<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 8 - K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
June 28, 1996
- - - - - - - - - - - - - - - - - - - - - - - - - - -
(Date of Report)
National City Corporation
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - -
(Exact name of registrant as specified in its charter)
Delaware 1-10074 34-1111088
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - -
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1900 East Ninth Street, Cleveland, Ohio 44114
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - -
(Address of principal executive offices) (Zip Code)
216-575-2000
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - -
(Registrant's telephone number, including area code)
<PAGE> 2
Item 5. Other Events
------------
ACQUISITION OF INTEGRA FINANCIAL CORPORATION
As previously reported on Form 8-K, dated May 9, 1996, National City
Corporation ("National City") completed its acquisition of Integra Financial
Corporation ("Integra") on May 3, 1996 in a transaction accounted for as a
pooling-of-interests. National City is filing this report on Form 8-K to present
the supplemental consolidated financial statements as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995 that
give effect to the merger as if National City and Integra had always been
combined. The supplemental consolidated financial statements will become the
historical financial statements of National City and may be incorporated by
reference into any future registration statements by reference to this report.
PRELIMINARY REGISTRATION STATEMENT FILED BY NATIONAL PROCESSING, INC.
National Processing, Inc., a wholly-owned subsidiary of National City, filed a
preliminary registration statement with the Securities and Exchange Commission
on June 7, 1996 for an initial public offering of 6,000,000 shares of common
stock in an underwritten public offering. The offering will be of new shares to
be issued by National Processing, Inc. No shares will be offered for sale
by National City. After completion of the planned offering, National City will
own at least 80 percent of the common shares of National Processing, Inc.
Item 7. Financial Statements and Exhibits
---------------------------------
c.) Exhibits
--------
23.1 Consent of Ernst & Young LLP
23.2 Consent of Coopers & Lybrand LLP
27.2 Financial Data Schedules as of and for the years
ended December 31, 1995, 1994 and 1993
99.1 Supplemental Consolidated Financial Statements:
Report of Ernst & Young LLP on the Supplemental
Consolidated Financial Statements
Supplemental Consolidated Balance Sheets as of
December 31, 1995 and 1994
Supplemental Consolidated Statements of Income for
the years ended December 31, 1995, 1994, and 1993
Supplemental Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993
Supplemental Consolidated Statements of Changes in
Stockholders' Equity for the years ended December 31,
1995, 1994 and 1993
Notes to Supplemental Consolidated Financial
Statements at December 31, 1995
99.2 Report of Coopers & Lybrand LLP on Integra Financial
Corporation's Financial Statements as of December
31, 1995 and 1994 and for each of the years in
the three year period ended December 31, 1995.
<PAGE> 3
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, National
City has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
Dated: June 28, 1996 By /s/ Thomas A. Richlovsky
------------- --------------------
Senior Vice President
and Treasurer
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statement No.
33-39479 on Form S-3, Registration Statement No. 33-39480 on Form S-3,
Registration No. 33-44209 on Form S-3, Post-Effective Amendment No. 1 (on Form
S-8) to Registration Statement No. 33-20267 on Form S-4, Registration Statement
No. 33-52271 on Form S-8, Registration Statement No. 33-45363 on Form S-8,
Post-Effective Amendment No. 1 (on Form S-8) to Registration Statement No.
33-45980 on Form S-4, Post Effective Amendment No. 1 (on Form S-8) to
Registration Statement No. 33-56539, Registration Statement No. 33-57045 on Form
S-8, Registration Statement No. 33-54323 on Form S-3, Registration Statement
No. 33-58115 on Form S-8 and Post-Effective Amendment No. 1 (on Form S-8) to
Registration Statement No. 333-01697 of our report, with respect to the
supplemental consolidated financial statements of National City Corporation
and subsidiaries dated January 22, 1996, except for Note 11 as to which the
date is May 1, 1996 and the pooling of interests with Integra Financial
Corporation as of May 3, 1996, included in Form 8-K for the year ended December
31, 1995.
Ernst & Young LLP
Cleveland, Ohio
June 26, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
National City Corporation on Form S-3 (File Numbers 33-39479, 33-39480,
33-44209, 33-54323), Form S-8 (File Numbers 33-52271, 33-45363, 33-57045,
33-58115), Post-Effective Amendment No. 1 (on Form S-8) to Registration
Statement No. 33-20267 on Form S-4, Post-Effective Amendment No. 1 (on Form
S-8) to Registration Statement No. 33-45980 on Form S-4, Post-Effective
Amendment No. 1 (on Form S-8) to Registration Statement No. 33-56539 and
Post-Effective Amendment No. 1 (on Form S-8) to Registration Statement No.
333-01697 of our report dated January 17, 1996, on our audits of the
consolidated financial statements of Integra Financial Corporation as of
December 31, 1995 and 1994, and for the three years in the period ended
December 31, 1995, which report is included in this Form 8-K dated June 28,
1996.
COOPERS & LYBRAND LLP
Pittsburgh, Pennsylvania
June 28, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994 DEC-31-1993
<PERIOD-START> JAN-01-1995 JAN-01-1994 JAN-01-1993
<PERIOD-END> DEC-31-1995 DEC-31-1994 DEC-31-1993
<CASH> 2,995,905 2,830,499 2,292,311
<INT-BEARING-DEPOSITS> 105,993 110,355 554,176
<FED-FUNDS-SOLD> 734,564 672,945 686,743
<TRADING-ASSETS> 23,715 7,940 150,296
<INVESTMENTS-HELD-FOR-SALE> 10,344,988 6,914,444 9,560,037
<INVESTMENTS-CARRYING> 0 2,722,410 1,763,025
<INVESTMENTS-MARKET> 0 2,630,952 1,824,855
<LOANS> 34,465,826 30,700,825 28,601,947
<ALLOWANCE> 705,846 706,452 685,313
<TOTAL-ASSETS> 50,541,845 45,869,368 45,164,279
<DEPOSITS> 35,580,967 34,555,326 33,144,487
<SHORT-TERM> 8,472,078 6,153,644 6,881,136
<LIABILITIES-OTHER> 1,009,972 757,528 625,227
<LONG-TERM> 1,414,982 943,220 717,916
<COMMON> 846,284 852,835 902,777
0 0 0
185,400 187,540 198,310
<OTHER-SE> 3,032,162 2,419,275 2,694,426
<TOTAL-LIABILITIES-AND-EQUITY> 50,541,845 45,869,368 45,164,279
<INTEREST-LOAN> 2,910,070 2,385,782 2,194,874
<INTEREST-INVEST> 648,310 581,763 639,693
<INTEREST-OTHER> 45,651 35,097 33,383
<INTEREST-TOTAL> 3,604,031 3,002,642 2,867,950
<INTEREST-DEPOSIT> 1,249,698 910,737 887,426
<INTEREST-EXPENSE> 1,775,686 1,237,014 1,125,597
<INTEREST-INCOME-NET> 1,828,345 1,765,628 1,742,353
<LOAN-LOSSES> 113,482 109,356 143,089
<SECURITIES-GAINS> 42,365 30,279 41,784
<EXPENSE-OTHER> 1,939,021 1,802,911 1,760,641
<INCOME-PRETAX> 845,145 859,322 791,453
<INCOME-PRE-EXTRAORDINARY> 845,145 598,467 791,453
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 60,000
<NET-INCOME> 591,460 598,467 616,817
<EPS-PRIMARY> 2.68 2.64 2.62
<EPS-DILUTED> 2.64 2.60 2.59
<YIELD-ACTUAL> 4.26 4.50 4.63
<LOANS-NON> 188,027 170,671 258,792
<LOANS-PAST> 64,669 51,312 68,080
<LOANS-TROUBLED> 26 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 706,452 685,313 622,680
<CHARGE-OFFS> 202,547 180,249 213,432
<RECOVERIES> 76,816 82,303 82,220
<ALLOWANCE-CLOSE> 705,846 706,452 685,313
<ALLOWANCE-DOMESTIC> 395,750 403,652 415,913
<ALLOWANCE-FOREIGN> 256 300 300
<ALLOWANCE-UNALLOCATED> 309,840 302,500 269,100
</TABLE>
<PAGE> 1
Exhibit 99.1
Report of Ernst & Young LLP, Independent Auditors
The Stockholders
National City Corporation
Cleveland, Ohio
We have audited the supplemental consolidated balance sheets of National City
Corporation and subsidiaries (formed as a result of the consolidation of
National City Corporation and Integra Financial Corporation) as of December 31,
1995 and 1994, and the related supplemental consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. The supplemental consolidated financial
statements give retroactive effect to the merger of National City Corporation
and Integra Financial Corporation (Integra) on May 3, 1996, which has been
accounted for using the pooling of interests method as described in Note 3.
These supplemental financial statements are the responsibility of National
City's management. Our responsibility is to express an opinion on these
supplemental financial statements based on our audits. We did not audit the
financial statements of Integra, a wholly owned subsidiary as of May 3, 1996,
which statements reflect total assets constituting 28% for 1995 and 30% for 1994
and net income constituting 22% for 1995, 28% for 1994 and 35% for 1993 of the
related supplemental consolidated financial statement totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the data included for Integra, is based solely
on the report of other auditors.
Generally accepted accounting principles proscribe giving effect to consummated
business combinations accounted for by the pooling of interests method in
financial statements that do not include the date of consummation. These
supplemental consolidated financial statements do not extend through the dates
of consummation; however, they will become the historical consolidated
financial statements of National City Corporation and subsidiaries after
financial statements covering the dates of consummation of the business
combination are issued. We have also audited the adjustment to 1995 net income,
as described in Note 3.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National City Corporation and subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 after giving retroactive
effect to the merger of Integra as described in Note 3, in conformity with
generally accepted accounting principles.
As described in Notes 17 and 18 to the supplemental consolidated financial
statements , in 1993, Integra changed its methods of accounting for
postretirement benefits other than pensions and income taxes, respectively.
