<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file number 1-10074
NATIONAL CITY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
34-1111088
(I.R.S. Employer
Identification No.)
1900 EAST NINTH STREET
CLEVELAND, OHIO 44114
(Address of principal executive office)
216-575-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock as of the latest practicable date.
Common stock - $4.00 Par Value
Outstanding as of September 30, 1999 - 616,564,714
<PAGE> 2
[NATIONAL CITY CORPORATION LOGO]
QUARTER ENDED SEPTEMBER 30, 1999
FINANCIAL REPORT
AND FORM 10-Q
<PAGE> 3
FINANCIAL REPORT AND FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION
Financial Highlights........................................ 3
Item 1. Financial Statements:
Consolidated Statements of Income....................... 4
Consolidated Balance Sheets............................. 5
Consolidated Statements of Cash Flows................... 6
Consolidated Statements of Changes in Stockholders'
Equity................................................. 7
Notes to Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis................ 15
Consolidated Average Balance Sheets......................... 21
Daily Average Balances/Net Interest Income/Rates............ 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Market risk disclosures are presented in the Net Interest
Income section of Management's Discussion and Analysis.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings (None)
Item 2. Changes in Securities and Use of Proceeds (None)
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders
(None)
Item 5. Other Information (None)
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 12 -- Computation of Ratio of Earnings to Fixed
Charges
Exhibit 27 -- Financial Data Schedule
Reports on Form 8-K:
July 15, 1999 -- National City Corporation reported
earnings for the second quarter and first six months of
fiscal year 1999.
Signature................................................... 25
</TABLE>
2
<PAGE> 4
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- Percent ------------------------- Percent
1999 1998 Change 1999 1998 Change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS (IN THOUSANDS):
- ---------------------------
Net interest income --
tax-equivalent...................... $757,753 $745,850 2% $2,280,638 $2,194,041 4%
Provision for loan losses............. 55,476 45,212 23 183,052 144,512 27
Fees and other income(1).............. 528,614 555,517 (5) 1,620,300 1,603,417 1
Securities gains(1)................... 20,353 64,451 (68) 69,212 85,217 (19)
Noninterest expense(1)................ 705,963 782,400 (10) 2,164,634 2,230,881 (3)
Net income before nonrecurring
items(3)............................ 356,462 344,456 3 1,059,275 973,307 9
Nonrecurring items(2)
Pre-tax............................. -- -- -- 37,123 (274,698) --
After-tax........................... -- -- -- 2,694 (193,885) --
Net income............................ 356,462 344,456 3 1,061,969 779,422 36
PERFORMANCE RATIOS:
- -------------------------
Net interest margin................... 4.03% 4.10% 4.03% 4.15%
Return on average assets(3)........... 1.71 1.69 1.69 1.65
Return on average common equity(3).... 23.79 19.00 22.52 19.08
Return on average total equity(3)..... 23.70 18.93 22.44 19.04
PER SHARE MEASURES:
- -------------------------
Net income per common share:
Basic............................... $.58 $.53 9 $1.69 $1.20 41
Diluted............................. .57 .52 10 1.67 1.18 42
Diluted-adjusted(3)................. .57 .52 10 1.66 1.47 13
Dividends paid per common share....... .27 .24 13 .79 .70 13
Book value per common share........... 9.54 10.95 (13)
Market value per common share
(close)............................. 26.69 32.97 (19)
Average shares -- diluted............. 624,581,200 672,697,322 (7) 636,413,367 663,234,898 (4)
AVERAGE BALANCES (IN MILLIONS):
- ------------------------------------
Assets................................ $82,691 $81,062 2 $83,850 $78,648 7
Loans................................. 57,142 55,103 4 57,243 53,895 6
Securities............................ 14,851 13,614 9 14,870 13,708 8
Earning assets........................ 74,971 72,529 3 75,567 70,475 7
Deposits.............................. 51,633 54,610 (5) 52,867 53,613 (1)
Common stockholders' equity........... 5,938 7,183 (17) 6,280 6,809 (8)
Stockholders' equity.................. 5,969 7,220 (17) 6,312 6,833 (8)
AT PERIOD END:
- -----------------
Equity to assets ratio................ 6.95% 8.75%
Tier 1 capital ratio.................. 6.78 8.81
Total risk-based capital ratio........ 11.48 12.70
Leverage ratio........................ 6.07 7.49
Common shares outstanding............. 616,564,714 660,672,556 (7)
Full-time equivalent employees........ 37,267 42,005 (11)
ASSET QUALITY:
- -----------------
Net charge-offs to average loans
(annualized)........................ .38% .33% .43% .35%
Loan loss reserve to loans
(period-end)........................ 1.67 1.74
Nonperforming assets to loans and
OREO................................ .45 .45
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes pre-tax effects of items designated as nonrecurring.
(2) Items designated as nonrecurring for 1999 include the gain on the exchange
of shares of Electronic Payment Services, Inc. for shares of Concord EFS,
Inc. and the gain on the subsequent sale of the Concord EFS, Inc. shares,
the gain on the sale of Stored Value Systems, Inc., the net loss on the
sale of certain National Processing, Inc. business lines, charges pursuant
to a plan to improve the cost-efficiency of branch office facilities and
costs associated with executive contract obligations. Nonrecurring items
for 1998 are solely comprised of merger-related expenses. Nonrecurring
items are discussed in further detail in Note 4 to the consolidated
financial statements.
(3) Excludes after-tax effects of items designated as nonrecurring.
3
<PAGE> 5
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
(In Thousands, Except Per Share Amounts) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans................................... $1,224,469 $1,229,009 $3,642,298 $3,579,665
Securities:
Taxable.............................. 217,175 207,384 649,534 621,024
Exempt from Federal income taxes..... 11,245 13,145 34,909 39,307
Federal funds sold and security resale
agreements........................... 8,656 16,642 29,572 30,941
Other short-term investments............ 3,189 4,302 9,176 13,481
---------- ---------- ---------- ----------
Total interest income.............. 1,464,734 1,470,482 4,365,489 4,284,418
INTEREST EXPENSE
Deposits................................ 397,516 475,951 1,209,684 1,394,476
Federal funds borrowed and security
repurchase agreements................ 87,901 96,416 266,947 251,280
Borrowed funds.......................... 37,632 38,078 103,073 137,918
Long-term debt and capital securities... 194,206 123,672 533,227 336,281
---------- ---------- ---------- ----------
Total interest expense............. 717,255 734,117 2,112,931 2,119,955
---------- ---------- ---------- ----------
NET INTEREST INCOME....................... 747,479 736,365 2,252,558 2,164,463
PROVISION FOR LOAN LOSSES................. 55,476 45,212 183,052 144,512
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses................. 692,003 691,153 2,069,506 2,019,951
NONINTEREST INCOME
Item processing revenue................. 91,519 124,268 318,311 354,494
Service charges on deposit accounts..... 107,430 98,472 312,127 286,289
Trust and investment management fees.... 81,097 74,565 243,627 231,248
Card-related fees....................... 48,383 56,415 142,952 152,689
Mortgage banking revenue................ 81,105 79,362 263,281 237,835
Other................................... 119,080 122,435 382,838 340,862
---------- ---------- ---------- ----------
Total fees and other income........ 528,614 555,517 1,663,136 1,603,417
Securities gains........................ 20,353 64,451 101,265 85,217
---------- ---------- ---------- ----------
Total noninterest income........... 548,967 619,968 1,764,401 1,688,634
NONINTEREST EXPENSE
Salaries, benefits and other
personnel............................ 367,638 409,279 1,157,987 1,189,707
Equipment............................... 47,590 51,054 153,306 154,253
Net occupancy........................... 48,944 51,737 152,305 150,145
Third party services.................... 49,304 70,075 143,425 171,029
Merger expenses......................... -- -- -- 274,698
Other................................... 192,487 200,255 595,377 565,747
---------- ---------- ---------- ----------
Total noninterest expense.......... 705,963 782,400 2,202,400 2,505,579
---------- ---------- ---------- ----------
Income before income taxes................ 535,007 528,721 1,631,507 1,203,006
Income tax expense........................ 178,545 184,265 569,538 423,584
---------- ---------- ---------- ----------
NET INCOME................................ $ 356,462 $ 344,456 $1,061,969 $ 779,422
========== ========== ========== ==========
NET INCOME APPLICABLE TO COMMON STOCK..... $ 356,005 $ 343,910 $1,060,687 $ 777,777
========== ========== ========== ==========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
NET INCOME PER COMMON SHARE
Basic................................... $.58 $.53 $1.69 $1.20
Diluted................................. .57 .52 1.67 1.18
AVERAGE COMMON SHARES OUTSTANDING
Basic................................... 616,884 659,385 626,908 649,503
Diluted................................. 624,581 672,697 636,413 663,235
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 December 31 September 30
(In Thousands) 1999 1998 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Loans:
Commercial................................... $22,426,781 $22,243,114 $20,745,705
Real estate -- commercial.................... 6,207,547 6,251,879 6,475,950
Real estate -- residential................... 8,360,180 9,664,115 9,435,870
Consumer..................................... 15,348,767 14,822,759 14,291,552
Credit card.................................. 2,199,984 1,852,635 1,797,840
Home equity.................................. 3,457,622 3,176,664 3,188,590
----------- ----------- -----------
Total loans............................. 58,000,881 58,011,166 55,935,507
Allowance for loan losses............... (970,736) (970,243) (975,100)
----------- ----------- -----------
Net loans............................... 57,030,145 57,040,923 54,960,407
Mortgage loans held for sale.................... 2,439,039 3,507,487 2,748,139
Securities available for sale, at fair value.... 15,811,453 16,119,370 15,424,507
Federal funds sold and security resale
agreements................................... 727,822 930,492 1,146,383
Other short-term investments.................... 122,272 218,149 100,292
