Total earning assets 2,882 (3,990) 6,872 5,810 (2,148) 7,958
Interest Paid on:
Savings deposits (158) (680) 522 573 186 387
Time deposits (977) (522) (455) (1) (143) 142
Brokered deposits 1,916 (157) 2,073 (468) (14) (454)
Other deposits (131) (104) (27) 8 3 5
Short-term funds borrowed (2,950) (519) (2,431) 206 (311) 517
Long-term debt 3,296 (355) 3,651 2,414 (155) 2,569
-------- --------- -------- ------ --------- ------
Total interest bearing liabilities 996 (2,337) 3,333 2,732 (434) 3,166
-------- --------- -------- ------ --------- ------
Increase (decrease) in net interest income $ 1,886 $ (1,653) $ 3,539 $3,078 $ (1,714) $4,792
======== ========= ======== ====== ========= ======
</TABLE>
In the above analysis, rate differences were computed as the change in the rate
between the current and prior period times the volume of the current year, while
the volume differences were computed as the change in volume between the current
and prior period times the prior year's rate.
- ------------------------------------------------------------------------------
SECURITIES
DECEMBER 31,
CARRYING VALUE OF SECURITIES --------------------------------------
(IN THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------------------
Available-for-sale
U.S. Treasury $ 4,958 $ 5,077 $ 23,997
U.S. Government agencies 21,637 17,089 9,844
Federal agency mortgage-backed 95,921 108,930 102,529
Municipal securities 9,189
Other securities 3,635 2,801 4,955
-------- -------- --------
$135,340 $133,897 $141,325
======== ======== ========
Held-to-maturity
Collateralized mortgage obligations $ 46,572 $ 41,255 $ 37,402
-------- -------- --------
$ 46,572 $ 41,255 $ 37,402
======== ======== ========
29
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTION OF ASSETS, LIABILITIES
AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999
--------------------------------------
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 $ 13,507 $ 691 5.12%
Securities:
Taxable 171,215 10,664 6.23
Tax-exempt 5,403 395 7.31
---------- -------
Total securities 176,618 11,059 6.26
Loans 798,518 76,801 9.62
---------- -------
Total earning assets 988,643 88,551 8.96
Cash and due from banks 41,768
Other assets 24,602
----------
$1,055,013
==========
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Savings $ 114,398 $ 4,125 3.61%
Time 232,433 12,633 5.44
Other 31,826 285 .90
---------- -------
Total 378,657 17,043 4.50
Short-term borrowed funds 233,576 12,325 5.28
Long-term debt 149,565 9,651 6.45
---------- -------
Total interest bearing liabilities 761,798 39,019 5.12
Non-interest bearing deposits 133,926
Other liabilities 11,487
Stockholders' equity 147,802
----------
$1,055,013
==========
-------
Net interest income and interest rate spread $49,532 3.84
=======
Net interest margin 5.01
Fees on loans included above $ 3,446
=======
</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.
30
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------------------------------ ------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 20,844 $ 1,092 5.24% $ 26,268 $ 1,450 5.52%
180,705 11,443 6.33 171,981 11,440 6.65
-------- ------- -------- -------
180,705 11,443 6.33 171,981 11,440 6.65
724,112 73,134 10.10 649,640 66,969 10.31
-------- ------- -------- -------
925,661 85,669 9.25 847,889 79,859 9.42
44,819 39,733
23,192 25,155
-------- --------
$993,672 $912,777
======== ========
- ----------------------------------------------------------------------------------
$101,964 $ 4,283 4.20% $ 92,338 $ 3,710 4.02%
204,296 11,694 5.72 209,737 12,163 5.80
34,034 416 1.22 33,629 408 1.21
-------- ------- -------- -------
340,294 16,393 4.82 335,704 16,281 4.85
277,780 15,275 5.50 268,567 15,069 5.61
94,994 6,355 6.69 57,509 3,941 6.85
-------- ------- -------- -------
713,068 38,023 5.33 661,780 35,291 5.33
130,761 117,605
10,118 9,069
139,725 124,323
-------- --------
$993,672 $912,777
======== ========
------- -------
$47,646 3.92 $44,568 4.09
======= =======
5.15 5.26
$ 3,281 $ 2,378
======= =======
</TABLE>
31
<PAGE>
- ------------------------------------------------------------------------------
LOAN PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31,
TYPES OF LOANS -------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $570,879 $520,672 $442,328 $393,534 $381,506
Real estate:
Construction 31,967 24,196 10,405 10,444 16,089
Residential mortgage 42,096 40,074 43,295 40,323 32,125
Non-residential mortgage 111,794 92,769 88,448 76,086 68,504
Loans to individuals for personal
expenditures 42,704 46,800 54,987 56,973 33,966
Other loans 39,145 41,598 31,131 22,960 22,607
-------- -------- -------- -------- --------