Ernst & Young LLP
Cleveland, Ohio
January 22, 1996 (except for Note 11, as to which the date is May 1, 1996 and
the pooling of interests with Integra Financial Corporation as of May 3,
1996)
1
<PAGE> 2
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Calendar Year
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Amounts) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans:
Taxable $ 2,884,469 $ 2,359,033 $ 2,168,146
Exempt from Federal income taxes 25,601 26,749 26,728
Securities:
Taxable 603,363 536,369 589,332
Exempt from Federal income taxes 44,947 45,394 50,361
Federal funds sold and security resale agreements 30,228 23,427 13,656
Eurodollar time deposits in banks 104 3,044 9,630
Other short-term investments 15,319 8,626 10,097
- -------------------------------------------------------------------------------------------------------------------
Total interest income 3,604,031 3,002,642 2,867,950
INTEREST EXPENSE
Deposits 1,249,698 910,737 887,426
Federal funds borrowed and security repurchase agreements 174,809 110,405 80,349
Borrowed funds 266,409 151,597 115,012
Corporate long-term debt 84,770 64,275 42,810
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 1,775,686 1,237,014 1,125,597
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 1,828,345 1,765,628 1,742,353
PROVISION FOR LOAN LOSSES 113,482 109,356 143,089
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,714,863 1,656,272 1,599,264
NONINTEREST INCOME
Item processing revenue 327,929 312,358 267,962
Service charges on deposit accounts 193,494 187,415 185,751
Trust fees 167,224 153,431 149,426
Credit card fees 91,084 92,118 98,957
Mortgage banking revenue 89,918 82,770 66,751
Brokerage revenue 29,502 19,748 9,984
Other 127,787 127,842 132,215
- -------------------------------------------------------------------------------------------------------------------
Total fees and other income 1,026,938 975,682 911,046
Security gains 42,365 30,279 41,784
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,069,303 1,005,961 952,830
NONINTEREST EXPENSE
Salaries and employee benefits 883,215 831,679 790,749
Equipment 127,612 122,278 114,955
Net occupancy 126,472 122,213 126,753
Assessments and taxes 105,005 109,955 113,843
Other 696,717 616,786 614,341
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,939,021 1,802,911 1,760,641
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting 845,145 859,322 791,453
changes
Income tax expense 253,685 260,855 234,636
- -------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes 591,460 598,467 556,817
Cumulative effect of accounting changes, net - - 60,000
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 591,460 $ 598,467 $ 616,817
===================================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 576,630 $ 583,267 $ 600,318
===================================================================================================================
NET INCOME PER COMMON SHARE
Before cumulative effect of accounting changes $ 2.68 $ 2.64 $ 2.36
Cumulative effect of accounting changes, net - - .26
- -------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share $ 2.68 $ 2.64 $ 2.62
===================================================================================================================
AVERAGE COMMON SHARES OUTSTANDING 215,097,124 220,822,755 228,794,810
===================================================================================================================
</TABLE>
See notes to supplemental consolidated financial statements.
2
<PAGE> 3
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Loans:
Commercial $ 11,271,410 $10,179,783
International 58,285 52,356
Real estate construction 712,524 574,936
Lease financing 357,883 297,383
Real estate mortgage--nonresidential 3,332,164 3,194,565
Real estate mortgage--residential 7,187,070 6,107,912
Mortgage loans held for sale 314,350 110,058
Consumer 8,148,886 7,161,125
Revolving credit 3,083,254 3,022,707
- -------------------------------------------------------------------------------------------------------------------
Total loans 34,465,826 30,700,825
Allowance for loan losses (705,846) (706,452)
- -------------------------------------------------------------------------------------------------------------------
Net loans 33,759,980 29,994,373
Securities held to maturity (market value $2,630,952 in 1994) - 2,722,410
Securities available for sale, at market 10,344,988 6,914,444
Federal funds sold and security resale agreements 734,564 672,945
Trading account assets 23,715 7,940
Other short-term money market investments 105,993 110,355
Cash and demand balances due from banks 2,995,905 2,830,499
Properties and equipment 593,506 559,489
Customers' acceptance liability 66,169 102,005
Accrued income and other assets 1,917,025 1,954,908
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 50,541,845 $45,869,368
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits (noninterest bearing) $ 6,993,221 $ 6,819,895
Savings and NOW accounts 6,138,779 6,631,867
Insured money market accounts 7,094,998 6,615,226
Time deposits of individuals 14,147,551 12,206,420
Other time deposits 488,595 476,595
Deposits in overseas offices 717,823 1,805,323
- -------------------------------------------------------------------------------------------------------------------
Total deposits 35,580,967 34,555,326
Federal funds borrowed and security repurchase agreements 4,263,873 2,861,786
Borrowed funds 4,208,205 3,291,858
Acceptances outstanding 66,169 102,005
Accrued expenses and other liabilities 943,803 655,523
Corporate long-term debt 1,414,982 943,220
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 46,477,999 42,409,718
===================================================================================================================
Stockholders' Equity:
Preferred stock, without par value, authorized 5,000,000 shares,
outstanding 741,600 and 750,160 shares (3,708,000 and 3,750,800
depositary shares) of 8% Cumulative Convertible Preferred Stock ($250
liquidation preference per share) in 1995 and 1994 185,400 187,540
Common stock, par value $4 per share, authorized 350,000,000 shares,
outstanding 211,571,079 shares in 1995 and 213,208,666 shares in 1994 846,284 852,835
Capital surplus 399,813 291,091
Retained earnings 2,635,090 2,137,202
Unallocated shares held by Employee Stock Ownership Plan (ESOP) trust (2,741) (9,018)
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 4,063,846 3,459,650
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,541,845 $45,869,368
===================================================================================================================
</TABLE>
See notes to supplemental consolidated financial statements.
3
<PAGE> 4
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Calendar Year
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 591,460 $ 598,467 $ 616,817
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of accounting changes, net - - (60,000)
Provision for loan losses 113,482 109,356 143,089
Depreciation and amortization 87,355 82,464 79,118
Amortization of goodwill and intangibles 65,232 57,411 78,583
Amortization of securities discount and premium 18,728 10,734 6,488
Security gains (42,365) (30,279) (41,784)
Other gains, net (23,271) (19,808) (2,740)
Net (increase) decrease in trading account securities (6,671) 142,356 (137,252)
Originations and purchases of mortgage loans held for sale (2,075,968) (2,039,026) (3,700,420)
Proceeds from sales of mortgage loans held for sale 1,878,381 2,668,063 3,496,154
Deferred income taxes 2,672 10,647 42,338
(Increase) in interest receivable (89,851) (49,035) (23,274)
Increase in interest payable 156,582 42,128 13,243
(Increase) in other assets (73,754) (21,406) (232,197)
Increase in other liabilities 109,695 60,356 36,592
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 711,707 1,622,428 314,755
LENDING AND INVESTING ACTIVITIES
Net (increase) decrease in short-term investments (20,553) 382,619 637,821
Purchases of securities (7,269,362) (4,800,590) (8,380,246)
Proceeds from sales of securities 5,589,865 4,165,952 5,258,907
Proceeds from maturities and prepayments of securities 1,932,384 1,767,919 3,381,160
Net (increase) in loans (3,043,087) (2,831,110) (1,970,115)
Proceeds from sales of loans 61,225 - 207,156
Net (increase) in properties and equipment (101,676) (98,220) (117,065)
Acquisitions (16,498) - (43,490)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used) by lending and investing activities (2,867,702) (1,413,430) (1,025,872)
DEPOSIT AND FINANCING ACTIVITIES
Net increase (decrease) in Federal funds borrowed and
security repurchase agreements 1,378,992 (439,267) 1,189,304
Net increase (decrease) in borrowed funds 795,917 (363,059) 840,358
Net increase (decrease) in demand, savings, NOW, insured
money market accounts, and deposits in overseas offices (1,530,940) 76,560 216,601
Net increase (decrease) in time deposits 1,668,121 1,334,279 (1,621,982)
Repayment of long-term debt (949) (15,362) (37,325)
Proceeds from issuance of long-term debt, net 470,630 248,033 297,647
Dividends paid, net of tax benefit of ESOP shares (270,279) (251,290) (236,259)
Issuance of common stock and preferred stock 44,885 30,453 35,395
Repurchase of common and preferred stock (241,253) (373,585) (195,382)
ESOP trust repayment 6,277 7,428 8,816
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by deposit and financing activities 2,321,401 254,190 497,173
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and demand balances due from banks 165,406 463,188 (213,944)
Cash and demand balances due from banks, January 1 2,830,499 2,367,311 2,581,255
- -------------------------------------------------------------------------------------------------------------------
Cash and demand balances due from banks, December 31 $ 2,995,905 $2,830,499 $2,367,311
===================================================================================================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 1,619,204 $1,195,018 $1,108,563
Income taxes paid 238,400 258,187 199,900
Common stock issued in purchase acquisitions 110,739 - 140,568
===================================================================================================================
</TABLE>
See notes to supplemental consolidated financial statements.
4
<PAGE> 5
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Unallocated
(Dollars in Thousands Except Preferred Common Capital Retained Shares Held by
Per Share Amounts) Stock Stock Surplus Earnings ESOP Trust Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1993 $201,159 $448,157 $667,447 $ 1,953,711 $(25,262) $ 3,245,212
Net income 616,817 616,817
Common dividends of National City, $1.06
per share (169,391) (169,391)
Common dividends of Integra, prior to
merger, $1.37 per Integra share (45,882) (45,882)
Preferred dividends, $4.00 per
depositary share (16,000) (16,000)
Issuance of 1,961,665 common shares
under corporate stock and dividend
reinvestment plans 5,697 29,894 35,591
Purchase of 7,011,082 common shares and
33,800 depositary shares of preferred
stock (1,690) (22,615) (29,263) (121,810) (175,378)
Issuance of 5,806,552 common shares
pursuant to acquisitions 20,174 120,394 140,568
Two-for-one stock split 447,929 (447,929) -
Shares distributed by ESOP trust and tax
benefit on dividends 875 8,816 9,691
Accounting change adjustment for
unrealized gains on securities
available for sale, net of tax 180,346 180,346
Other (1,159) 3,435 (22,451) (5,886) (26,061)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1993 198,310 902,777 318,092 2,392,780 (16,446) 3,795,513
Net income 598,467 598,467
Common dividends of National City, $1.18
per share (179,675) (179,675)
Common dividends of Integra, prior to
merger, $1.70 per Integra share (56,865) (56,865)
Preferred dividends, $4.00 per
depositary share (15,415) (15,415)
Issuance of 1,499,589 common shares
under corporate stock and dividend
reinvestment plans 5,998 23,265 29,263
Purchase of 14,030,032 common shares
and 215,400 depositary shares of
preferred stock (10,770) (56,120) (50,618) (256,077) (373,585)
Shares distributed by ESOP trust and tax
benefit on dividends 665 7,428 8,093
Change in unrealized market value
adjustment on securities available
for sale, net of tax (346,599) (346,599)
Other 180 352 (79) 453
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 187,540 852,835 291,091 2,137,202 (9,018) 3,459,650
Net income 591,460 591,460
Common dividends of National City, $1.30
per share (191,907) (191,907)
Common dividends of Integra, prior to
merger, $1.95 per Integra share (64,006) (64,006)
Preferred dividends $4.00 per depositary
share (14,910) (14,910)
Issuance of 2,279,422 common shares
under corporate stock and dividend
reinvestment plans 9,116 37,015 (1,246) 44,885
Purchase of 8,215,284 common shares and
30,000 depositary shares of preferred
stock (1,500) (32,860) (22,479) (184,414) (241,253)
Issuance of 4,267,760 common shares
pursuant to acquisitions 17,071 93,668 110,739
Conversion of 12,800 depositary shares
of preferred stock to 30,515 common
shares (640) 122 518 -
Shares distributed by ESOP trust and tax
benefit on dividends 544 6,277 6,821
Change in unrealized market value
adjustment on securities available
for sale, net of tax 362,367 362,367
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 $185,400 $846,284 $399,813 $ 2,635,090 $ (2,741) $ 4,063,846
==============================================================================================================================
</TABLE>
See notes to supplemental consolidated financial statements.