Cash and demand balances due from banks......... 3,346,593 4,783,491 3,406,647
Properties and equipment........................ 1,076,180 1,150,210 1,134,480
Accrued income and other assets................. 4,504,049 4,495,510 4,213,824
----------- ----------- -----------
TOTAL ASSETS............................ $85,057,553 $88,245,632 $83,134,679
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest bearing deposits.................... $10,909,167 $10,911,926 $10,158,773
NOW and money market accounts................... 16,677,065 18,610,832 17,735,380
Savings accounts................................ 3,700,585 4,021,113 4,051,228
Time deposits of individuals.................... 14,472,674 15,869,440 16,332,956
Other time deposits............................. 3,016,770 3,862,437 4,156,427
Deposits in overseas offices.................... 1,619,190 4,971,161 1,793,442
----------- ----------- -----------
Total deposits.......................... 50,395,451 58,246,909 54,228,206
Federal funds borrowed and security repurchase
agreements................................... 6,625,101 9,427,309 8,662,013
Borrowed funds.................................. 5,707,438 2,117,916 3,122,562
Long-term debt.................................. 14,625,031 9,009,448 7,788,754
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trusts
holding solely debentures of the
Corporation.................................. 180,000 679,895 679,894
Accrued expenses and other liabilities.......... 1,610,230 1,751,247 1,379,855
----------- ----------- -----------
TOTAL LIABILITIES....................... 79,143,251 81,232,724 75,861,284
Stockholders' Equity:
Preferred stock................................. 30,474 36,098 36,556
Common stock.................................... 5,883,828 6,976,810 7,236,839
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY.............. 5,914,302 7,012,908 7,273,395
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................ $85,057,553 $88,245,632 $83,134,679
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------
(In Thousands) 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 1,061,969 $ 779,422
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses............................ 183,052 144,512
Depreciation and amortization........................ 117,594 114,068
Amortization of intangibles and servicing rights..... 129,515 94,693
Amortization of premiums/discounts on securities and
debt.............................................. (7,978) 4,094
Securities gains..................................... (101,265) (85,217)
Other gains, net..................................... (169,780) (164,415)
Net (increase) decrease in trading account assets.... (6,845) 12,209
Originations and purchases of mortgage loans held for
sale.............................................. (12,772,328) (13,472,024)
Proceeds from sales of mortgage loans held for
sale.............................................. 14,184,989 10,286,326
Increase in interest receivable...................... (54,903) (17,649)
Increase (decrease) in interest payable.............. 76,774 (22,274)
Net change in other assets/liabilities............... 205,384 (126,097)
------------ -----------
Net Cash Provided (Used) by Operating
Activities...................................... 2,846,178 (2,452,352)
LENDING AND INVESTING ACTIVITIES
Net decrease (increase) in short-term investments......... 305,392 (612,706)
Purchases of securities................................... (4,666,392) (9,832,244)
Proceeds from sales of securities......................... 2,126,364 6,621,955
Proceeds from maturities and prepayments of securities.... 2,477,023 2,625,151
Net increase in loans..................................... (869,995) (518,047)
Proceeds from sales of loans.............................. 687,783 176,032
Net increase in properties and equipment.................. (53,682) (160,246)
Acquisitions/disposals.................................... (192,297) 157,632
------------ -----------
Net Cash (Used) by Lending and Investing
Activities...................................... (185,804) (1,542,473)
DEPOSIT AND FINANCING ACTIVITIES
Net (decrease) increase in Federal funds borrowed and
security repurchase agreements......................... (2,802,208) 3,566,443
Net increase (decrease) in borrowed funds................. 3,267,935 (1,172,528)
Net decrease in noninterest bearing, savings, NOW, money
market accounts, and deposits in overseas offices...... (5,609,025) (60,653)
Net decrease in time deposits............................. (2,242,433) (878,510)
Repayment of long-term debt and capital securities........ (1,901,950) (1,605,331)
Proceeds from issuance of long-term debt, net............. 7,020,068 3,658,666
Dividends paid............................................ (501,519) (436,984)
Issuances of common stock................................. 120,114 157,060
Repurchases of common stock............................... (1,448,254) (146,000)
------------ -----------
Net Cash (Used) Provided by Deposit and Financing
Activities...................................... (4,097,272) 3,082,163
------------ -----------
Net Decrease in Cash and Demand Balances Due From Banks... (1,436,898) (912,662)
Cash and Demand Balances Due From Banks, January 1........ 4,783,491 4,319,309
------------ -----------
Cash and Demand Balances Due From Banks, September 30..... $ 3,346,593 $ 3,406,647
============ ===========
SUPPLEMENTAL DISCLOSURES
Interest paid............................................. $ 2,033,839 $ 2,143,791
Income taxes paid......................................... 254,978 146,054
Common and preferred stock issued in purchase
acquisitions........................................... -- 787,184
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 8
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
(Dollars in Thousands, Except Per Preferred Common Capital Retained Comprehensive
Share Amounts) Stock Stock Surplus Earnings Income
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Balance January 1, 1998................. $ -- $1,262,790 $ 1,108,920 $ 3,440,763 $ 345,787
Comprehensive Income:
Net income.......................... 779,422
Other comprehensive income, net of
tax
Change in unrealized gains and
losses on securities of $63,453
net of reclassification adjustment
for gains included in net income
of $55,391........................ 8,062
Total comprehensive income............
Common dividends declared, $.71 per
share............................... (467,424)
Preferred dividends declared.......... (1,645)
Issuance of 7,630,602 common shares
under corporate stock and dividend
reinvestment plans.................. 15,261 141,799
Net issuance of 21,620,168 common
shares and 739,976 preferred shares
pursuant to acquisitions............ 36,999 43,240 690,245 (130,824)
Conversion of 8,850 shares of
preferred stock to 26,810 common
shares.............................. (443) 54 389
------- ---------- ----------- ----------- ---------
Balance September 30, 1998.............. $36,556 $1,321,345 $ 1,941,353 $ 3,620,292 $ 353,849
======= ========== =========== =========== =========
Balance January 1, 1999................. $36,098 $1,305,309 $ 1,968,751 $ 3,430,672 $ 272,078
Comprehensive Income:
Net income.......................... 1,061,969
Other comprehensive income, net of
tax Change in unrealized gains and
losses on securities of ($268,376)
net of reclassification adjustment
for gains included in net income
of $65,822........................ (334,198)
Total comprehensive income............
Common dividends declared, $.80 per
share............................... (496,955)
Preferred dividends declared.......... (1,282)
Issuance of 5,493,602 common shares
under corporate stock and dividend
reinvestment plans.................. 12,863 107,251
Purchase of 41,924,300 common
shares.............................. (86,121) (70,831) (1,291,302)
Conversion of 112,475 shares of
preferred stock to 340,692 common
shares.............................. (5,624) 686 4,938
Stock split........................... 1,233,522 (1,233,522)
------- ---------- ----------- ----------- ---------
Balance September 30, 1999.............. $30,474 $2,466,259 $ 776,587 $ 2,703,102 $ (62,120)
======= ========== =========== =========== =========
<CAPTION>
(Dollars in Thousands, Except Per
Share Amounts) Total
<S> <C>
- -------------------------------------------------------------------
Balance January 1, 1998................. $ 6,158,260
Comprehensive Income:
Net income.......................... 779,422
Other comprehensive income, net of
tax
Change in unrealized gains and
losses on securities of $63,453
net of reclassification adjustment
for gains included in net income
of $55,391........................ 8,062
-----------
Total comprehensive income............ 787,484
Common dividends declared, $.71 per
share............................... (467,424)
Preferred dividends declared.......... (1,645)
Issuance of 7,630,602 common shares
under corporate stock and dividend
reinvestment plans.................. 157,060
Net issuance of 21,620,168 common
shares and 739,976 preferred shares
pursuant to acquisitions............ 639,660
Conversion of 8,850 shares of
preferred stock to 26,810 common
shares.............................. --
-----------
Balance September 30, 1998.............. $ 7,273,395
===========
Balance January 1, 1999................. $ 7,012,908
Comprehensive Income:
Net income.......................... 1,061,969
Other comprehensive income, net of
tax Change in unrealized gains and
losses on securities of ($268,376)
net of reclassification adjustment
for gains included in net income
of $65,822........................ (334,198)
-----------
Total comprehensive income............ 727,771
Common dividends declared, $.80 per
share............................... (496,955)
Preferred dividends declared.......... (1,282)
Issuance of 5,493,602 common shares
under corporate stock and dividend
reinvestment plans.................. 120,114
Purchase of 41,924,300 common
shares.............................. (1,448,254)
Conversion of 112,475 shares of
preferred stock to 340,692 common
shares.............................. --
Stock split........................... --
-----------
Balance September 30, 1999.............. $ 5,914,302
===========
</TABLE>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited consolidated
financial statements of National City Corporation ("National City" or the
"Corporation") have been prepared on a basis consistent with accounting
principles applied in the prior periods and include all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the financial position, results of operations and cash flows for the interim
periods presented. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the full year or
any other interim period.