$838,585 $766,109 $670,594 $600,320 $554,797
======== ======== ======== ======== ========
</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, 1999:
<TABLE>
<CAPTION>
AFTER ONE AFTER
WITHIN BUT WITHIN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $444,106 $112,486 $14,287 $570,879
Real estate construction 16,895 7,593 7,479 31,967
-------- -------- ------- --------
$461,001 $120,079 $21,766 $602,846
======== ======== ======= ========
Loans with predetermined interest rates $ 7,956 $ 44,128 $17,772 $ 69,856
Loans with floating interest rates 453,045 75,951 3,994 532,990
-------- -------- ------- --------
$461,001 $120,079 $21,766 $602,846
======== ======== ======= ========
</TABLE>
The following table summarizes non-performing assets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 322 $ 696 $ 320 $ 1,329 $ 1,314
Impaired non-accrual loans 1,316 10,562 171 1,017 2,409
Restructured loans 221 235
Loans past due 90 days or more as to
interest or principal 4 703 871 135
------- ------- ------- ------- -------
1,859 11,497 1,194 3,217 3,858
Percent of total loans 0.2% 1.5% 0.2% 0.5% 0.7%
Impaired accruing loans 14,398 6,174 13,935 7,797 176
------- ------- ------- ------- -------
$16,257 $17,671 $15,129 $11,014 $ 4,034
======= ======= ======= ======= =======
Percent of total loans 1.9% 2.3% 2.3% 1.8% 0.7%
</TABLE>
The gross interest income that would have been recorded in 1999 had
non-performing assets remained current and in accordance with original terms, is
approximately $816,000. The amount of interest included in income was $13,000.
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.
32
<PAGE>
- ------------------------------------------------------------------------------
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance of allowance for losses $ 13,785 $ 14,283 $ 10,111 $ 8,602 $ 9,726
Provision charged to operating expense 3,480 2,890 4,819 3,148 452
Charge-offs:
Commercial and industrial 3,414 3,252 898 2,062 1,637
Real estate (includes construction and real
estate) 155 125 195
Individuals for personal expenditures 60 37 156 298 44
Other 86
--------- --------- --------- --------- ---------
3,560 3,444 1,179 2,555 1,681
Recoveries:
Commercial and industrial 138 37 267 829 45
Real estate (includes construction and real
estate) 1 12 31 36
Individuals for personal expenditures 3 4 47 17 24
Foreign 8
Other 37 14 198 39
--------- --------- --------- --------- ---------
178 56 532 916 105
--------- --------- --------- --------- ---------
Charge-offs net of recoveries 3,382 3,388 647 1,639 1,576
--------- --------- --------- --------- ---------
Ending balance of allowance for losses $ 13,883 $ 13,785 $ 14,283 $ 10,111 $ 8,602
========= ========= ========= ========= =========
Average gross loans outstanding $ 798,518 $ 724,112 $ 649,640 $ 571,959 $ 509,899
Percent of net loan charge-offs to average
loans 0.42% 0.47% 0.10% 0.29% 0.31%
Percent of allowance for losses to loans
outstanding at end of period 1.66% 1.80% 2.13% 1.68% 1.55%
</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. The allowance
for loan losses is allocated to individual loan categories based on the relative
risk characteristics of the loan portfolio. 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 loans to
individuals. 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 loans to individuals which
are considered past due are reported to management on a monthly basis. The
Company also routinely maintains an unallocated allowance to recognize its
exposure to unanticipated losses within the loan portfolio. This exposure is
caused by inherent delays in obtaining information regarding an individual
borrower's financial condition or change in their specific business condition;
the judgmental nature of individual loan evaluations, collateral assessments and
the interpretation of economic trends; the volatility of general economic or
specific customer conditions affecting the identification and quantification of
losses for large individual credits; and the sensitivity assumptions used in
establishing allocated allowances for general categories of loans. The
unallocated allowance also addresses risk in concentration of credit to specific
borrowers, products, or industries.
33
<PAGE>
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
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Amount allocated $ 11,329 $ 100 $ 300 $2,154 $13,883
Outstandings to total loans 68.08% 22.16% 5.09%
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%
</TABLE>
The increase in the unallocated allowance for loan losses in 1999 is the result
of the resolution of a large non-accrual loan.