5
<PAGE> 6
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
National City Corporation ("National City" or "the Corporation") is a multi-bank
holding company headquartered in Cleveland, Ohio. On May 3, 1996, National City
acquired Integra Financial Corporation ("Integra"), a Pittsburgh-based holding
company with assets of approximately $14 billion. The transaction was accounted
for as a pooling-of-interests. The accompanying supplemental consolidated
financial statements give retroactive effect to this merger as though the
combining companies had been consolidated for all periods presented. These
supplemental consolidated financial statements will become the historical
consolidated financial statements of National City after financial statements
covering the date of consummation of the transaction are issued. For additional
information regarding this acquisition, see Note 3.
NATURE OF OPERATIONS--The Corporation's principal banking subsidiaries are
located in Cleveland, Columbus, Indianapolis, Louisville and Pittsburgh. In
addition to general commercial banking, the Corporation or its subsidiaries are
engaged in trust and investment management, mortgage banking, merchant banking,
leasing, item processing, venture capital, insurance, and other financially
related businesses.
CONSOLIDATION--The supplemental consolidated financial statements include the
accounts of the Corporation and all of its subsidiaries.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BUSINESS COMBINATIONS--Business combinations which have been accounted for
under the purchase method of accounting include the results of operations of the
acquired businesses from the date of acquisition. Net assets of the companies
acquired were recorded at their estimated fair value as of the date of
acquisition.
Other business combinations have been accounted for under the
pooling-of-interests method of accounting which requires the assets, liabilities
and shareholders' equity of the acquired entity to be combined with the
Corporation's respective accounts at recorded value. Prior period financial
statements have been restated to give effect to business combinations accounted
for under this method.
AMORTIZATION OF INTANGIBLES--The excess of the purchase price over net
identifiable assets acquired in a purchase business combination (goodwill) is
included in other assets and is amortized over varying remaining lives not
exceeding 24 years. Core deposit intangibles are generally amortized on a
straight-line basis over periods ranging from seven to fifteen years.
CASH FLOWS--Cash and cash equivalents are defined as those amounts included
in the balance sheet caption "Cash and demand balances due from banks."
MORTGAGE LOANS HELD FOR SALE--Mortgage loans held for sale are valued at the
lower of cost or market, as calculated on an aggregate loan basis.
ALLOWANCE FOR LOAN LOSSES--The provision for loan losses and the adequacy of
the allowance for loan losses are based upon a continuing evaluation of the loan
portfolio, current economic conditions, prior loss experience, and other
pertinent factors.
SECURITIES AND TRADING ACCOUNT--Trading account assets are held for resale in
anticipation of short-term market movements and are carried at market value.
Gains and losses, both realized and unrealized, are included in other income.
Debt securities are classified as held to maturity when management has the
intent and ability to hold the securities to maturity. Securities held to
maturity are carried at amortized cost.
Debt securities not classified as held to maturity or trading and marketable
equity securities not classified as trading are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately through retained earnings, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from investments. Realized gains and losses are recorded as net security
gains (losses). The adjusted cost of specific securities sold is used to compute
gains or losses on sales.
Other income also includes gains and losses and adjustments to market on
interest rate futures and forward contracts related to trading account assets
and liabilities.
TIME DEPOSITS--Certificates of deposit and other time deposits in
denominations of $100,000 or more totaled approximately $2,759.0 million and
$1,937.9 million at December 31, 1995 and 1994, respectively.
OFF-BALANCE SHEET FINANCIAL AGREEMENTS--The Corporation utilizes a variety of
off-balance sheet financial instruments to manage various financial risks. These
instruments include interest rate swaps, interest rate caps and floors, futures,
forwards, and option contracts. Interest rate swaps are used to synthetically
alter the price risk or cash flow characteristics of various on-balance sheet
assets and liabilities. The net interest income or expense on interest rate
swaps is accrued and recognized as an adjustment to the interest income or
expense of the associated on-balance sheet asset or liability. The Corporation
purchases interest rate caps and floors to reduce the cash flow risk of various
on-balance sheet variable rate assets and liabilities. The cost or premium paid
for purchased interest rate caps and floors is capitalized and charged to income
based on the economic value at the time of purchase. The unamortized cost of
caps or floors purchased is carried in other assets. Interest payments received
on interest rate caps and floors are recorded as an interest income or expense
adjustment to the related assets and liabilities.
Futures, forwards, and options are also utilized to manage exposures to changes
in interest rates. Futures, forwards, and options that are used for risk
management are carried at cost and realized gains and losses are amortized into
interest income or interest expense over the life of the instrument. Realized
gains and losses on all off-balance sheet transactions used to manage risk that
are terminated prior to maturity are deferred and amortized as a yield
adjustment over the remaining original life of the agreement. Unrealized gains
or losses on interest
6
<PAGE> 7
rate swaps or purchased interest rate caps and floors are deferred. Deferred
gains and losses are recorded in other assets and other liabilities, as
applicable.
Unrealized gains or losses on any interest rate caps or floors sold and foreign
exchange positions are marked to market and included in other income.
PURCHASED MORTGAGE SERVICING RIGHTS--Purchased mortgage servicing rights are
initially recorded at the lower of cost or estimated present value of the future
net servicing income. The capitalized amount is amortized in proportion to, and
over the period of, estimated net positive cash flows. Management evaluates the
recoverability of purchased mortgage servicing rights in relation to the impact
of actual and anticipated loan portfolio prepayment, foreclosure, and
delinquency experience.
DEPRECIABLE ASSETS--Properties and equipment are stated at cost less
accumulated depreciation and amortization. Buildings and equipment are
depreciated on a straight-line basis over their useful lives. Leasehold
improvements are amortized over the lives of the leases. Maintenance and repairs
are charged to expense as incurred, while improvements which extend the useful
life are capitalized and depreciated over the remaining life. Upon the sale or
disposal of property, the cost and accumulated deprecation are removed from the
accounts and the resulting gain or loss is included in current income.
INCOME--Interest and other income are recorded as earned. Loans are
classified as nonaccrual, reduced rate or renegotiated based on management's
judgment and requirements established by bank regulatory agencies. Subsequent
receipts on nonaccrual loans, including those considered impaired under the
provisions of SFAS No. 114, are recorded as a reduction of principal, and
interest income is only recorded once principal recovery is reasonably assured.
Loan origination fees and other direct costs are amortized into interest or
other income using a method which approximates the interest method over the
estimated life of the related loan.
INCOME TAXES--Deferred income taxes reflect the temporary tax consequences in
future years of differences between the tax and financial statement basis of
assets and liabilities.
TREASURY STOCK--Acquisitions of treasury stock are recorded on the par value
method, which requires the cash paid to be allocated to common or preferred
stock, surplus and retained earnings.
RECLASSIFICATION--Certain prior year amounts have been reclassified to
conform with the current year presentation.
2. ACCOUNTING CHANGES
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN--Effective January 1, 1995,
the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118, Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures. These standards address the accounting for certain loans when it is
probable that all amounts due pursuant to the contractual terms of the loan will
not be collected. Impairment is measured based on either the present value of
expected future cash flows using the initial effective interest rate on the
loan, the observable market price of the loan, or the fair value of the
collateral if the loan is collateral dependent. If the recorded investment in
the loan exceeds the measure of fair value, a valuation allowance is established
as a component of the allowance for loan losses. The adoption of these
accounting standards did not have a material impact on the overall allowance for
loan losses and did not affect the Corporation's charge-off or income
recognition policies.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF--In March 1995, the Financial Accounting Standards Board
issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. This standard requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The impairment is measured based on the present value of
expected future cash flows from the use of the asset and its eventual
disposition. If the expected future cash flows are less than the carrying amount
of the asset, an impairment loss is recognized. Management plans to adopt this
standard on January 1, 1996. The adoption is not expected to have a material
impact on financial position or results of operations.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS--In May 1995, the Financial
Accounting Standards Board issued SFAS No. 122, Accounting for Mortgage
Servicing Rights. This standard requires that entities recognize rights to
service mortgage loans for others as separate assets, whether those rights are
acquired through loan origination activities or through purchase activities.
Additionally, the enterprise must periodically assess its capitalized mortgage
servicing rights for impairment based on the fair value of those rights.
Management plans to adopt this standard on January 1, 1996. The adoption is not
expected to have a material impact on financial position or results of
operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION--In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 defines a fair value-based method of accounting for
stock-based employee compensation plans. Under the fair value-based method,
compensation cost is measured at the grant date based upon the value of the
award and is recognized over the service period. The standard encourages all
entities to adopt this method of accounting for all employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
costs for its plans as prescribed in APB Opinion No. 25, Accounting for Stock
Issued to Employees. If an entity elects to continue to use the accounting in
Opinion 25, pro forma disclosures of net income and earnings per share must be
made as if the fair value method of accounting, as defined by SFAS No. 123, had
been applied. At this time, management expects to continue its accounting in
accordance with APB Opinion 25. The disclosure requirements of SFAS No. 123 will
be adopted as required for financial statements beginning in 1996.
3. ACQUISITIONS
As described in Note 1, on May 3, 1996, National City Corporation acquired
Integra Financial Corporation, a $14 billion bank holding company headquartered
in Pittsburgh, Pennsylvania in a transaction accounted for as a
pooling-of-interests. National City issued 66.6 million shares of common stock
to the shareholders of Integra common stock based upon an exchange ratio of two
shares of National City common stock for each outstanding share of Integra
common stock.