Certain prior period amounts have been reclassified to conform with current
period presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133, requires derivative instruments be carried at fair
value on the balance sheet. The statement continues to allow derivative
instruments to be used to hedge various risks and sets forth specific criteria
to be used to determine when hedge accounting can be used. The statement also
provides for offsetting changes in fair value or cash flows of both the
derivative and the hedged asset or liability to be recognized in earnings in the
same period;
7
<PAGE> 9
however, any changes in fair value or cash flow that represent the ineffective
portion of a hedge are required to be recognized in earnings and cannot be
deferred. For derivative instruments not accounted for as hedges, changes in
fair value are required to be recognized in earnings.
The Corporation plans to adopt the provisions of this statement, as amended,
for its quarterly and annual reporting beginning January 1, 2001, the
statement's effective date. The impact of adopting the provisions of this
statement on National City's financial position, results of operations and cash
flow subsequent to the effective date is not currently estimable and will depend
on the financial position of the Corporation and the nature and purpose of the
derivative instruments in use at that time.
3. BUSINESS COMBINATION
On August 31, 1999, National City acquired First Franklin Financial
Companies, Inc. ("First Franklin"), a wholesale originator of nonagency
residential mortgage loans headquartered in San Jose, California, for $266.1
million. First Franklin, with $468 million in assets, was accounted for as a
purchase acquisition and included in the consolidated results of operations from
the date of acquisition. Goodwill of $226.5 million was recorded at the time of
acquisition and is being amortized on a straight-line basis over 20 years.
4. NONRECURRING ITEMS
Included in the nine-month results for the Corporation were several
nonrecurring items which, while having no impact on the third quarter and a $2.7
million impact on net income for the first nine months of 1999, did affect a
number of reported income and expense line items.
National City sold its 20% ownership interest in Electronic Payment
Services, Inc. ("EPS"), a provider of transaction processing services, to
Concord EFS, Inc. ("Concord") and recognized a gain of $95.7 million pre-tax, or
$62.2 million after-tax. The pre-tax gain on the sale of EPS is included in
other noninterest income in the Consolidated Statements of Income. The
transaction was effected by exchanging each common share of EPS for 7.9091
shares of unregistered Concord common stock. National City received 5.9 million
shares of unregistered Concord common stock as a result of the exchange. The
shares were subsequently registered by Concord and National City sold its
holdings in Concord in the open market and recognized a gain of $32.1 million
pre-tax, or $20.8 million after-tax. The pre-tax gain on the sale of Concord
common stock is included in securities gains in the Consolidated Statements of
Income.
National City also sold its interest in Stored Value Systems, Inc. ("SVS"),
a subsidiary that had been involved in the development of smart card technology,
for a gain of $6.1 million pre-tax, or $4.0 million after-tax. The pre-tax gain
on the sale of SVS is included in other noninterest income.
National Processing, Inc. ("National Processing"), an 88%-owned subsidiary
of the Corporation, sold its freight payables, payables outsourcing, remittance
and merchant check services business lines. As a result, the Corporation
recognized a loss of $59.0 million pre-tax, or $59.8 million after-tax. The
larger after-tax loss was the result of nondeductible goodwill. The impact of
the business line disposals on the earnings of the Corporation was partially
offset by the minority interest effect of $8.4 million. The pre-tax impact of
the National Processing business line disposals is included in other noninterest
income, net of the minority interest effect.
Lastly, National City recognized charges of $28.6 million pre-tax, or $18.6
million after-tax, pursuant to a plan to improve the cost efficiency of branch
office facilities. These charges are included in other noninterest expense in
the Consolidated Statements of Income. In addition, the Corporation recorded
$9.2 million pre-tax, or $5.9 million after-tax, of personnel expense related to
executive contract obligations.
In the first nine months of 1998, merger charges totaling $274.7 million
pre-tax, or $193.9 million after-tax, were incurred in connection with the
acquisitions of First of America Bank Corporation ("First of America") and Fort
Wayne National Corporation ("Fort Wayne").
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
------------------- -------------------
(In Thousands) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------
Balance at beginning of
period $970,229 $976,469 $970,243 $941,874
Provision 55,476 45,212 183,052 144,512
Allowance related to loans
acquired (sold) (16) (1,388) 345 29,291
Charge-offs:
Commercial 16,741 10,485 61,782 28,333
Real estate -- commercial 1,828 2,674 3,943 7,407
Real estate -- residential 1,454 2,058 3,600 5,485
Consumer 42,381 37,732 138,071 114,491
Credit card 23,831 21,434 76,122 71,838
Home equity 1,339 2,563 5,380 7,079
-------- -------- -------- --------
Total charge-offs 87,574 76,946 288,898 234,633
Recoveries:
Commercial 4,834 9,369 15,290 20,812
Real estate -- commercial 1,401 1,415 6,167 5,424
Real estate -- residential 68 114 1,016 363
Consumer 19,940 14,863 64,287 49,442
Credit card 5,299 4,765 16,093 15,419
Home equity 1,079 1,227 3,141 2,596
-------- -------- -------- --------
Total recoveries 32,621 31,753 105,944 94,056
-------- -------- -------- --------
Net charge-offs 54,953 45,193 182,904 140,577
-------- -------- -------- --------
Balance at end of period $970,736 $975,100 $970,736 $975,100
======== ======== ======== ========
</TABLE>
The allowance for loan losses is maintained at a level believed adequate to
absorb estimated probable credit losses and is periodically evaluated based on
an assessment of the losses inherent in the loan portfolio. This assessment
results in an allowance consisting of two components, allocated and unallocated.
The allocated component reflects expected losses resulting from the analysis
of individual loans, developed through specific credit allocations for
individual loans, historical loss experience for loan categories and
management's determination of the amounts necessary for concentrations and
changes in mix and volume of the portfolio.
8
<PAGE> 10
The unallocated portion of the allowance is determined based on management's
assessment of general economic conditions as well as specific economic factors
in the individual markets in which National City operates. This determination
inherently involves a higher degree of uncertainty and considers current risk
factors that may not have yet manifested themselves in the Corporation's
historical loss factors used to determine the allocated component of the
allowance, and it recognizes that knowledge of the portfolio may be incomplete.
Details regarding nonperforming loans are included in the Asset Quality
section of Management's Discussion and Analysis. At September 30, 1999, December
31, 1998 and September 30, 1998, loans considered to be impaired under SFAS No.
114 totaled $40.7 million, $16.9 million and $13.7 million, respectively. The
related allowance allocated to these loans was $12.4 million, $7.4 million and
$7.7 million, respectively. All impaired loans were included in nonperforming
assets and had an associated allowance. The contractual interest due and actual
interest recorded on nonperforming assets for the nine months ended September
30, 1999, was $20.3 million and $7.9 million, respectively, compared with $39.4
million and $8.4 million, respectively, for the nine months ended September 30,
1998.
6. SECURITIES
The table below summarizes the Corporation's portfolio of securities
available for sale. The portfolio consists mainly of financial instruments that
pay back par value upon maturity. Fair value fluctuations occur over the lives
of the instruments due to changes in market interest rates.
Gross unrealized gains for the entire portfolio totaled $189.3 million,
$445.1 million and $564.5 million at September 30, 1999, December 31, 1998 and
September 30, 1998, respectively. Gross unrealized losses at the same periods
totaled $284.9 million, $26.7 million and $20.1 million, respectively.
For the nine months ended September 30, 1999 and 1998, gross gains of $111.0
million and $113.5 million, and gross losses of $9.7 million and $28.3 million
were realized, respectively, for the entire securities portfolio.
Other securities includes the Corporation's internally-managed equity
portfolio of bank and thrift common stock investments, which had an amortized
cost and fair value of $478.1 million and $606.5 million, respectively, as of
September 30, 1999.