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET ITEMS (IN MILLIONS)
Securities $ 182 $ 175 $ 179 $ 165 $ 158
Loans 839 766 671 600 555
All other assets 119 85 85 137 90
Total assets 1,140 1,026 935 902 803
Total deposits 614 517 479 520 440
Short-term borrowed funds 174 211 246 206 198
Long-term debt 176 139 67 48 48
All other liabilities 24 12 10 9 10
Total liabilities 988 879 802 783 696
Stockholders' equity 152 147 133 119 107
INCOME AND EXPENSE ITEMS (IN THOUSANDS)
Interest and fees on loans 76,779 73,040 66,910 58,795 55,972
All other interest income 11,617 12,535 12,890 11,404 10,417
Total interest income 88,396 85,575 79,800 70,199 66,389
Interest expense on deposits 17,043 16,393 16,281 14,980 12,950
Interest expense on short-term borrowed funds 12,325 15,275 15,069 11,908 11,680
Interest expense on long-term debt 9,651 6,355 3,941 3,261 3,638
Total interest expense 39,019 38,023 35,291 30,149 28,268
Net interest income 49,377 47,552 44,509 40,050 38,121
Provision for loan losses 3,480 2,890 4,819 3,148 452
Trust fees 4,512 4,641 4,801 4,605 4,839
State income tax refund 1,233 1,369
Gains (losses) on sale of securities 133 (122)
All other income 4,952 4,601 5,220 5,344 4,460
All other expenses 29,091 28,049 28,265 26,189 26,053
Net earnings 16,627 15,664 13,722 12,686 12,696
Basic Earnings Per Share
Net earnings 1.90 1.77 1.54 1.42 1.42
</TABLE>
34
<PAGE>
- ------------------------------------------------------------------------------
SELECTED RATIOS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings to average assets 1.58% 1.58% 1.50%
Net earnings to average stockholders' equity 11.23 11.26 11.26
Average stockholders' equity to average total assets 14.03 14.00 14.00
Dividend payout ratio 25.26 27.12
Regulatory Capital Ratios:
Tier 1 risk capital 15.40 16.33 16.52
Total risk capital 16.65 17.58 17.77
Leverage 13.42 14.27 14.15
(ratios calculated before unrealized gains or losses)
</TABLE>
- ------------------------------------------------------------------------------
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1999
---------------------------------------------------------
(UNAUDITED) FIRST SECOND THIRD FOURTH
(IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 20,531 $ 21,459 $ 22,960 $ 23,446
Interest expense 8,814 9,152 10,231 10,822
Net interest income 11,717 12,307 12,729 12,624
Provision for loan losses 862 997 1,111 510
Other non-interest income 2,413 2,423 3,647 2,214
Non-interest expense 7,304 7,263 7,045 7,479
Income tax expense 2,359 2,556 3,197 2,764
Net earnings 3,605 3,914 5,023 4,085
Basic earnings per share 0.41 0.45 0.57 0.47
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
(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
</TABLE>
Certain information has been restated from the information originally reported
in the Company's Quarterly Reports on Form 10-Q. The restatements reflect the
correction of previously reported information as discussed in the Company's
Current Report on Form 8-K, dated November 15, 1999.
<TABLE>
<CAPTION>
1999 1998
-------------------- ---------------------
LOW HIGH LOW HIGH
--------------------------------------------
<S> <C> <C> <C> <C>
Stock Price Range*
First quarter $21 $27 1/2 $23 3/8 $29 1/2
Second quarter 17 1/4 22 5/8 30 35 1/4
Third quarter 17 3/8 21 24 34 1/2
Fourth quarter 16 20 3/8 23 1/2 28
December 31 (Closing Price) $16 3/4 $26 1/4
</TABLE>
- -----------------
*Adjusted for stock dividends
35
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS
<TABLE>
<CAPTION>
NATIONAL CITY BANCORPORATION
<S> <C> <C> <C>
David C. Malmberg Michael J. Boris* James B. Goetz, Sr. Walter E. Meadley, Jr.
Chairman of the Board Private investor and President and Chief Retired Vice Chairman
National City Bancorporation Consultant Executive Officer of the Board
Goetz Companies National City Bank
Wendell R. Anderson* Marvin Borman*
Of Counsel Partner Esperanza Guerrero-Anderson* Robert L. Olson
Larkin, Hoffman, Maslon, Edelman, President and Chief President and Chief
Daly & Lindgren Ltd Borman & Brand Executive Officer Executive Officer
Milestone Growth Fund, Inc. Diversified Business Credit, Inc.