7
<PAGE> 8
Separate results of operations for National City and Integra as originally
reported for the three years ended December 31, 1995 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(Dollars In Thousands) 1995 1994 1993
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net interest
income
National City $ 1,321,085 $1,236,809 $1,200,054
Integra 507,260 528,819 542,299
- -----------------------------------------------------------------
COMBINED $ 1,828,345 $1,765,628 $1,742,353
Net income
National City $ 465,109 $ 429,434 $ 403,997
Integra 128,390 169,033 212,820
Conforming accounting
adjustment (2,039) - -
- -----------------------------------------------------------------
COMBINED $ 591,460 $ 598,467 $ 616,817
Net income per common share
National City $ 3.03 $ 2.70 $ 2.41
Integra 3.88 5.01 6.28
- -----------------------------------------------------------------
COMBINED $ 2.68 $ 2.64 $ 2.62
=================================================================
</TABLE>
The 1995 net income for Integra has been adjusted by $2.04 million from amounts
previously reported in order to conform the timing of Integra's adoption of FAS
122, Accounting for Mortgage Servicing Rights, to that of National City's. Other
adjustments related to non-conforming accounting practices were not significant.
On January 15, 1993, Equimark, a bank holding company with total assets of $2.6
billion was merged into Integra. The merger was accounted for as a
pooling-of-interests. Each share of Equimark common stock outstanding was
converted into .20 shares of Integra common stock. In total 7.7 million Integra
common shares were issued in the merger. Each share of Equimark preferred stock
was also exchanged into one share of Integra preferred stock. A total of 1.1
million preferred shares were issued in the merger. These preferred shares were
subsequently redeemed.
On January 5, 1995, Integra acquired Lincoln Savings Bank, a Pennsylvania
chartered publicly- owned savings bank. Integra paid cash of $58.00 for each
outstanding share of Lincoln common stock for a total purchase price of $50.5
million. This transaction was accounted for as a purchase. Goodwill of $32.9
million was recorded and is being amortized over 15 years.
On July 1, 1995, National City acquired United Bancorp of Kentucky, Inc. (UBK),
a $662 million asset bank holding company headquartered in Lexington, Kentucky.
National City paid approximately $75 million for the common and preferred stock
of UBK, consisting of approximately 2.5 million shares of common stock and $10
million in cash. The transaction was accounted for as a purchase. Total goodwill
was approximately $39 million and is being amortized over 20 years.
On July 13, 1995, National City acquired, for cash, the net assets of
Raffensperger, Hughes & Co., Inc. a full-service investment banking/brokerage
firm headquartered in Indianapolis, Indiana in a purchase transaction.
The pro forma effect of the above purchase transactions was not material to the
1995 and 1994 results of operations.
4. LOANS
Total loans outstanding were recorded net of unearned income of $238.6 million
in 1995 and $196.0 million in 1994.
The following table summarizes the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
For the Calendar Year
- ------------------------------------------------------------------
(In Thousands) 1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 706,452 $ 685,313 $ 622,680
Acquired allowance 11,643 9,729 50,756
Provision 113,482 109,356 143,089
Loans charged-off (202,547) (180,249) (213,432)
Recoveries 76,816 82,303 82,220
- ------------------------------------------------------------------
Net charge-offs (125,731) (97,946) (131,212)
- ------------------------------------------------------------------
BALANCE AT END OF YEAR $ 705,846 $ 706,452 $ 685,313
==================================================================
</TABLE>
The allowance for loan losses is maintained at a level believed adequate to
absorb estimated probable credit losses. Both the provision and allowance for
loan losses are based upon an analysis of individual credits, adverse situations
that could affect a borrower's ability to repay (including the timing of future
payments), prior and current loss experience, overall growth in the portfolio,
current economic conditions, and other factors. This evaluation is inherently
subjective and it requires material estimates, including the amounts and timing
of future cash flows expected to be received on impaired loans, that could be
susceptible to change.
At December 31, 1995, loans that were considered to be impaired under SFAS No.
114 totaled $42.8 million, all of which were included in nonperforming assets.
Management does not individually evaluate certain smaller-balance loans for
impairment. These loans are evaluated on an aggregate basis using a
formula-based approach in accordance with the Corporation's policy. The majority
of the loans deemed impaired were evaluated using the fair value of the
collateral as the measurement method. The related allowance allocated to
impaired loans was $20.0 million. The contractual interest due and actual
interest recognized on impaired loans, as well as on total nonperforming assets,
for the twelve months ended December 31, 1995 was $21.3 million and $12.1
million, respectively.
At December 31, 1995, nonaccrual, reduced-rate, and renegotiated loans were
$192.3 million, and other real estate owned was $22.1 million. At December 31,
1994, the corresponding amounts were $177.5 million and $42.6 million,
respectively.
8
<PAGE> 9
5. SECURITIES
The following is a summary of securities held to maturity and available for
sale:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
(In Thousands) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treas. and Fed. agency
debentures $ 2,075,783 $ 28,524 $ (7,576) $ 2,096,731
Mortgage-backed
securities 5,996,309 63,034 (23,723) 6,035,620
Corporate debt securities 816,578 217,289 (9,050) 1,024,817
States and political subdivisions 435,988 22,681 (1,154) 457,515
Other 718,077 15,136 (2,908) 730,305
- -------------------------------------------------------------------------------------------
TOTAL SECURITIES $10,042,735 $346,664 $ (44,411) $10,344,988
===========================================================================================
<CAPTION>
December 31, 1994
- -------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Treas. and Fed. agency
debentures $ 584,139 $ - $ (30,406) $ 553,733
Mortgage-backed securities 1,256,262 749 (68,083) 1,188,928
Corporate debt securities 42,211 36 (515) 41,732
States and political subdivisions 545,952 23,790 (8,860) 560,882
Other 293,846 7 (8,176) 285,677
- -------------------------------------------------------------------------------------------
Total held to maturity 2,722,410 24,582 (116,040) 2,630,952
AVAILABLE FOR SALE:
U.S. Treas. and Fed. agency
debentures 2,119,788 18,980 (98,848) 2,039,920
Mortgage-backed securities 4,012,845 659 (243,826) 3,769,678
Corporate debt securities 693,061 119,399 (45,936) 766,524
States and political subdivisions 32,279 168 (221) 32,226
Other 306,343 2,457 (2,704) 306,096
- -------------------------------------------------------------------------------------------
Total available for sale 7,164,316 141,663 (391,535) 6,914,444
- -------------------------------------------------------------------------------------------
TOTAL SECURITIES $ 9,886,726 $166,245 $(507,575) $ 9,545,396
===========================================================================================
</TABLE>
On November 15, 1995, the FASB staff issued a special report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with provisions in that special report,
management chose to reclassify all securities classified as held to maturity to
available for sale. At December 1, 1995, the date of the transfer, the amortized
cost of those securities was $3.0 billion and the unrealized gain on those
securities was $38.7 million.
At December 31, 1995, the unrealized appreciation in securities available for
sale included in retained earnings totaled $196.5 million, net of tax, compared
to unrealized depreciation of $162.4 million, net of tax, at December 31, 1994.
The securities portfolio consists mainly of financial instruments that pay back
par value upon maturity. Market value fluctuations occur over the lives of the
instruments due to changes in market interest rates. Management has concluded
that current declines in value are temporary and accordingly, no valuation
adjustments have been included as a charge to income.
The following table shows the amortized cost and market value (carrying value)
of securities at December 31, 1995 by maturity:
<TABLE>
<CAPTION>
---------------------------
Available for Sale
Amortized Market
(In Thousands) Cost Value
- ------------------------------------------------------
<S> <C> <C>
Due in 1 year or less $ 250,259 $ 253,517
Due in 1 to 5 years 4,699,081 4,737,293
Due in 5 to 10 years 1,605,222 1,634,587
Due after 10 years 3,488,173 3,719,591
- ------------------------------------------------------
Total $10,042,735 $10,344,988
======================================================
</TABLE>
Mortgage-backed securities and other securities which have prepayment provisions
are assigned to maturity categories based on estimated average lives.
At December 31, 1995, the carrying value of securities pledged to secure public
and trust deposits, trading account liabilities, U.S. Treasury demand notes,
Federal Home Loan Bank advances, and security repurchase agreements totaled
$5.85 billion.
At December 31, 1995, there were no securities of a single issuer, other than
U.S. Treasury and other U.S. government agency securities, which exceeded 10% of
stockholders' equity.
The following table represents the segregation of cash flows between securities
available for sale and securities held to maturity:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Available Held to
(In Thousands) for Sale Maturity Total
- ------------------------------------------------------------------------
<S> <C> <C> <C>
1995
Purchases of securities $6,058,386 $1,210,976 $7,269,362
Proceeds from sales of securities 5,589,865 - 5,589,865
Proceeds from maturities and
prepayments of securities 916,138 1,016,246 1,932,384
1994
Purchases of securities $4,249,260 $ 551,330 $4,800,590
Proceeds from sales of securities 4,165,952 - 4,165,952
Proceeds from maturities and
prepayments of securities 888,000 879,919 1,767,919
========================================================================
</TABLE>
In 1995, 1994, and 1993, gross gains of $71.4 million, $46.9 million, and $50.3
million and gross losses of $29.0 million, $16.3 million, and $8.5 million were
realized, respectively.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value disclosures of financial instruments are made to comply with the
requirements of SFAS No. 107, Disclosures About Fair Value of Financial
Instruments. The market value of securities is primarily based upon quoted
market prices. For substantially all other financial instruments, the fair
values are management's estimates of the values at which the instruments could
be exchanged in a transaction between willing parties. Fair values are based on
estimates using present value and other valuation techniques in instances where
quoted market prices are not available. These techniques are significantly
affected by the assumptions used, including discount rates and estimates of
future cash flows. As such, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, further, may not be
realized in an immediate settlement of the instruments.
9
<PAGE> 10
SFAS No. 107 also excludes certain items from its disclosure requirements. These
items include non-financial assets, intangibles, and future business growth, as
well as certain liabilities such as pension and other post-retirement benefits,
deferred compensation arrangements, and leases. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
Portions of the unrealized gains and losses inherent in the valuation are a
result of management's program to manage overall interest rate risk and
represent a point in time valuation. It is not management's intention to
immediately dispose of a significant portion of its financial instruments, and
thus, the unrealized gains or losses should not be interpreted as a forecast of
future earnings and cash flows.
The following table presents the estimates of fair value of financial
instruments at December 31, 1995 and 1994. Bracketed amounts in the carrying
value columns represent either reduction of asset accounts, liabilities, or
commitments representing potential cash outflows. Bracketed amounts in the fair
value columns represent estimated cash outflows required to settle the
obligations at current market rates.