As of September 30, 1999, there were no securities of a single issuer, other
than U.S. Treasury securities and other U.S. government agencies, which exceeded
10% of stockholders' equity.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------
AMORTIZED FAIR
(In Thousands) COST VALUE
<S> <C> <C>
- -----------------------------------------------------------
U.S. Treasury and Federal
agency debentures............ $ 1,171,855 $ 1,139,133
Mortgage-backed securities..... 10,098,896 9,913,963
Asset-backed and corporate debt
securities................... 2,806,575 2,780,436
States and political
subdivisions................. 849,370 862,850
Other.......................... 980,338 1,115,071
----------- -----------
Total securities............. $15,907,034 $15,811,453
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------
Amortized Fair
(In Thousands) Cost Value
<S> <C> <C>
- -----------------------------------------------------------
U.S. Treasury and Federal
agency debentures............ $ 1,212,437 $ 1,246,251
Mortgage-backed securities..... 9,717,908 9,809,332
Asset-backed and corporate debt
securities................... 3,044,075 3,045,457
States and political
subdivisions................. 917,424 968,119
Other.......................... 809,154 1,050,211
----------- -----------
Total securities............. $15,700,998 $16,119,370
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
--------------------------
Amortized Fair
(In Thousands) Cost Value
<S> <C> <C>
- -----------------------------------------------------------
U.S. Treasury and Federal
agency debentures............ $ 3,085,077 $ 3,179,139
Mortgage-backed securities..... 7,752,728 7,880,189
Asset-backed and corporate debt
securities................... 2,327,773 2,350,223
States and political
subdivisions................. 957,835 1,013,260
Other.......................... 756,711 1,001,696
----------- -----------
Total securities............. $14,880,124 $15,424,507
=========== ===========
</TABLE>
7. BORROWED FUNDS
<TABLE>
<CAPTION>
SEPT. 30 Dec. 31 Sept. 30
(In Thousands) 1999 1998 1998
<S> <C> <C> <C>
- ----------------------------------------------------------------
U.S. Treasury demand notes
and Federal funds
borrowed-term........... $4,824,216 $ 916,342 $2,549,096
FHLB advances............. 50,000 250,000 200,000
Bank notes and other...... 27,138 556,313 93,600
---------- ---------- ----------
Total bank
subsidiaries.......... 4,901,354 1,722,655 2,842,696
Commercial paper.......... 449,985 392,938 246,805
Other..................... 356,099 2,323 33,061
---------- ---------- ----------
Total parent company and
other subsidiaries.... 806,084 395,261 279,866
---------- ---------- ----------
Total............. $5,707,438 $2,117,916 $3,122,562
========== ========== ==========
</TABLE>
9
<PAGE> 11
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPT. 30 Dec. 31 Sept. 30
(In Thousands) 1999 1998 1998
- ---------------------------------------------------------------
<S> <C> <C> <C>
9 7/8% subordinated
notes due 1999.......... $ 65,000 $ 64,965 $ 64,953
6.50% subordinated notes
due 2000............... 99,970 99,931 99,919
8.50% subordinated notes
due 2002............... 99,937 99,920 99,914
6 5/8% subordinated
notes due 2004......... 249,428 249,330 249,299
7.75% subordinated notes
due 2004............... 198,761 198,569 198,505
8.50% subordinated notes
due 2004............... 149,453 149,358 149,327
7.20% subordinated notes
due 2005............... 249,836 249,814 249,807
5.75% subordinated notes
due 2009............... 298,928 -- --
6 7/8% subordinated
notes due 2019......... 698,794 -- --
Other................... 10,000 12,073 12,594
----------- ---------- ----------
Total parent company.. 2,120,107 1,123,960 1,124,318
----------- ---------- ----------
6.50% subordinated notes
due 2003............... 199,731 199,675 199,657
7.25% subordinated notes
due 2010............... 223,230 223,107 223,066
6.30% subordinated notes
due 2011............... 200,000 200,000 200,000
7.25% subordinated notes
due 2011............... 197,623 197,475 197,425
6.25% subordinated notes
due 2011............... 297,336 -- --
Other................... 1,159 1,475 1,582
----------- ---------- ----------
Total subsidiary...... 1,119,079 821,732 821,730
----------- ---------- ----------
Total long-term debt
qualifying for Tier
2 Capital........... 3,239,186 1,945,692 1,946,048
----------- ---------- ----------
Senior bank notes....... 8,718,431 4,992,219 4,320,529
FHLB advances........... 2,660,141 2,063,207 1,516,718
Other................... 7,273 8,330 5,459
----------- ---------- ----------
Total other long-term
debt................ 11,385,845 7,063,756 5,842,706
----------- ---------- ----------
Total............... $14,625,031 $9,009,448 $7,788,754
=========== ========== ==========
</TABLE>
During the nine months ended September 30, 1999, National City issued $1.0
billion in subordinated notes and its wholly-owned subsidiary, National City
Bank, issued $300 million in subordinated notes. These subordinated notes
qualify for inclusion in Tier 2 Capital.
A credit agreement dated March 14, 1997, with a group of unaffiliated banks,
allows the Corporation to borrow up to $350 million until February 1, 2001, with
a provision to extend the expiration date under certain circumstances. The
Corporation pays an annual facility fee of 10 basis points on the amount of the
line. There were no borrowings outstanding under this agreement at September 30,
1999.
9. CORPORATION OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY DEBENTURES OF THE CORPORATION
<TABLE>
<CAPTION>
SEPT. 30 Dec. 31 Sept. 30
(In Thousands) 1999 1998 1998
- ----------------------------------------------------------------
<S> <C> <C> <C>
8.12% Capital Securities of
First of America Capital Trust
I, due January 31, 2027......... $150,000 $150,000 $150,000
9.85% Capital Securities of Fort
Wayne Capital Trust I, due
April 15, 2027................. 30,000 30,000 30,000
-------- -------- --------
Total Capital Securities
qualifying as Tier 1
capital....................... 180,000 180,000 180,000
6.75% Capital Securities of
National City Capital Trust
I.............................. -- 499,895 499,894
-------- -------- --------
Total......................... $180,000 $679,895 $679,894
======== ======== ========
</TABLE>
The corporation-obligated mandatorily redeemable capital securities (the
"capital securities") of subsidiary trusts holding solely junior subordinated
debt securities of the Corporation (the "debentures") were issued by three
statutory business trusts, First of America Capital Trust I, Fort Wayne Capital
Trust I and National City Capital Trust I, of which 100% of the common equity in
each of the trusts is owned by the Corporation. The trusts were formed for the
purpose of issuing the capital securities and investing the proceeds from the
sale of such capital securities in the debentures. The debentures held by each
trust are the sole assets of that trust. Distributions on the capital securities
issued by each trust are payable semiannually at a rate per annum equal to the
interest rate being earned by the trust on the debentures held by that trust and
are recorded as interest expense by the Corporation. The capital securities are
subject to mandatory redemption, in whole or in part, upon repayment of the
debentures. The Corporation has entered into agreements which, taken
collectively, fully and unconditionally guarantee the capital securities subject
to the terms of each of the guarantees.
The debentures held by First of America Capital Trust I and Fort Wayne
Capital Trust I are first redeemable, in whole or in part, by the Corporation on
January 31, 2007 and April 15, 2007, respectively. The debentures held by
National City Capital Trust I were redeemed by the Corporation on June 1, 1999.
10
<PAGE> 12
10. CAPITAL RATIOS AND REGULATORY DIVIDENDS
The following table reflects various measures of capital:
<TABLE>
<CAPTION>
SEPT. 30 Dec. 31 Sept. 30
1999 1998 1998
(Dollars in ---------------- ---------------- ----------------
Millions) AMOUNT RATIO Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------
Total
equity(1)... $5,914.3 6.95% $7,012.9 7.95% $7,273.4 8.75%
Total common
equity(1)... 5,883.8 6.92 6,976.8 7.91 7,236.8 8.70
Tangible common
equity(2)... 4,629.2 5.52 5,850.6 6.72 6,114.7 7.46
Tier 1
capital(3).. 4,948.6 6.78 5,726.1 7.95 5,941.9 8.81
Total risk-
based
capital(4)... 8,376.6 11.48 8,493.7 11.79 8,561.4 12.70
Leverage(5)... 4,948.6 6.07 5,726.1 6.94 5,941.9 7.49
- ----------------------------------------------------------------------
</TABLE>
(1) Computed in accordance with generally accepted accounting principles,
including unrealized fair value adjustment of securities available for sale.
(2) Common stockholders' equity less all intangible assets; computed as a ratio
to total assets less intangible assets.
(3) Stockholders' equity less certain intangibles and the unrealized fair value
adjustment of securities available for sale; computed as a ratio to
risk-adjusted assets, as defined.
(4) Tier 1 Capital plus qualifying loan loss allowance and subordinated debt and
unrealized holding gains on certain equity securities; computed as a ratio
to risk-adjusted assets, as defined.
(5) Tier 1 Capital; computed as a ratio to average total assets less certain
intangibles.
- ------------------------------------------------------------
The Corporation and its banking subsidiaries must meet specific capital
requirements that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as set forth by banking industry regulators.
Failure to meet minimum capital requirements can result in certain mandatory and
possible additional discretionary actions by regulators that could have a
material effect on a bank's operations.
National City's Tier 1, total risk-based capital and leverage ratios for the
current period are based on preliminary data. Such ratios are above the required
minimum levels of 4.00%, 8.00%, and 4.00%, respectively.
The capital levels at all of National City's subsidiary banks are maintained
at or above the well-capitalized minimums of 6.00%, 10.00% and 5.00% for the
Tier 1 capital, total risk-based capital and leverage ratios, respectively.
Intangible assets used in the capital ratio calculations are summarized
below:
<TABLE>
<CAPTION>
SEPT. 30 Dec. 31 Sept. 30
(In Millions) 1999 1998 1998
- ------------------------------------------------------------
<S> <C> <C> <C>
Goodwill.................... $1,174.4 $1,043.3 $1,035.4
Other intangibles........... 80.2 82.9 86.7
-------- -------- --------
Total intangibles........... $1,254.6 $1,126.2 $1,122.1
======== ======== ========
</TABLE>
A significant source of liquidity for the Parent company is dividends from
subsidiaries. Dividends paid by the subsidiary banks are subject to various
legal and regulatory restrictions. At September 30, 1999, bank subsidiaries may
pay the Parent company, without prior regulatory approval, approximately $1.9
billion of dividends. During the first nine months of 1999, dividends totaling
$2.8 million were declared and $76.0 million of previously declared dividends
were paid to the Parent company by the bank subsidiaries.
11. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPT. 30 Dec. 31 Sept. 30
(Outstanding Shares) 1999 1998 1998
<S> <C> <C> <C>
- ----------------------------------------------------------------
Preferred Stock, no par
value, authorized
5,000,000 shares...... 609,479 721,954 731,126
Common Stock, $4 par
value, authorized
1,400,000,000 shares.. 616,564,714 652,654,720 660,672,556
</TABLE>
National City's preferred stock has a stated value of $50 per share. The
holders of the preferred shares are entitled to receive cumulative preferred
dividends payable quarterly at the annual rate of 6%. The preferred shares may
be redeemed by the Corporation at its option at any time, or from time to time,
on or after April 1, 2002 at $50 per share, plus accrued and unpaid dividends.