David L. Andreas Sharon N. Bredeson
President and President and Chief Thomas E. Holloran* Roger H. Scherer*
Chief Executive Officer Executive Officer Professor, Graduate Programs Chairman of the Board
National City Bancorporation STAFF-PLUS, Inc. in Management Scherer Bros. Lumber Company
President and University of St. Thomas
Chief Executive Officer Kenneth H. Dahlberg
National City Bank Chairman of the Board C. Bernard Jacobs
Dahlberg, Inc. Retired President and
Terry L. Andreas Chief Executive Officer
School for Field Studies John H. Daniels, Jr.* National City Bancorporation
Chairman of the Board Partner Retired Chairman of the Board
Beverly, Massachusetts Willeke & Daniels National City Bank *Members of the Audit Committee
</TABLE>
- --------------------------------------------------------------------------------
PRINCIPAL OFFICERS
<TABLE>
<CAPTION>
NATIONAL CITY BANCORPORATION
<S> <C> <C> <C>
David L. Andreas Thomas J. Freed
President and Secretary and Chief Financial Officer
Chief Executive Officer
<CAPTION>
NATIONAL CITY BANK OF MINNEAPOLIS
<S> <C> <C> <C>
David L. Andreas Margaret A. Newhouse DeWayne A. Hoium FINANCIAL MANAGEMENT DIVISION
President and Vice President Vice President Thomas J. Freed
Chief Executive Officer Senior Vice President
Scott D. Thorson Sherri L. Kelly and Chief Financial Officer
CLIENT SERVICES DIVISION Vice President Vice President
William J. Klein Robert A. Duncan
Executive Vice President BANK OPERATIONS DIVISION James R. Kitchen Vice President
Donald W. Kjonaas Vice President
Donna M. DeMatteo Senior Vice President Michael G. Jensen
Vice President and Security Officer Susan E. Martenson Vice President
Vice President
David M. Nash Laura J. Carlson Robert A. Kramer
Senior Vice President Vice President Lisa A. Ruhl Vice President and Controller
Vice President
Robert A. Steuck
COMPLIANCE COUNSEL Vice President and Auditor
Connie G. Weinman
<CAPTION>
DIVERSIFIED BUSINESS CREDIT, INC.
<S> <C> <C> <C>
Robert L. Olson William D. Farrar Bridget A. Manahan Walter D. Tomaszek
President and Chief Vice President Vice President Vice President
Executive Officer
Jeffrey S. Holland Kevin D. Schrader
Janet L. Pomeroy Vice President Vice President
Senior Vice President
Robert L. Johnson Mark W. Schwieters
Anthony R. Bassett Vice President Vice President
Vice President
</TABLE>
36
<PAGE>
NATIONAL CITY BANCORPORATION
Sixth On The Mall
651 Nicollet Mall, Minneapolis, MN 55402-1611
(612) 904-8500
www.nationalcitybank.com
www.businesscredit.com
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3, No. 333-93941) of National City Bancorporation and in the related
Prospectus of our report dated January 14, 2000, with respect to the
consolidated financial statements and schedules of National City Bancorporation
incorporated by reference in its Annual Report on Form 10-K for the year ended
December 31, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 36,997
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 55,655
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 135,340
<INVESTMENTS-CARRYING> 46,572
<INVESTMENTS-MARKET> 45,297
<LOANS> 838,585
<ALLOWANCE> 13,883
<TOTAL-ASSETS> 1,140,180
<DEPOSITS> 614,308
<SHORT-TERM> 173,780
<LIABILITIES-OTHER> 22,719
<LONG-TERM> 176,000
0
0
<COMMON> 11,077
<OTHER-SE> 140,872
<TOTAL-LIABILITIES-AND-EQUITY> 1,140,180
<INTEREST-LOAN> 76,779
<INTEREST-INVEST> 10,926
<INTEREST-OTHER> 691
<INTEREST-TOTAL> 88,396
<INTEREST-DEPOSIT> 17,043
<INTEREST-EXPENSE> 39,019
<INTEREST-INCOME-NET> 49,377
<LOAN-LOSSES> 3,480
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 29,091
<INCOME-PRETAX> 27,503
<INCOME-PRE-EXTRAORDINARY> 27,503
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,627
<EPS-BASIC> 1.90
<EPS-DILUTED> 1.90
<YIELD-ACTUAL> 5.01
<LOANS-NON> 1,638
<LOANS-PAST> 0
<LOANS-TROUBLED> 221
<LOANS-PROBLEM> 33,569
<ALLOWANCE-OPEN> 13,785
<CHARGE-OFFS> 3,560
<RECOVERIES> 178
<ALLOWANCE-CLOSE> 13,883
<ALLOWANCE-DOMESTIC> 11,729
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,154
</TABLE>