<TABLE>
<CAPTION>
----------------------------------------------
1995 1994
----------------------------------------------
CARRYING FAIR Carrying Fair
(In Millions) VALUE VALUE Value Value
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 4,378 $ 4,378 $ 4,101 $ 4,101
Loans held for sale 314 314 110 110
Loans receivable 34,151 34,371 30,591 30,435
Allowance for loan losses (706) - (706) -
Securities 10,345 10,346 9,637 9,594
Trading account assets 24 24 8 8
- -------------------------------------------------------------------------
LIABILITIES
Demand deposits $ (6,993) $ (6,993) $ (6,820) $ (6,820)
Savings and time deposits (28,588) (28,814) (27,735) (27,707)
Short-term borrowings (8,472) (8,472) (6,154) (6,154)
Long-term borrowings (1,415) (1,502) (943) (837)
Other liabilities (450) (450) (329) (329)
- -------------------------------------------------------------------------
OFF-BALANCE SHEET INSTRUMENTS
Interest rate swaps $ - $ 94 $ - $ (277)
Interest rate caps, floors
and corridors 29 47 28 33
Commitments to extend
credit (11) (11) (11) (11)
Standby letters of credit (1) (1) (1) (1)
=========================================================================
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS--The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values. For
purposes of this disclosure only, cash equivalents include Federal funds sold,
security resale agreements, Eurodollar time deposits, customers' acceptance
liability, accrued interest receivable, and other short-term money market
investments.
LOANS RECEIVABLE AND LOANS HELD FOR SALE--For performing variable rate loans
that reprice frequently and loans held for sale, estimated fair values are based
on carrying values. The fair values for all other loans are estimated using a
discounted cash flow calculation that applies interest rates used to price new,
similar loans to a schedule of aggregated expected monthly maturities, adjusted
for market and credit risks.
SECURITIES--The market values of securities are based upon quoted market
prices, where available, and on quoted market prices of comparable instruments
when specific quoted prices are not available.
DEPOSIT LIABILITIES--The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings, and certain types of money
market accounts) are, by definition, equal to the amounts payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values for fixed rate certificates
of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
SHORT-TERM BORROWINGS--The carrying amounts of Federal funds purchased,
borrowings under repurchase agreements, commercial paper, and other short-term
borrowings approximate their fair values.
LONG-TERM BORROWINGS--The fair values of long-term borrowings (other than
deposits) are estimated using discounted cash flow analyses based on the
Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
OFF-BALANCE SHEET INSTRUMENTS--The amounts shown under carrying value
represent accruals or deferred income (fees) arising from the related
unrecognized financial instruments. Fair values for off-balance sheet
instruments (futures, swaps, forwards, options, guarantees, and lending
commitments) are based on quoted market prices (futures); current settlement
values (financial forwards); quoted market prices of comparable instruments;
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing
(guarantees, loan commitments); or, if there are no relevant comparables, on
pricing models or formulas using current assumptions (interest rate swaps and
options).
7. CASH AND DEMAND BALANCES DUE FROM BANKS
The Corporation's subsidiary banks are required to maintain noninterest bearing
reserve balances with the Federal Reserve Bank. The consolidated average reserve
balance was $364 million for 1995.
8. PROPERTIES AND EQUIPMENT
A summary of properties and equipment follows:
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------
(In Thousands) 1995 1994
- ----------------------------------------------------------
<S> <C> <C>
Land $ 87,572 $ 82,441
Buildings and leasehold 601,713 557,383
improvements
Equipment 665,472 607,734
- ----------------------------------------------------------
1,354,757 1,247,558
Less accumulated
depreciation and amortization 761,251 688,069
- ----------------------------------------------------------
NET PROPERTIES AND EQUIPMENT $ 593,506 $ 559,489
==========================================================
</TABLE>
10
<PAGE> 11
The Corporation and certain of its subsidiary banks occupy their respective
headquarters offices under long-term operating leases and, in addition, lease
certain data processing equipment. The aggregate minimum annual rental
commitments under these leases is approximately $52.5 million in 1996, $47.2
million in 1997, $43.9 million in 1998, $42.1 million in 1999, $40.2 million in
2000, and $252.7 million thereafter.
Total expense recorded under all operating leases in 1995, 1994, and 1993 was
$73.3 million, $69.2 million, and $71.3 million, respectively.
9. BORROWED FUNDS
The composition of borrowed funds follows:
<TABLE>
<CAPTION>
December 31
(In Thousands) 1995 1994
- ---------------------------------------------------------
<S> <C> <C>
U.S. Treasury demand notes and
Federal funds borrowed-term $ 391,765 $ 230,528
Security repurchase agreements 1,035,693 980,371
Notes payable to Student Loan
Marketing Association 600,000 300,000
Bank notes 654,547 -
Federal Home Loan Bank advances 955,461 1,027,447
Military banking liabilities 109,401 215,951
Other 77,515 55,225
- ---------------------------------------------------------
TOTAL BANK SUBSIDIARIES 3,824,382 2,809,522
Commercial paper 374,017 415,710
Other 9,806 66,626
- ---------------------------------------------------------
TOTAL PARENT COMPANY AND OTHER
SUBSIDIARIES 383,823 482,336
- ---------------------------------------------------------
TOTAL $4,208,205 $3,291,858
=========================================================
</TABLE>
Securities sold under agreements to repurchase, with maturities greater than
thirty days, were comprised of U.S. Treasury and government agency securities.
The majority of these agreements are due within one year.
The $600 million floating rate notes payable to Student Loan Marketing
Association are due $300 million each in June 1996 and 1998, respectively. The
notes are secured by and provide funding for student loan receivables.
Advances from the FHLB are collateralized by qualifying securities and loans.
$709.3 million of the advances are due in 1996 with the remaining advances
maturing in various years through 2014.
Pursuant to the terms of a contract with the U.S. Department of Defense,
National City Bank, Indiana, a principal banking subsidiary of the Corporation,
manages a military banking network which provides retail banking services to
U.S. military personnel and certain related parties. Total assets under
fiduciary management approximated $795 million at year-end. In conjunction with
the contract, certain funds relating to the military banking network are placed
with National City Bank, Indiana and are included in borrowed funds as military
banking liabilities. The contract will expire March 31, 1996.
Credit agreements with unaffiliated banks allow the Corporation to borrow up to
$350 million. The Corporation pays annual facility fees ranging from .1875% to
.125% on the amount of the lines. There were no borrowings outstanding under
these agreements at December 31, 1995.
10. CORPORATE LONG-TERM DEBT
The composition of corporate long-term debt follows:
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------
(In Thousands) 1995 1994
- --------------------------------------------------------------------
<S> <C> <C>
8-3/8% Notes due 1996 $ 100,000 $ 100,000
Less discount (13) (94)
Floating Rate Subordinated Notes due 1997 75,000 75,000
Less discount (20) (39)
Floating Rate Notes due 1997 50,000 50,000
Less discount (38) (59)
9-7/8% Subordinated Notes due 1999 65,000 65,000
Less discount (175) (222)
6.50% Subordinated Notes due 2000 100,000 100,000
Less discount (223) (275)
8.50% Subordinated Notes due 2002 100,000 100,000
Less discount (151) (174)
6-5/8% Subordinated Notes due 2004 250,000 250,000
Less discount (1,058) (1,187)
7.20% Subordinated Notes due 2005 250,000 -
Less discount (273) -
Other 2,561 3,377
- --------------------------------------------------------------------
TOTAL PARENT COMPANY 990,610 741,327
6.50% Subordinated Notes due 2003 200,000 200,000
Less discount (549) (624)
7.25% Subordinated Notes due 2010 225,000 -
Less discount (2,388) -
Other 2,309 2,517
- --------------------------------------------------------------------
TOTAL SUBSIDIARIES 424,372 201,893
- --------------------------------------------------------------------
TOTAL $ 1,414,982 $ 943,220
====================================================================
</TABLE>
In May 1995, the Corporation issued $250 million principal amount of 7.20%
Subordinated Notes due 2005. These notes, the 6-5/8% Subordinated Notes due
2004, the 6.50% Subordinated Notes due 2000 and the 8.50% Subordinated Notes due
2002, all pay interest semiannually, are not redeemable prior to maturity, and
qualify as Tier 2 capital for regulatory purposes.
In July 1995, five subsidiary banks issued a combined $225 million principal
amount of 7.25% Subordinated Notes due 2010. These notes and the 6.50%
Subordinated Notes due 2003 both pay interest semiannually, may not be redeemed
prior to maturity and qualify as Tier 2 capital for regulatory purposes.
The 8-3/8% Notes pay interest semiannually and may not be redeemed prior to
maturity.
The $75 million Floating Rate Subordinated Notes pay interest quarterly at a
rate of 12.5 basis points over the three-month Eurodollar deposit rate, subject
to a floor of 5.25%. The actual borrowing rate at December 31, 1995, was 6.06%.
The interest rate on the $50 million Floating Rate Notes is 12.5 basis points
over the three-month Eurodollar deposit rate (6.06% at December 31, 1995),
adjusted quarterly. Both floating rate note issues may be redeemed at the option
of the Corporation, in whole or in part, at their principal amount.
The 9-7/8% Subordinated Notes pay interest semiannually and may not be redeemed
prior to maturity.
Corporate long-term debt maturities for the next five years are as follows:
$100.2 million in 1996; $125.2 million in 1997; $1.6 million in 1998; $65.3
million in 1999; and $100.3 million in 2000.
11
<PAGE> 12
11. PREFERRED STOCK
At December 31, 1995 and 1994, the Corporation had outstanding 741,600 and
750,160 shares, respectively, of 8% Cumulative Convertible Preferred Stock in
the form of 3,708,000 and 3,750,800 depositary shares, respectively, at a stated
value of $50.00 per depositary share. Each depositary share represents a
one-fifth interest in a preferred share. The preferred stock is convertible at
the option of the holder into 2.384 common shares per depositary share.
Accordingly, 8,839,872 shares of common stock were reserved at December 31, 1995
for conversion of the preferred stock. The preferred stock is redeemable at the
option of the Corporation, in whole or in part, on or after May 1, 1996 and for
each 12-month period thereafter through the year 2000, at redemption prices of
$52.00, $51.60, $51.20, $50.80 and $50.40, respectively, and thereafter, at
$50.00 per depositary share plus, in each case, dividends accrued and unpaid to
the redemption date. Management exercised their option to call the preferred
stock on March 5, 1996. Substantially all the shares were converted to common
stock on May 1, 1996.
12. EMPLOYEE STOCK OWNERSHIP PLAN
As a result of a past merger, National City assumed the obligations and benefits
of an Employee Stock Ownership Plan (ESOP) which was merged into the National
City Savings and Investment Plan (a contributory benefit plan offered to
substantially all employees). The original ESOP was established through the
purchase of stock on the open market. National City provided a loan to the ESOP
Trust for the purpose of acquiring the shares. The shares presently held by the
ESOP (totaling 612,669 shares of National City common stock) will be used to
fulfill the Corporation's future commitment to participants in the Corporation's
benefit plans. During 1995, 890,874 shares were allocated to benefit plan
participants. Company contributions plus dividends earned on the unallocated
shares are used to service the loan and acquire additional shares, which are
allocated to benefit plan participants. Company contributions totaled $6.8
million and $8.5 million in 1995 and 1994, respectively. Dividends earned by the
ESOP in 1995 and 1994 were $1.4 million and $2.2 million, respectively. The tax
benefit for dividends paid on shares held by the ESOP is recorded directly to
retained earnings.