Such redemption may be subject to prior approval by the Federal Reserve Bank.
Holders of the preferred shares have the right, at any time at their option, to
convert each share of preferred stock into 3.0291 shares of National City common
stock.
During the fourth quarter of 1998, the board of directors authorized the
purchase of up to 60 million shares of National City common stock in the open
market or through privately negotiated transactions subject to an aggregate
purchase limit of $2.7 billion. To date, 52 million shares have been
repurchased. Of the 52 million repurchased shares, 42 million were repurchased
during the first nine months of 1999.
On June 30, 1999, the Corporation declared a two-for-one stock split of its
common stock effected in the form of a 100% stock dividend, payable July 26,
1999 to stockholders of record July 9, 1999. The stock split was accounted for
by a transfer of $1.2 billion from capital surplus to common stock. All share
and per share information has been restated to reflect the stock split.
12. INCOME TAX EXPENSE
The composition of income tax expense follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------
(In Thousands) 1999 1998
<S> <C> <C>
- -----------------------------------------------------------
Applicable to income exclusive
of securities transactions... $534,095 $393,758
Applicable to securities
transactions................. 35,443 29,826
-------- --------
Total.................. $569,538 $423,584
======== ========
</TABLE>
The effective tax rate was 34.9% and 35.2% for the nine months ended
September 30, 1999 and 1998, respectively.
11
<PAGE> 13
13. NET INCOME PER SHARE
The calculation of net income per common share follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
In Thousands, Except ------------------- ---------------------
Per Share Amounts) 1999 1998 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC:
Net income............... $356,462 $344,456 $1,061,969 $779,422
Less preferred
dividends.............. 457 546 1,282 1,645
-------- -------- ---------- --------
Net income applicable to
common stock........... $356,005 $343,910 $1,060,687 $777,777
======== ======== ========== ========
Average common shares
outstanding............ 616,884 659,385 626,908 649,503
======== ======== ========== ========
Net income per common
share -- basic......... $ .58 $ .53 $ 1.69 $ 1.20
======== ======== ========== ========
DILUTED:
Net income............... $356,462 $344,456 $1,061,969 $779,422
======== ======== ========== ========
Average common shares
outstanding............ 616,884 659,385 626,908 649,503
Stock option adjustment.. 5,849 11,097 7,623 11,924
Preferred stock
adjustment............. 1,848 2,215 1,882 1,808
-------- -------- ---------- --------
Average common shares
outstanding -- diluted.. 624,581 672,697 636,413 663,235
======== ======== ========== ========
Net income per common
share -- diluted....... $ .57 $ .52 $ 1.67 $ 1.18
======== ======== ========== ========
</TABLE>
14. CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments to
extend credit, guarantees, etc., which are not reflected in the financial
statements. In addition, the Corporation or its subsidiaries are involved in a
number of legal proceedings arising out of their businesses and regularly face
various claims, including unasserted claims, which may ultimately result in
litigation. While in management's opinion the financial statements would not be
materially affected by the outcome of any present legal proceedings,
commitments, or asserted claims, management is aware of a potential claim,
currently unasserted, by the Internal Revenue Service concerning the
Corporation's corporate-owned life insurance programs. Management believes it
has complied with all applicable tax laws and regulations with respect to such
programs and will vigorously contest any claim.
15. LINE OF BUSINESS REPORTING
National City operates four major lines of businesses: corporate banking,
retail sales and distribution, consumer finance and fee-based businesses.
Corporate banking includes lending and related financial services to large and
medium-sized corporations. Retail sales and distribution includes direct
lending, deposit gathering, and small business services. Consumer finance is
comprised of credit card lending, education finance, dealer finance, national
home equity lending and nonagency-quality residential mortgage banking.
Fee-based businesses includes agency-quality mortgage banking activities,
institutional trust, private investment advisory services and item processing
(conducted through National Processing, Inc.). The business units are identified
by the product or services offered and the channel through which the product or
service is delivered. The accounting policies of the individual business units
are the same as those of the Corporation. When material, prior period amounts
are reclassified to conform to the current line of business reporting structure.
The reported results reflect the underlying economics of the businesses.
Expenses for centrally provided services are allocated based upon estimated
usage of those services. The portion of the provision for loan losses that is
not related to specific loans is allocated to the business units based upon
factors such as loan growth and net charge-offs for the unit, among other
qualitative factors. The business units are match-funded and interest rate risk
is centrally managed by an investment funding unit within parent and other.
Transactions between business units are primarily conducted at fair value,
resulting in profits that are eliminated for reporting consolidated results of
operations.
Parent and other is comprised of several smaller business units including
venture capital and the investment funding unit as well as intersegment revenue
(expense) elimination and unallocated amounts. Operating results of the business
units are discussed in the Line of Business Results section of Management's
Discussion and Analysis. Selected line of business information is included in
the table on the following page.
12
<PAGE> 14
<TABLE>
<CAPTION>
Corporate Retail Sales Consumer Fee-Based Parent Consolidated
(In Thousands) Banking and Distribution Finance Businesses and Other Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 1999
Net interest income (expense) --
tax-equivalent.................. $214,841 $ 373,274 $144,835 $ 36,853 $ (12,050) $ 757,753
Provision (benefit) for loan
losses.......................... 10,249 9,987 40,040 476 (5,276) 55,476
-------- ---------- -------- -------- --------- ----------
Net interest income (expense)
after provision................. 204,592 363,287 104,795 36,377 (6,774) 702,277
Noninterest income................ 50,157 143,087 31,664 284,074 39,985 548,967
Noninterest expense............... 96,384 296,599 79,275 220,298 13,407 705,963
-------- ---------- -------- -------- --------- ----------
Income before taxes............... 158,365 209,775 57,184 100,153 19,804 545,281
Income tax expense (benefit)...... 58,976 79,395 22,201 39,590 (11,343) 188,819
-------- ---------- -------- -------- --------- ----------
Net income........................ $ 99,389 $ 130,380 $ 34,983 $ 60,563 $ 31,147 $ 356,462
======== ========== ======== ======== ========= ==========
Intersegment revenue (expense).... $ -- $ 9,316 $ -- $ 5,045 $ (14,361) $ --
Average assets (In millions)...... $ 25,853 $ 16,765 $ 15,386 $ 5,565 $ 19,122 $ 82,691
QUARTER ENDED SEPTEMBER 30, 1998
Net interest income (expense) --
tax-equivalent.................. $223,148 $ 367,621 $143,183 $ 30,016 $ (18,118) $ 745,850
Provision (benefit) for loan
losses.......................... 390 5,186 46,973 445 (7,782) 45,212
-------- ---------- -------- -------- --------- ----------
Net interest income (expense)
after provision................. 222,758 362,435 96,210 29,571 (10,336) 700,638
Noninterest income................ 52,365 156,948 25,935 305,764 78,956 619,968
Noninterest expense............... 94,062 308,673 68,755 268,175 42,735 782,400
-------- ---------- -------- -------- --------- ----------
Income before taxes............... 181,061 210,710 53,390 67,160 25,885 538,206
Income tax expense................ 66,993 77,963 19,754 24,390 4,650 193,750
-------- ---------- -------- -------- --------- ----------
Net income........................ $114,068 $ 132,747 $ 33,636 $ 42,770 $ 21,235 $ 344,456
======== ========== ======== ======== ========= ==========
Intersegment revenue (expense).... $ -- $ 5,513 $ -- $ 12,327 $ (17,840) $ --
Average assets (In millions)...... $ 24,852 $ 18,571 $ 13,686 $ 5,564 $ 18,389 $ 81,062
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net interest income (expense) --
tax-equivalent.................. $643,017 $1,114,928 $440,108 $117,613 $ (35,028) $2,280,638
Provision (benefit) for loan
losses.......................... 39,817 28,980 134,258 1,732 (21,735) 183,052
-------- ---------- -------- -------- --------- ----------
Net interest income (expense)
after provision................. 603,200 1,085,948 305,850 115,881 (13,293) 2,097,586
Noninterest income................ 151,710 414,198 77,230 859,105 262,158 1,764,401
Noninterest expense............... 282,241 880,639 208,550 733,144 97,826 2,202,400
-------- ---------- -------- -------- --------- ----------
Income before taxes............... 472,669 619,507 174,530 241,842 151,039 1,659,587
Income tax expense................ 176,007 234,612 66,334 111,110 9,555 597,618
-------- ---------- -------- -------- --------- ----------
Net income........................ $296,662 $ 384,895 $108,196 $130,732 $ 141,484 $1,061,969
======== ========== ======== ======== ========= ==========
Intersegment revenue (expense).... $ -- $ 37,136 $ -- $ 17,914 $ (55,050) $ --
Average assets (In millions)...... $ 25,883 $ 17,436 $ 15,334 $ 5,919 $ 19,303 $ 83,850
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net interest income (expense) --
tax-equivalent.................. $654,757 $1,104,139 $410,626 $ 86,038 $ (61,519) $2,194,041
Provision (benefit) for loan
losses.......................... 16,371 20,658 137,673 1,615 (31,805) 144,512
-------- ---------- -------- -------- --------- ----------
Net interest income (expense)
after provision................. 638,386 1,083,481 272,953 84,423 (29,714) 2,049,529
Noninterest income................ 149,702 433,775 67,870 897,555 139,732 1,688,634
Noninterest expense............... 296,553 913,517 196,698 761,559 337,252 2,505,579
-------- ---------- -------- -------- --------- ----------
Income (loss) before taxes........ 491,535 603,739 144,125 220,419 (227,234) 1,232,584
Income tax expense (benefit)...... 181,868 223,384 53,326 80,741 (86,157) 453,162
-------- ---------- -------- -------- --------- ----------
Net income (loss)................. $309,667 $ 380,355 $ 90,799 $139,678 $(141,077) $ 779,422
======== ========== ======== ======== ========= ==========
Intersegment revenue (expense).... $ -- $ 15,358 $ -- $ 30,385 $ (45,743) $ --
Average assets (In millions)...... $ 24,338 $ 18,594 $ 13,255 $ 4,837 $ 17,624 $ 78,648
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Net income for the fee-based businesses includes losses on the sale of
certain National Processing businesses, Table 1 in Management's Discussion and
Analysis shows net income excluding these losses and other nonrecurring items.