13. NET INCOME PER COMMON SHARE
Net income per common share is based upon net income after preferred dividend
requirements and the weighted average number of common shares outstanding,
adjusted for the dilutive effect of outstanding stock options. Fully diluted
earnings per share is based upon net income and the weighted average number of
shares outstanding, adjusted for the dilutive effect of outstanding stock
options and the assumed conversion of preferred stock.
The calculation of net income per common share follows:
<TABLE>
<CAPTION>
For the Calendar Year
- ------------------------------------------------------------------------------------
(In Thousands Except Per Share Amounts) 1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY
Net income $ 591,460 $ 598,467 $ 616,817
Less preferred dividends 14,830 15,200 16,499
- ------------------------------------------------------------------------------------
Net income applicable to common stock $ 576,630 $ 583,267 $ 600,318
====================================================================================
Average common shares outstanding 215,097,124 220,822,755 228,794,810
====================================================================================
Net income per common share $ 2.68 $ 2.64 $ 2.62
====================================================================================
ASSUMING FULL DILUTION
Net income $ 591,460 $ 598,467 $ 616,284
====================================================================================
Pro forma fully diluted
average common shares outstanding 224,004,487 229,844,700 238,314,506
====================================================================================
Pro forma fully diluted net
income per share $ 2.64 $ 2.60 $ 2.59
====================================================================================
</TABLE>
14. PARENT COMPANY AND REGULATORY RESTRICTIONS
Dividends paid by the Corporation's subsidiary banks are subject to various
legal and regulatory restrictions. In 1995, subsidiary banks declared $329.8
million in dividends to the parent company. The subsidiary banks can initiate
dividend payments in 1996, without prior regulatory approval, of $498.5 million,
plus an additional amount equal to their net profits for 1996, as defined by
statute, up to the date of any such dividend declaration.
Under Section 23A of the Federal Reserve Act, as amended, loans from subsidiary
banks to nonbank affiliates, including the parent company, are required to be
collateralized.
Commercial paper borrowings of a subsidiary ($339.7 million at December 31,
1995) are guaranteed by the parent company.
Condensed parent company financial statements, which include transactions with
subsidiaries, follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------
(In Thousands) 1995 1994
- --------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and demand balances due from banks $ 12,658 $ 11,228
Loans to and accounts receivable
from subsidiaries 587,534 351,576
Securities 252,686 202,588
Investments in:
Subsidiary banks 3,592,561 3,182,175
Nonbank subsidiaries 642,812 436,554
Goodwill, net of accumulated
amortization of $32,217 and
$29,857, respectively 50,473 52,833
Other assets 87,435 117,284
- --------------------------------------------------------------------
TOTAL ASSETS 5,226,159 4,354,238
====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings from bank $ - $ 5,000
subsidiaries
Commercial paper 34,319 36,434
Corporate long-term debt 990,610 741,327
Accrued expenses and other 137,384 111,827
liabilities
- --------------------------------------------------------------------
Total liabilities 1,162,313 894,588
Stockholders' equity 4,063,846 3,459,650
- --------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,226,159 $4,354,238
====================================================================
</TABLE>
12
<PAGE> 13
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Calendar Year
- -----------------------------------------------------------------------------
(In Thousands) 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from:
Subsidiary banks $ 329,751 $ 354,878 $ 796,452
Nonbank subsidiaries 12,676 16,129 23,248
Interest on loans to subsidiaries 11,686 5,250 4,431
Interest and dividends on securities 9,268 7,487 4,402
Security gains 19,764 476 541
Other income 1,046 3,542 8,127
- -----------------------------------------------------------------------------
TOTAL INCOME 384,191 387,762 837,201
- -----------------------------------------------------------------------------
EXPENSE
Interest on debt and other
borrowings 68,578 55,147 40,318
Goodwill amortization 2,360 2,344 2,163
Other expense 118,909 70,915 63,789
- -----------------------------------------------------------------------------
TOTAL EXPENSE 189,847 128,406 106,270
- -----------------------------------------------------------------------------
Income before taxes and equity in
undistributed income of subsidiaries 194,344 259,356 730,931
Income tax (benefit) (79,474) (60,082) (44,382)
- -----------------------------------------------------------------------------
Income before equity in undistributed
net income of subsidiaries 273,818 319,438 775,313
Equity in undistributed (distributed)
net income of subsidiaries 317,642 279,029 (218,496)
Cumulative effect of accounting
changes, net - - 66,234
- -----------------------------------------------------------------------------
Total equity in undistributed
(distributed) net income of
subsidiaries 317,642 279,029 (152,262)
- -----------------------------------------------------------------------------
Income before parent only
cumulative effect of
accounting changes 591,460 598,467 623,051
Parent only cumulative
effect of accounting
change, net - - (6,234)
- -----------------------------------------------------------------------------
NET INCOME $ 591,460 $ 598,467 $ 616,817
=============================================================================
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Calendar Year
- --------------------------------------------------------------------------------
(In Thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 591,460 $ 598,467 $ 616,817
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net
income of subsidiaries (317,642) (279,029) 152,262
Parent only cumulative effect
of accounting change, net - - 6,234
Amortization of goodwill 2,360 2,344 2,163
Depreciation of premises
and equipment 4,339 7,750 6,149
Decrease (increase) in dividends
receivable from subsidiaries (89,500) 55,669 (126,169)
Security gains (19,764) (476) (541)
Other, net (79,879) (109,762) (22,224)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 91,374 274,963 634,691
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in short-term
money market investments (35,613) (26,750) (27,900)
Purchases of securities (144,259) (123,613) (174,877)
Sales and maturities of
securities 93,129 91,261 69,833
Net sales (purchases) of
premises and equipment 19,266 (10,221) (24,314)
Principal collected on
loans to subsidiaries 7,800 50,850 283,107
Loans to subsidiaries (24,975) (25,805) (306,507)
Investment in subsidiaries (72,961) (14,784) (152,042)
Return on investment from
subsidiaries 286,000 168,000 -
- --------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 128,387 108,938 (332,700)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of corporate
long-term debt (556) (13,405) (43,629)
Proceeds from issuance of
long-term debt 249,710 247,080 99,697
Increase (decrease) in
other borrowings (7,115) (26,148) 18,197
Common and preferred
dividends (270,823) (251,955) (237,134)
Redemption of preferred
stock - - (20,004)
Issuance of common stock 44,885 30,453 35,395
Repurchase of stock (241,253) (373,585) (175,378)
Shares distributed by ESOP 6,821 8,093 9,691
- --------------------------------------------------------------------------------
NET CASH (USED) BY
FINANCING ACTIVITIES (218,331) (379,467) (313,165)
- --------------------------------------------------------------------------------
Increase (decrease) in cash
and demand balances due
from banks 1,430 4,434 (11,174)
Cash and demand balances
due from banks, January 1 11,228 6,794 17,968
- --------------------------------------------------------------------------------
Cash and demand balances
due from banks, December 31 $ 12,658 $ 11,228 $ 6,794
================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 65,106 $ 46,700 $ 38,400
Long-term debt assumed in
merger of subsidiaries - - 151,000
Securities transferred to
subsidiaries 89,400 - -
Shares issued in purchase acquisitions and
additional investment in subsidiaries 110,739 - 141,000
================================================================================
</TABLE>
13
<PAGE> 14
15. STOCK OPTIONS AND AWARDS
The Corporation was authorized in 1993 to grant options up to 10,000,000 shares
of common stock under an employee stock option plan. The stock option plans
authorize the issuance of options to purchase common stock to officers and key
employees at the market price of the shares at the date of grant. Options
generally become exercisable to the extent of either 25% or 50% annually
beginning one year from the date of grant.
The Corporation was authorized in 1991 to grant 1,000,000 shares of common stock
under a Restricted Stock Plan. These shares are issued to key employees and
directors. In general, the restrictions on directors' shares granted after 1992
expire after nine months and restrictions on grants to key employees expire over
a four-year period. The Corporation generally recognizes additional compensation
expense over the restricted period.
The Corporation was authorized in 1995 to grant options up to 3,500,000 shares
of common stock to virtually all employees in commemoration of National City's
150th Anniversary. One-third of these options become exercisable in each of the
years 1998, 1999, and 2000.
As of the acquisition date, all former Integra options were assumed by National
City with appropriate conversion of the option price per share and the number of
shares under option. All former Integra plans were terminated with respect to
the granting of any additional options.
A summary of the stock options and award activity follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Shares
----------------------------------
Available
for Grant
----------- Range of
Awards Outstanding Option
and ----------------------- Price
Options Awards Options per Share
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 1, 1993 2,247,782 170,400 8,507,538 $4.08-$47.50
Authorized 10,000,000
Canceled 80,468 (4,008) (76,460)
Exercised (25,992) (1,292,729) 4.08-22.00
Granted (1,988,950) 103,350 1,885,600 20.69-24.88
- -------------------------------------------------------------------
December 31, 1993 10,339,300 243,750 9,023,949 5.00-47.50
Integra shares
authorized 1,300,000
Canceled 109,492 (4,350) (105,142)
Exercised (4,400) (952,028) 5.00-24.88
Granted (2,205,600) 92,800 2,112,800 22.57-26.88
- -------------------------------------------------------------------
December 31, 1994 9,543,192 327,800 10,079,579 5.00-47.50
Authorized 3,500,000
Canceled 95,577 (8,950) (793,767)
Acquired 88,418 6.94-23.61
Exercised (139,250) (1,822,509) 5.32-26.50
Granted (5,849,640) 111,090 5,738,550 18.82-33.63
- -------------------------------------------------------------------
DECEMBER 31, 1995 7,289,129 290,690 13,290,271 $5.00-$47.50
===================================================================
</TABLE>
At December 31, 1995 and 1994, options issued under National City option plans
totaling 6,160,826 and 5,669,645 shares, respectively, were exercisable at a
price range of $6.94 to $29.88 and $7.55 and $24.88, per share, respectively.
All options outstanding under the Integra option plan became exercisable as of
the acquisition date. Options outstanding under this plan totaled 1,891,136
shares at December 31, 1995.
16. PENSION PLANS
National City has a noncontributory, defined benefit retirement plan covering
substantially all employees. Retirement benefits are based upon the employees'
length of service and salary levels. Actuarially determined pension costs are
charged to current operations. The funding policy is to pay at least the minimum
amount required by the Employee Retirement Income Security Act of 1974.
The defined benefit pension plan's funded status (at its year-end September 30)
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(In Thousands) 1995 1994
- ---------------------------------------------------------
<S> <C> <C>
Projected benefit obligation:
Vested benefits $ 414,937 $ 336,733
Nonvested benefits 15,342 12,331
- ---------------------------------------------------------
Accumulated benefit obligation 430,279 349,064
Effect of projected future 99,229 81,652
compensation levels
- ---------------------------------------------------------
Projected benefit obligation 529,508 430,716
Plan's assets at fair value,
primarily stocks and bonds,
including $16.7 million and
$15.2 million in the common
stock of the Corporation for
1995 and 1994, respectively 496,400 423,033
- ---------------------------------------------------------
Funded status--plan assets (less
than) projected benefit
obligation (33,108) (7,683)
=========================================================
Comprised of:
Unrecognized net (losses) (35,482) (9,468)
Unrecognized net assets being
recognized over 15 years 24,477 28,167
- ---------------------------------------------------------
Less accrued pension
liability on balance sheet 22,103 26,382
- ---------------------------------------------------------
$ (33,108) $ (7,683)
=========================================================
</TABLE>
Assumptions used in the valuation of the defined benefit pension plan at its
year end (September 30) follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Weighted average
discount rate 7.50% 8.25%-8.50% 7.25%-7.50%
Assigned average rate
of compensation
increase 4.75-5.00 4.75-5.50 4.75-5.00
Long-term rate of
return on assets 10.00 9.50 9.50-10.00
==============================================================
</TABLE>
Net defined benefit pension plan costs include the following components:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
For the Calendar Year
- ----------------------------------------------------------------------
(In Thousands) 1995 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned
during year $ 19,871 $ 22,775 $ 19,409
Interest cost on projected benefit
obligation 36,324 33,619 29,813
Actual return on plan assets (74,411) (7,889) (35,400)
Net amortization and deferral 29,732 (37,140) (5,504)
- ----------------------------------------------------------------------
Net periodic pension cost $ 11,516 $ 11,365 $ 8,318
======================================================================
</TABLE>
14
<PAGE> 15
The Corporation also maintains nonqualified supplemental retirement plans for
certain key employees. All benefits provided under these plans are unfunded and
any payments to plan participants are made by the Corporation. As of December
31, 1995 and 1994, approximately $18.2 million and $15.7 million were included
in accrued expenses and other liabilities for these plans. For the years ended
December 31, 1995, 1994, and 1993, expense related to these plans was $5.6
million, $5.4 million, and $4.2 million, respectively.
Substantially all employees with one or more years of service are eligible to
contribute a portion of their pre-tax salary to a defined contribution plan. The
Corporation may make contributions to the plan in varying amounts depending on
the level of employee contributions. For the years ended 1995, 1994, and 1993,
the expense related to this plan was $17.8 million, $18.5 million, and $18.2
million, respectively.
17. OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation has a benefit plan which offers postretirement medical and life
insurance benefits to all employees who have attained the age of 55 and have at
least 10 years of service (five years of service if age 65 or older). The
medical portion is contributory and the life insurance coverage is
noncontributory to the participants. For any employee who retired on or after
April 1, 1989, the Corporation's medical contribution is fixed, based on years
of service and age at retirement. The accounting for the medical portion
anticipates contributions for retirees prior to April 1, 1989, to continue to
increase as a proportion of the total costs of the plan. The Corporation
reserves the right to terminate or make plan changes at any time.
The Corporation has no plan assets attributable to the plan and funds the
benefits as the claims are paid. Postretirement benefit costs are recognized
during the periods in which employees provide service for such benefits. The
following table presents the Plan's status at December 31, reconciled with
amounts recognized in the consolidated balance sheet:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(In Thousands) 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 32,739 $ 29,406
Fully eligible active plan participants 8,463 6,938
Other active plan participants 13,593 10,153
- ---------------------------------------------------------------------
Accumulated postretirement benefit obligation 54,795 46,497
Unrecognized net gain (loss) (6,846) 1,018
Unrecognized transition obligation (29,133) (31,057)
- ---------------------------------------------------------------------
Accrued postretirement benefit cost $ 18,816 $ 16,458
=====================================================================
</TABLE>
Net periodic postretirement benefit costs include the following components:
<TABLE>
<CAPTION>
For the Calendar Year
- -------------------------------------------------------------------
(In Thousands) 1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 983 $1,194 $1,067
Interest cost 3,906 3,933 3,622
Net amortization and deferral 1,822 2,172 1,981
- -------------------------------------------------------------------
Net periodic postretirement benefit cost $6,711 $7,299 $6,670
===================================================================
</TABLE>
Assumptions used in the valuation of the accumulated postretirement benefit
obligation at December 31 follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7.75% 8.50% 7.50%
Average salary scale 5.00 5.50 5.00
=====================================================================
</TABLE>
The health care trend rate assumption only affects those participants retired
under the plan prior year April 1, 1989. The 1996 health care trend rate is
projected to be 11.5 percent for participants under 65 and 9.0 percent for
participants over 65. These rates are assumed to decrease incrementally by .5
percentage point per year until they reach 6 percent and remain at that level
thereafter. The health care trend rate assumption does not have a significant
effect on the medical plan, therefore, a 1 percentage point change in the trend
rate is not material in the determination of the accumulated postretirement
benefit obligation or the ongoing expense.
The tables above do not include the accrued postretirement benefit cost and
related net periodic cost of the former Integra plan. Under this plan, medical
and insurance benefits have been maintained for those participants eligible at
the date of the plan's adoption but participation was restricted thereafter. The
entire accumulated postretirement benefit obligation of $5.2 million, after-tax,
was recorded upon the adoption of FASB Statement 106, Employers' Accounting for
Postretirement Benefits. The accrued postretirement benefit cost totaled $7.1
million as of December 31, 1995 and 1994. The net periodic postretirement
benefit cost for the three year period ended December 31, 1995 was minimal and
consisted primarily of the interest cost on the accumulated benefit obligation.
18. INCOME TAXES
The composition of income tax expense (benefit) follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
For the Calendar Year
- -------------------------------------------------------------
(In Thousands) 1995 1994 1993
- -------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $234,809 $237,452 $ 182,494
State 16,204 12,756 9,804
- -------------------------------------------------------------
Total current 251,013 250,208 192,298
Deferred:
Federal 1,733 8,886 43,915
State 939 1,761 (1,577)
- -------------------------------------------------------------
Total deferred 2,672 10,647 42,338
- -------------------------------------------------------------
Tax expense $253,685 $260,855 $ 234,636
=============================================================
Tax expense applicable
to security transactions $ 13,501 $ 10,248 $ 14,173
=============================================================
</TABLE>
The effective tax rate differs from the statutory rate applicable to
corporations as a result of permanent differences between accounting and taxable
income as shown below:
<TABLE>
<CAPTION>
For the Calendar Year
- ---------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Life insurance (3.0) (2.2) (1.9)
Tax-exempt income (2.3) (2.6) (3.3)
Other .3 .2 (.2)
- ---------------------------------------------------------
EFFECTIVE TAX RATE 30.0% 30.4% 29.6%
=========================================================
</TABLE>
15
<PAGE> 16
Significant components of deferred tax liabilities and assets as of December 31
are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(In Thousands) 1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Lease accounting $ 79,937 $ 84,466
Depreciation 24,444 24,151
Other--net 76,974 59,505
- -----------------------------------------------------------
Total deferred tax liabilities 181,355 168,122
Deferred tax assets (liabilities):
Provision for losses 246,637 249,123
Mark to market adjustments (116,206) 89,286
Pension 11,384 13,249
Other--net 112,071 79,058
- -----------------------------------------------------------
Total deferred tax assets 253,886 430,716
- -----------------------------------------------------------
Net deferred tax assets $ 72,531 $262,594
===========================================================
</TABLE>
On January 1, 1993, Integra adopted FAS 109, Accounting for Income Taxes. The
adoption increased 1993 earnings by $65.2 million, net of tax, and was reported
as part of the cumulative effect of accounting changes. National City adopted
FAS 109 in 1992. The cumulative effect of adopting FAS 109 was not material to
National City's 1992 results of operations. For practical purposes, a
calculation was not done to determine the amount of the cumulative effect of a
change in accounting principal if Integra would have adopted FAS 109 on January
1, 1992. Thus, the supplemental consolidated financial statements include the
effect of the adoption as originally reported by Integra.
19. OTHER NONINTEREST EXPENSE
The composition of other noninterest expense is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
(In Thousands) 1995 1994 1993
- ----------------------------------------------------------------
<S> <C> <C> <C>
Third party services $147,595 $116,834 $115,564
Processing assessments 115,184 98,663 87,771
Postage and supplies 89,905 84,597 85,343
Amortization of intangibles 64,222 55,393 74,326
Marketing and public
relations 60,668 48,365 41,135
Transportation 31,293 30,247 28,940
Telephone 36,877 33,599 30,928
Other real estate owned expense 6,075 13,630 30,829
Other 144,898 135,458 119,505
- ----------------------------------------------------------------
Total $696,717 $616,786 $614,341
================================================================
</TABLE>
20. OFF-BALANCE SHEET FINANCIAL AGREEMENTS
The Corporation uses a variety of off-balance sheet financial instruments such
as interest rate swaps, futures, options, forwards, and cap and floor contracts.
These financial instruments, frequently called interest rate derivatives, enable
management to efficiently manage its exposure to changes in interest rates. The
Corporation also enters into derivative contracts on behalf of customers,
however, such activity is not significant.
As with any financial instrument, derivatives have inherent risks. Market risk
represents the risk of gains and losses that result from changes in interest
rates. These gains and losses may be offset by other on- or off-balance sheet
transactions. Credit risk is the risk that a counterparty to a derivative
contract with an unrealized gain fails to perform according to the terms of the
agreement. Credit risk can be measured as the cost of acquiring a new derivative
agreement with cash flows identical to those of a defaulted agreement in the
current interest rate environment. The credit exposure to counterparties is
managed by limiting the aggregate amount of net unrealized gains in agreements
outstanding, monitoring the size and the maturity structure of the derivative
portfolio, applying uniform credit standards maintained for all activities with
credit risk and by collateralizing unrealized gains. The Corporation has
established bilateral collateral agreements with its major off-balance sheet
counterparties that provide for exchanges of marketable securities to
collateralize either party's unrealized gains. On December 31, 1995, these
collateral agreements covered 95% of the notional amount of the derivative
portfolio and the Corporation was holding U.S. government and agency securities
with a market value of $111 million from various counterparties to collateralize
unrealized gains. The Corporation has never experienced, nor does it have any
reason to expect, a credit loss associated with any interest rate derivative.