13
<PAGE> 15
[THIS PAGE INTENTIONALLY LEFT BLANK]
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL HIGHLIGHTS
Net income for the third quarter and nine months ended September 30, 1999
was $356.5 million and $1,062.0 million, respectively, compared with $344.4
million and $779.4 million for the third quarter and first nine months of 1998,
respectively. Net income per diluted common share was $.57 for the third quarter
and $1.67 for the first nine months of 1999, compared with $.52 and $1.18 for
the same periods last year. Returns on average common equity and average assets
for the third quarter of 1999 were 23.79% and 1.71%, respectively, compared with
19.00% and 1.69% for the third quarter of 1998. For the first nine months of
1999, returns on average common equity and average assets were 22.58% and 1.69%,
respectively, compared with 15.27% and 1.32% for the same period in 1998.
Excluding the effects of the nonrecurring items described in Note 4 to the
Consolidated Financial Statements, net income per diluted share was $1.66 for
the first nine months of 1999, compared with $1.47 for the same period last
year. On this same basis, returns on average common equity and average assets
for the first nine months of 1999 were 22.52% and 1.69%, compared with 19.08%
and 1.65% for the same period in 1998.
Financial performance for the third quarter and first nine months of 1999
reflected well-controlled expenses, sound credit quality, continued strength in
consumer lending, and a stable net interest margin.
LINE OF BUSINESS RESULTS
National City's operations are managed along four major lines of business:
corporate banking, retail sales and distribution, consumer finance and fee-
based businesses. Note 15 to the Consolidated Financial Statements provides
selected financial information for each business line. Table 1 summarizes net
income, excluding nonrecurring items, by line of business.
Corporate banking net income for both the third quarter and first nine
months of 1999 decreased as a result of a decline in net interest income and an
increase in the provision for loan losses. The decline in net interest income
was the result of a decrease in net interest margin partially offset by an
increase in average earning assets. The decrease in net interest income and
increased provision for the first nine months of 1999 was partially offset by a
decrease in noninterest expense resulting from merger integration synergies and
expense containment.
For the first nine months of 1999, retail sales and distribution net income
increased over the prior year due to an increase in net interest income and a
reduction in noninterest expense, partially offset by a decrease in branch sale
gains. Net interest income has improved over the prior year due to an increase
in lower-cost deposits combined with a benefit from the managed reduction of
lower-yielding residential real estate loans. The decline in noninterest expense
was driven by cost efficiencies gained as a result of merger integration savings
and functional centralization efforts. Retail sales and distribution net income
for the third quarter of 1999 was down from the comparable 1998 quarter due
primarily to a decrease in branch sale gains.
Consumer finance net income for the third quarter and first nine months of
1999 improved over the comparable 1998 periods due primarily to increases in net
interest income and fee income driven by increased loan origination volume,
partially offset by an increase in noninterest expense resulting from the
acquisition of First Franklin. The results of First Franklin, accounted for as a
purchase and included in the results of operations beginning in September 1999,
reduced consumer finance net income by approximately $5 million.
Fee-based businesses net income for the third quarter of 1999 increased
over the same period of 1998 due to improved revenues and cost efficiencies
realized in the item processing, institutional trust and private investment
advisory services businesses. Net income for the fee-based businesses as shown
in Table 1 excludes the loss on the sale of certain National Processing
businesses. Excluding this loss, fee-based business net income for the first
nine months of
TABLE 1: NET INCOME BY LINE OF BUSINESS
<TABLE>
<S> <C> <C> <C> <C>
Three Months Nine Months
Ended Ended
September 30 September 30
---------------- ------------------
(In Millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------
Corporate banking........................ $ 99.4 $114.0 $ 296.7 $309.7
Retail sales and distribution............ 130.4 132.8 384.9 380.4
Consumer finance......................... 35.0 33.6 108.2 90.8
Fee-based businesses..................... 60.5 42.8 190.5 139.7
Parent and other......................... 31.2 21.2 79.0 52.7
------ ------ -------- ------
Consolidated total................... $356.5 $344.4 $1,059.3 $973.3
====== ====== ======== ======
</TABLE>
Note: Amounts exclude nonrecurring items.
15
<PAGE> 17
1999 grew over the same period last year due to growth in the item processing,
institutional trust, private investment advisory services and mortgage banking
businesses.
Net income for parent and other as shown in Note 15 to the Consolidated
Financial Statements includes the effects of nonrecurring items other than the
loss on the sale of National Processing businesses. Excluding these items,
parent and other net income for the first nine months of 1999 (Table 1)
increased over the prior year due to increased securities gains and a higher
contribution from the investment/funding unit.
NET INTEREST INCOME
On a tax-equivalent basis, net interest income for the third quarter and
first nine months of 1999 was $757.7 million and $2,280.6 million, respectively,
up $11.9 million and $86.6 million over the same periods last year. Net interest
income benefited from growth in average earning assets of 3.4% and 7.2%,
respectively, over the third quarter and first nine months of 1998, partially
offset by decreases in the net interest margin of 7 basis points and 12 basis
points for the same periods. The decline in net interest margin both on a
quarterly and year-to-date basis is attributed to lower yields on earning
assets, a greater reliance on purchased funding, a lower contribution from
noninterest bearing sources of funds, and the effects of additional long-term
borrowings to fund the Corporation's share repurchase program.
The Corporation uses a variety of off-balance sheet financial instruments,
primarily interest rate swaps, futures and options, to efficiently manage its
exposure to changes in interest rates. The notional amount of the off-balance
sheet portfolio used to manage interest rate risk, which represents the
Corporation's primary market risk, totaled $32.8 billion at September 30, 1999,
compared to $17.0 billion at December 31, 1998. The increase in the notional
amount of the off-balance sheet derivative portfolio since year end is due
primarily to an increase in interest rate swaps used to convert fixed-rate
funding to variable combined with an increase in futures contracts used to hedge
the price risk of fixed-income available-for-sale securities. For the third
quarter and first nine months of 1999, the off-balance sheet derivative
portfolio contributed $13.8 million and $45.2 million, respectively, to net
interest income and added 7 basis points and 8 basis points, respectively, to
the net interest margin.
Management is responsible for monitoring and limiting the Corporation's
exposure to interest rate risk within established guidelines while maximizing
net interest income and the net value of the Corporation's future cash flows. As
part of carrying out these responsibilities, management continually takes into
consideration many factors. Most prominent among these factors are expected
future interest rate movements, variability and timing of balance sheet cash
flows, mortgage prepayments, and potential attrition of core deposits. The
Corporation employs three complementary measures to monitor interest rate risk:
static gap, income simulation and net present value analysis. While each of the
interest rate risk measurements has its limitations, taken together they
represent a reasonably comprehensive view of the magnitude of interest rate risk
in the Corporation, the distribution of risk along the yield curve, the level of
risk through time, and the amount of exposure to changes in certain interest
rate relationships.
As of September 30, 1999, the earnings simulation model projects net income
would increase by 2.6% of net income in a stable-rate environment if rates fall
gradually by 200 basis points over the next year and decrease by 2.2% if rates
rise gradually by 200 basis points over the next year. Within a two-year
horizon, and assuming an additional 200 basis point move in rates, the model
forecasts net income would decrease below that earned in a stable-rate
environment by .5% in a falling rate scenario and decrease by 6.2% in a
rising-rate scenario. Both the one- and two-year simulation risk measures are
within their guidelines of minus 5% and minus 15%, respectively.
The cumulative one-year gap, at September 30, 1999, was negative 13.1% of
adjusted total earning assets. The policy limit for the one-year gap is plus or
TABLE 2: CONTRIBUTION OF INTEREST RATE DERIVATIVE PORTFOLIO
<TABLE>
<S> <C> <C> <C> <C>
Three Months Nine Months
Ended Ended
September 30 September 30
---------------- ----------------
(In Millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Interest adjustment to loans.............. $ 1.8 $ (.7) $ 4.9 $ .5
Interest adjustment to securities......... (.5) (.2) (1.0) (.8)
------ ------ ------ ------
Interest adjustment to earning assets... 1.3 (.9) 3.9 (.3)
Interest adjustment to interest bearing
liabilities............................. (12.5) (9.6) (41.3) (29.4)
------ ------ ------ ------
Effect on net interest income........... $ 13.8 $ 8.7 $ 45.2 $ 29.1
====== ====== ====== ======
</TABLE>
Note: Amounts in brackets represent reductions of the related interest income or
expense line, as applicable.
16
<PAGE> 18
minus 15% of adjusted total earning assets.
During the first nine months of 1999, the Corporation's net present value
risk position grew more liability sensitive. The change in position primarily
resulted from an increase in interest rates and repurchases of the Corporation's
own stock. The Corporation's net present value model indicates a 150 basis point
immediate upward shock in rates would cause a reduction in the value of expected
asset and liability cash flows by an amount equal to 12.8% of total net present
value at September 30, 1999, whereas a 150 basis point immediate downward shock
would cause total net present value to rise by 5.8%. Policy limits restrict a
decline in net present value to 15% of stable-rate net present value.
NONINTEREST INCOME
For the third quarter and first nine months of 1999, noninterest income,
excluding securities gains and nonrecurring items, was $528.6 million and
$1,620.3 million, respectively, compared to $555.5 million and $1,603.4 million,
respectively, for the same periods in 1998. Excluding securities gains,
nonrecurring items and the effects of the businesses divested by National
Processing in the second quarter of 1999, noninterest income for the third
quarter of 1999 increased 2.1% from $517.8 million in the third quarter of 1998.
On this same basis, year-to-date noninterest income increased 5.0%, from
$1,488.6 million for the first nine months of 1998 to $1,563.6 million for the
comparable 1999 period. Year-over-year growth in both the quarter and year-to-
date periods was primarily driven by increases in trust and investment
management fees, service charges on deposit accounts and item processing
revenue. Improved mortgage banking revenue also benefited the year-to-date
comparison.
Item processing revenue for the third quarter and first nine months of 1999
decreased 26.4% and 10.2% from revenues in the respective periods in 1998 as a
result of the disposal of four National Processing business lines during the
second quarter of 1999. Item processing revenue generated by the remaining core
business units for the third quarter and first nine months of 1999 increased by
15.2% and 15.3%, respectively, over the same periods last year.
Service charges on deposit accounts for the third quarter and first nine
months of 1999 increased 9.1% and 9.0% over revenues generated in the respective
periods of 1998 due to higher debit card and other transaction volume coupled
with improved deposit fee management.
Trust and investment management fees for the third quarter and first nine
months of 1999 grew 8.8% and 5.4% over the respective amounts for the third
quarter and first nine months of 1998 due primarily to new business volume and
the implementation of a uniform fee structure by the private investment advisory
services business line.
Card-related fees decreased 14.2% and 6.4%, respectively, from $56.4
million and $152.7 million in the third quarter and first nine months of 1998
primarily due to a decline in securitized loans.
Mortgage banking revenue for the third quarter of 1999 was relatively flat
compared to the same period in 1998 as a result of a decline in origination
volume due to higher interest rates offset by growth in servicing revenue.
Mortgage banking revenue for the first nine months of 1999 grew 10.7% due to an
increase in servicing revenue associated with a larger servicing portfolio and
an increase in sales volume in 1999. The volume of mortgage loans sold in the
secondary market for the third quarter and first nine months of 1999 was $3.9
billion and $14.2 billion, respectively, compared with $4.0 billion and $10.3
billion for the same periods in 1998. The Corporation's residential loan
servicing portfolio was $44.4 billion at September 30, 1999, up 35.7% from $32.7
billion at September 30, 1998.
Other noninterest income includes certain nonrecurring items discussed in
Note 4 to the Consolidated Financial Statements and branch sale gains of $6.4
million for the third quarter and first nine months of 1999 and $21.4 million
and $32.1 million, respectively, for the third quarter and first nine months of
1998. Excluding the afore-mentioned items, other noninterest income increased
over the
TABLE 3: OVERHEAD AND EFFICIENCY PERFORMANCE
MEASURES BY LINE OF BUSINESS
<TABLE>
<S> <C> <C> <C> <C>
Nine Months Ended
---------------------------------------------
SEPTEMBER 30, 1999 September 30, 1998
--------------------- ---------------------
OVERHEAD EFFICIENCY Overhead Efficiency
RATIO RATIO Ratio Ratio
- ---------------------------------------------------------------------------------
Corporate banking................. 20.30% 35.51% 22.43% 36.86%
Retail sales and distribution..... 41.84 57.59 43.45 59.40
Consumer finance.................. 29.84 40.31 31.37 41.11
Fee-based businesses.............. -- 70.79 -- 77.43
Parent and other.................. -- -- -- --
Consolidated total excluding
nonrecurring items.......... 23.87% 55.49% 28.60% 58.75%
Consolidated total............ 23.65% 55.84% 41.12% 65.98%
</TABLE>
17
<PAGE> 19
1998 periods due primarily to growth in brokerage revenues.
Net securities gains for the third quarter and first nine months of 1999,
excluding the nonrecurring gain of $32.1 million on the sale of Concord EFS,
Inc. common stock, were $20.3 million and $69.2 million, respectively. This
compares to $64.4 million and $85.2 million for the respective periods in 1998.
NONINTEREST EXPENSE
Noninterest expense, excluding nonrecurring items, decreased 9.8% to $705.9
million in the third quarter of 1999 from $782.4 million in the third quarter of
1998. On the same basis, noninterest expense for the first nine months of 1999
decreased 3.0% to $2,164.6 million from $2,230.9 million for the same period in
1998. Reduced incentive compensation, merger integration savings and lower
expenses from the disposition of the National Processing businesses in the
second quarter of 1999 contributed to the decline in both periods. Partially
offsetting these reductions were increased expenses in 1999 resulting from
growth in fee-based businesses, information technology initiatives and the
purchase of First Franklin, whose costs were not in the 1998 periods.
National City's staffing level on a full-time equivalent basis was 37,267
at September 30, 1999, down 11.3% from 42,005 at September 30, 1998 as a result
of business line divestitures at National Processing and operating efficiencies
achieved from the 1998 business combinations with First of America and Fort
Wayne, partially offset by increases due to growth in the consumer finance and
fee-based businesses.
The efficiency ratio calculates noninterest expense as a percentage of fee
and other income plus tax-equivalent net interest income. The overhead ratio
calculates noninterest expense less fee and other income as a percentage of tax-
equivalent net interest income. Excluding the effects of nonrecurring items, the
efficiency ratios for the first nine months of 1999 and 1998 were 55.49% and
58.75%, respectively. On the same basis, the overhead ratios for the first nine
months of 1999 and 1998 were 23.87% and 28.60%, respectively.
EARNING ASSETS AND INTEREST BEARING LIABILITIES
Average earning assets for the third quarter were $74,971 million, down
slightly from $75,238 million in the second quarter of 1999 and up 3.4% from
$72,529 million in the third quarter of last year. The decrease from the second
quarter of 1999 was due to the managed reduction of lower-yielding assets,
principally residential real estate loans, offset by increases in average
balances of higher-yielding loan types and securities. The growth in average
earning assets over the third quarter of 1998 was driven by a $1.7 billion
increase in average loans and a $1.2 billion increase in average securities.
Average loan growth was primarily concentrated in the commercial and consumer
installment portfolios and was partially offset by real estate loan runoff.
Average interest bearing liabilities in the third quarter of 1999 were
$64,338 million, down slightly from $64,660 million in the second quarter of
1999 as a result of a decrease in interest bearing deposits, partially offset by
an increase in purchased funding. Average interest bearing liabilities increased
2.8% over $62,596 million in the third quarter of 1998 as a result of an
increase in long-term debt, par-
TABLE 4: ANNUALIZED NET CHARGE-OFFS AS A PERCENTAGE OF
AVERAGE LOANS
<TABLE>
<S> <C> <C> <C> <C>
Three Months Nine Months
Ended Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------
Commercial....................................... .21% .02% .28% .05%
Real estate -- commercial........................ .03 .08 (.05) .04
Real estate -- residential....................... .07 .08 .04 .07
Consumer......................................... .59 .65 .66 .66
Credit card...................................... 3.52 3.64 4.10 4.03
Home equity...................................... .03 .17 .09 .20
Total net charge-offs to average loans......... .38% .33% .43% .35%
</TABLE>
TABLE 5: NONPERFORMING ASSETS
<TABLE>
<S> <C> <C> <C>
SEPT. 30 Dec. 31 Sept. 30
(In Millions) 1999 1998 1998
- -----------------------------------------------------------------------------------
Commercial:
Nonaccrual................................... $106.7 $ 97.4 $ 92.4
Restructured................................. .2 .4 .4
------ ------ ------
Total commercial........................... 106.9 97.8 92.8
Real estate mortgage:
Nonaccrual................................... 126.9 118.2 126.5
Restructured................................. 2.3 2.6 2.6
------ ------ ------
Total real estate mortgage................. 129.2 120.8 129.1
------ ------ ------
Total nonperforming loans.................. 236.1 218.6 221.9
Other real estate owned (OREO)................. 23.9 29.9 30.5
------ ------ ------
Nonperforming assets........................... $260.0 $248.5 $252.4
====== ====== ======
Loans 90 days past due accruing interest....... $244.0 $209.5 $170.8
====== ====== ======
</TABLE>
18
<PAGE> 20
tially offset by a decrease in interest bearing deposits.
For the third quarter of 1999, average core deposits of $46,336 million
were down 2.1% from $47,344 million in the second quarter of 1999 and 4.8% from
$48,670 million in the third quarter of 1998.
ASSET QUALITY
The allowance for loan losses was $970.7 million at September 30, 1999 or
1.67% of loans, compared with $970.2 million or 1.67% of loans at December 31,
1998 and $975.1 million or 1.74% of loans at September 30, 1998. For the third
quarter of 1999, net charge-offs were $54.9 million compared with $45.2 million
for the same period last year.
Table 4 presents net charge-offs as a percentage of average loans by
portfolio type. Net charge-offs were .38% and .43% of average loans for the
third quarter and first nine months of 1999, respectively, compared with .33%
and .35% for the same periods in 1998.