On December 31, 1995, the total notional amount of the interest rate swap
portfolio used to manage interest rate sensitivity was $7.3 billion, which is a
decrease of $45 million from December 31, 1994. Management uses both receive
fixed interest rate swaps to convert variable rate loans and securities into
synthetic fixed rate instruments and to convert fixed rate funding sources into
synthetic variable rate funding instruments. Management increased its use of
receive fixed interest rate swaps during the year primarily to facilitate its
funding activities. During 1995, the Corporation entered into $1.3 billion of
receive fixed interest rate swaps in association with the issuance of fixed rate
term funding products. As of December 31, 1995, these swaps had a weighted
maturity of 5.5 years. During 1995, the Corporation entered into $1.4 billion of
receive fixed indexed amortizing interest rate swaps. These swaps were used
primarily to convert portions of variable rate loan portfolios into synthetic
fixed rate loans. During 1995, $685 million of receive fixed interest rate swaps
matured and $2.1 billion of receive fixed indexed amortizing interest rate swaps
matured or amortized.
Management uses pay fixed interest rate swaps to convert fixed rate loans and
securities into synthetic variable rate instruments and to convert variable rate
funding sources into synthetic fixed rate funding instruments. During 1995, the
Corporation entered into $419 million of pay fixed interest rate swaps, with a
weighted initial expected maturity of 2.0 years. During 1995, $282 million of
pay fixed interest rate swaps matured and $342 million were terminated prior to
maturity. These terminations generated pre-tax net losses of $2.1 million,
recognized as an adjustment to carrying value of the securities portfolio.
Management uses interest rate floors to help protect interest margin in periods
of low interest rates and a flattening yield curve. During 1995, the Corporation
purchased $435 million three-month Eurodollar floors. On December 31, 1995,
these floors had an average maturity of 2.9 years with average strike rates of
5.5%. The total three-month Eurodollar floor portfolio on December 31, 1995 was
$1.4 billion in notional amount with an average maturity of 3.9 years and $21.7
million of net unrealized gains.
16
<PAGE> 17
The Corporation has purchased $3.3 billion of interest rate corridors to help
protect its net interest margin in various interest rate environments. These
interest rate corridors pay 1.0% of the notional amount per annum over their
lives when the three-month Eurodollar rate is between the corridor strike rates.
There are no payments due to the Corporation when three-month Eurodollar rates
are outside of the corridor strike rates. As of December 31, 1995, these
interest rate corridors had an average maturity of 1.2 years and $5.8 million in
net unrealized losses.
During 1995, the Corporation entered into interest rate derivative contracts to
hedge the market value of a portion of its purchased mortgage servicing rights.
The Corporation purchased $700 million of interest rate floors with payoffs
based on ten-year U.S. Treasury note yields. As of December 31, 1995, these
floors had an average strike rate of 5.5% and an average maturity of 3.4 years.
The Corporation also entered into $315 million of receive fixed interest rate
swaps. As of December 31, 1995, these swaps had an average fixed rate of 6.2%
and average maturity of 4.5 years. On December 31, 1995, the interest rate
derivative contracts had unrealized gains of $9.2 million.
As of December 31, 1995, there were $9.1 million of net deferred gains on
terminated derivative contracts and there were no derivative contracts
outstanding that were hedging anticipated transactions.
Summary information with respect to the interest rate derivative portfolio used
for risk management purposes follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------------------------------------
WEIGHTED AVERAGE
------------------------------------------
December 31, 1994
NOTIONAL UNREALIZED UNREALIZED RECEIVE PAY STRIKE LIFE -----------------
(In Thousands) AMOUNT GAINS LOSSES RATE RATE RATE (YEARS) Notional Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS
Receive fixed indexed
amortizing swaps $ 2,769,970 $ 9,231 $(6,085) 5.92% 5.88% N/A 1.0 $3,860,798
Receive fixed callable
swaps 105,000 3,514 - 7.31 6.04 N/A 4.7 -
Receive fixed swaps 2,771,370 99,423 (2,002) 6.71 5.80 N/A 4.0 1,675,000
Pay fixed swaps 582,000 - (9,444) 5.89 7.05 N/A 1.1 787,200
Basis swaps 1,050,000 518 (602) 5.41 5.82 N/A .5 1,000,000
- -------------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps 7,278,340 112,686 (18,133) 7,322,998
INTEREST RATE CAPS AND FLOORS
Three-month Eurodollar
floors purchased 1,435,000 23,700 (2,013) N/A N/A 5.60% 3.9 1,000,000
Five-year U.S. Treasury
floors purchased 50,000 88 - N/A N/A 6.00 1.0 50,000
Ten-year U.S. Treasury
floors purchased 906,820 2,932 (152) N/A N/A 5.56 3.3 231,253
Three-month LIBOR caps 300,000 - - N/A N/A 7.00 .9 1,000,000
One-month Eurodollar caps 95,000 - - N/A N/A 12.00 1.3 171,000
- -------------------------------------------------------------------------------------------------------------------------------
Total interest rate caps
and floors 2,786,820 26,720 (2,165) 2,452,253
INTEREST RATE CORRIDORS PURCHASED
1% Payout corridors 200,000 266 - N/A N/A 4.50% to 5.50% 1.5 -
1% Payout corridors 250,000 - (623) N/A N/A 6.00 to 7.50 2.5 -
1% Payout corridors 2,000,000 - (3,883) N/A N/A 6.13 to 7.50 .6 2,000,000
1% Payout corridors 500,000 - (657) N/A N/A 6.50 to 7.50 2.7 -
1% Payout corridors 300,000 - (877) N/A N/A 8.50 to 9.75 1.2 300,000
- -------------------------------------------------------------------------------------------------------------------------------
Total interest rate
corridors 3,250,000 266 (6,040) 2,300,000
- -------------------------------------------------------------------------------------------------------------------------------
Total interest rate
swaps, caps, floors
and corridors $13,315,160 $139,672 $(26,338) $12,075,251
===============================================================================================================================
</TABLE>
The variable rates in the interest rate swap contracts are primarily based on
the three-month Eurodollar rate. The average variable rates included in the
table above are those in effect in the specific contracts at December 31, 1995.
17
<PAGE> 18
The following table details the expected notional maturities of off-balance
sheet instruments at December 31, 1995:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Greater
Less than 1 to 3 3 to 5 5 to 10 than 10
(In Thousands) 1 Year Years Years Years Years
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Receive fixed indexed amortizing swaps $2,290,970 $479,000 $ - $ - $ -
Receive fixed callable swaps - - 105,000 - -
Receive fixed swaps 475,000 986,370 665,000 420,000 225,000
Pay fixed swaps 32,000 550,000 - - -
Basis swaps 1,000,000 - 50,000 - -
Three-month Eurodollar floors purchased 200,000 435,000 300,000 500,000 -
Five-year U.S. Treasury floors purchased 50,000 - - - -
Ten-year U.S. Treasury floors purchased - 225,000 681,820 - -
One-month Eurodollar caps sold - 95,000 - - -
Three-month LIBOR caps 200,000 100,000 - - -
Interest rate corridors purchased 2,000,000 1,250,000 - - -
- ---------------------------------------------------------------------------------------------------------
TOTAL $6,247,970 $4,120,370 $1,801,820 $920,000 $225,000
=========================================================================================================
</TABLE>
Indexed amortizing interest rate swaps are contracts where the notional amount
amortizes after a predetermined lock-out period. The rate of amortization is
determined by formula and is based upon movements of short-term interest rates,
usually three-month Eurodollar rates. The indexed amortizing interest rate swap
portfolio contains no imbedded options that have multiplicative impacts
affecting valuations or expected notional maturities.
All contracts in the preceding tables are valued using cash flow projection
models either acquired from third parties or developed in-house. Pricing models
used for valuing derivative instruments are regularly validated by testing
through comparison with other third parties. Valuations and notional maturities
presented above are based on yield curves, forward yield curves, and implied
volatilities that were observable in the cash and derivatives markets on
December 31, 1995.
The Corporation also enters into forward contracts related to its mortgage
banking business. At December 31, 1995 and 1994, the Corporation had commitments
to sell mortgages and mortgage-backed securities totaling $472.7 million and
$80.9 million, respectively. These contracts mature in less than one year.
In the normal course of business, the Corporation makes various commitments to
extend credit which are not reflected in the balance sheet. A summary of these
commitments follows:
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------
(In Millions) 1995 1994
- --------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $9,473 $9,207
Standby letters of credit 2,124 1,011
========================================================
</TABLE>
The credit risk associated with loan commitments and standby letters of credit
is essentially the same as that involved in extending loans to customers and is
subject to normal credit policies. Collateral is obtained based on management's
credit assessment of the customer.
21. LITIGATION
National City and its subsidiaries are parties (either as plaintiff or
defendant) to a number of lawsuits incidental to their businesses and, in
certain lawsuits, claims or counterclaims have been asserted. Although
litigation is subject to many uncertainties and the ultimate exposure with
respect to many of these matters cannot be ascertained, management does not
believe the ultimate outcome of these matters will have a material adverse
effect on the financial condition or results of operations of the Corporation.
18
<PAGE> 1
Exhibit 99.2
To The Board of Directors and Shareholders
of Integra Financial Corporation
We have audited the accompanying consolidated balance sheet of Integra
Financial Corporation and subsidiaries (the Corporation) as of December 31,
1995 and 1994, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 1995 (not presented separately herein). These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all materials respects, the consolidated financial position of
Integra Financial Corporation and subsidiaries as of December 31, 1995 and
1994, and the consolidated results of their operations and their cash flows for
each of the years in the three year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Notes 1, 6 and 8 to the consolidated financial statements, in
1995 the Corporation changed its method of accounting for loan impairment by
adopting Financial Accounting Standards Board (FASB) Statement 114 Accounting
by Creditors for Impairment of a Loan and Statement 118 Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures and its
accounting for mortgage servicing rights by adopting FASB Statement 122
Accounting for Mortgage Servicing Rights. Also, as discussed in Notes 1, 11
and 12 to the consolidated financial statements, in 1993 the Corporation
changed its method of computing income taxes by adopting FASB Statement 109
Accounting for Income Taxes and its accounting for non-pension benefit plans by
adopting FASB Statement 106 Employers' Accounting for Postretirement Benefits
Other Than Pensions as well as its accounting for investments by adopting FASB
Statement 115 Accounting for Certain Investments in Debt and Equity Securities.
COOPERS & LYBRAND LLP
Pittsburgh Pennsylvania
January 17, 1996