Nonperforming assets (Table 5) were $260.0 million at September 30, 1999 up
from $248.5 million at December 31, 1998 and $252.4 million at September 30,
1998. Nonperforming assets as a percentage of loans and OREO were .45% at
September 30, 1999, .43% at December 31, 1998 and .45% at September 30, 1998.
Loans 90 days past due accruing interest were $244.0 million at September 30,
1999 compared with $209.5 million at December 31, 1998 and $170.8 million at
September 30, 1998.
CAPITAL
At September 30, 1999, total stockholders' equity was $5.9 billion compared
to $7.0 billion at December 31, 1998 and $7.3 billion at September 30, 1998. The
repurchase of National City common stock and unrealized depreciation in the
available-for-sale securities portfolio led to the decline in stockholders'
equity. Book value per common share at September 30, 1999, December 31, 1998 and
September 30, 1998 was $9.54, $10.69 and $10.95, respectively. Book value per
common share at September 30, 1999 included unrealized losses on securities
available for sale of $.10 compared with unrealized gains of $.42 and $.54 at
December 31, 1998 and September 30, 1998, respectively.
During the first nine months of 1999, 42 million common shares were
repurchased by the Corporation. As of September 30, 1999, approximately 8
million shares remained authorized for repurchase under the 60 million share
authorization approved by the board of directors in the fourth quarter of 1998.
On October 25, 1999, the board of directors authorized the repurchase of up
to 30 million shares of National City common stock subject to a purchase limit
of $1.0 billion. The shares will be acquired either in the open market or
through privately negotiated transactions in accordance with the applicable
regulations of the Securities and Exchange Commission.
Dividends of $.27 per common share were declared during the third quarter
of 1999, reflecting a dividend payout ratio of 47.37%. This compares with $.24
per share and 46.15% for the third quarter of 1998.
Average equity as a percentage of average assets for the third quarter and
nine months ended September 30, 1999 was 7.22% and 7.53%, respectively, compared
with 8.91% and 8.69% for the same periods in 1998.
YEAR 2000
Management initiated the process of preparing its computer systems and
applications for the Year 2000 in January 1995. The process involved identifying
and remediating date recognition problems in computer systems and software and
other operating equipment that could be caused by the date change from December
31, 1999 to January 1, 2000.
Management has completed its assessment of all business processes that
could be affected by the Year 2000 issue. Each business process assessment
included a review of the information systems used in that process, including
related hardware and software, the involvement of any third parties, and any
affected operating equipment. To date, the affected systems within all of those
business processes determined to be critical for supporting the core services
offered by National City have been remediated, unit tested, and returned to
production. As part of the testing process, National City established a separate
isolated testing environment that further tests the functioning of modified
systems when linked together.
Management has modified its existing business continuity plans and has
developed contingency plans to address potential risks in the event of Year 2000
failures, including non-compliance or failure by third parties. Throughout the
remainder of 1999, management will continue to monitor the Corporation's state
of readiness and will continue to work closely with significant customers,
vendors and other business counterparties to monitor their Year 2000 progress.
Efforts in the last quarter of the year will include activities related to the
ongoing prepara-
19
<PAGE> 21
tion and management of the actual Year 2000 event.
Management believes it has an effective plan in place to manage and resolve
the Year 2000 issue in a timely manner and, thus far, activities have tracked in
accordance with the original plan. Despite National City's efforts to date to
remediate affected systems and develop contingency plans for potential failures,
management continues to manage and monitor the various Year 2000 readiness
risks. Under the unlikely scenario that unanticipated failures occur, National
City could be materially adversely affected as a result of not being able to
process transactions related to its core business activities. In addition, non-
compliance by third parties (including loan customers) and disruptions to the
economy in general resulting from Year 2000 issues could also have a negative
impact of undeterminable magnitude on National City.
The total cost of the Year 2000 project is estimated at $65 million.
Approximately one-half of this estimate represents costs related to internal
personnel working on the project and certain capitalizable costs related to
replacing non-compliant hardware and software. To date, $60 million of the total
project costs have been incurred. During the first nine months of 1999,
incremental noninterest expense associated with the project totaled
approximately $9 million.
FORWARD-LOOKING STATEMENTS
The discussion regarding the Corporation's interest rate risk position
included in the section entitled "Net Interest Income" as well as the section
entitled "Year 2000" contain certain forward-looking statements (as defined in
the Private Securities Litigation Reform Act of 1995). These forward-looking
statements involve risks and uncertainties including changes in general economic
conditions, the Corporation's ability to execute its business plans, including
its plan to address the Year 2000 issue, and the ability of third parties to
effectively address their Year 2000 issues. Although National City believes the
expectations reflected in such forward-looking statements are reasonable, actual
results may differ materially from the results discussed in these
forward-looking statements.
20
<PAGE> 22
CONSOLIDATED AVERAGE BALANCE SHEETS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In Millions) September 30, September 30,
- ---------------------------------------------------------------------------------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
ASSETS
Earning Assets:
Loans:
Commercial........................................... $22,066 $20,206 $22,147 $19,611
Real estate -- commercial............................ 6,238 6,466 6,272 6,444
Real estate -- residential........................... 8,362 9,505 8,594 9,707
Consumer............................................. 15,052 13,964 15,044 13,188
Credit Card.......................................... 2,088 1,818 1,958 1,874
Home equity.......................................... 3,336 3,144 3,228 3,071
------- ------- ------- -------
Total loans........................................ 57,142 55,103 57,243 53,895
Mortgage loans held for sale........................... 2,172 2,525 2,489 1,978
Securities available for sale, at cost................. 14,851 13,614 14,870 13,708
Federal funds sold and security resale agreements...... 666 1,177 819 779
Other short-term investments........................... 140 110 146 115
------- ------- ------- -------
Total earning assets................................. 74,971 72,529 75,567 70,475
Allowance for loan losses................................ (990) (994) (988) (981)
Fair value (depreciation) appreciation of securities
available for sale..................................... (8) 511 211 537
Cash and demand balances due from banks.................. 3,306 3,685 3,624 3,557
Properties and equipment................................. 1,077 1,124 1,115 1,072
Accrued income and other assets.......................... 4,335 4,207 4,321 3,988
------- ------- ------- -------
Total assets......................................... $82,691 $81,062 $83,850 $78,648
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest bearing deposits........................... $11,338 $10,051 $11,519 $ 9,834
NOW and money market accounts.......................... 16,742 17,890 16,879 17,232
Savings accounts....................................... 3,795 4,157 3,890 4,203
Time deposits of individuals........................... 14,461 16,572 14,971 16,786
Other time deposits.................................... 2,908 4,155 3,023 3,965
Deposits in overseas offices........................... 2,389 1,785 2,585 1,593
------- ------- ------- -------
Total deposits....................................... 51,633 54,610 52,867 53,613
------- ------- ------- -------
Federal funds borrowed and security repurchase
agreements........................................... 7,703 7,431 8,024 6,590
Borrowed funds......................................... 2,808 2,644 2,875 3,176
Long-term debt and capital securities.................. 13,532 7,962 12,721 7,161
Accrued expenses and other liabilities................. 1,046 1,195 1,051 1,275
------- ------- ------- -------
Total liabilities.................................... 76,722 73,842 77,538 71,815
Stockholders' Equity:
Preferred.............................................. 31 37 32 24
Common................................................. 5,938 7,183 6,280 6,809
------- ------- ------- -------
Total stockholders' equity........................... 5,969 7,220 6,312 6,833
------- ------- ------- -------
Total liabilities and stockholders' equity........... $82,691 $81,062 $83,850 $78,648
======= ======= ======= =======
</TABLE>
21
<PAGE> 23
DAILY AVERAGE BALANCES/NET INTEREST INCOME/RATES
<TABLE>
<CAPTION>
(Dollars In Millions) Daily Average Balance
- -----------------------------------------------------------------------------------------------------
1999 1998
--------------------------- -----------------
THIRD Second First Fourth Third
QUARTER Quarter Quarter Quarter Quarter
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Loans:
Commercial...................................... $22,066 $22,228 $22,154 $21,609 $20,206
Real estate -- commercial....................... 6,238 6,275 6,305 6,314 6,466
Real estate -- residential(1)................... 10,534 10,827 11,902 12,318 12,030
Consumer........................................ 15,052 15,130 14,956 14,491 13,964
Credit Card..................................... 2,088 1,953 1,829 1,818 1,818
Home equity..................................... 3,336 3,188 3,149 3,193 3,144
------- ------- ------- ------- -------
Total loans................................... 59,314 59,601 60,295 59,743 57,628
Securities:
Taxable......................................... 14,000 13,761 14,227 13,563 12,647
Tax-exempt...................................... 851 877 899 937 967
------- ------- ------- ------- -------
Total securities.............................. 14,851 14,638 15,126 14,500 13,614
Federal funds sold................................ 112 78 43 141 175
Security resale agreements........................ 554 772 902 1,016 1,002
Other short-term investments...................... 140 149 148 113 110
------- ------- ------- ------- -------
Total earning assets/
Total interest income/rates................ 74,971 75,238 76,514 75,513 72,529
Allowance for loan losses........................... (990) (989) (985) (988) (994)
Fair value (depreciation) appreciation of securities
available for sale................................ (8) 268 377 509 511
Cash and demand balances due from banks............. 3,306 3,506 4,068 3,826 3,685
Properties and equipment............................ 1,077 1,124 1,145 1,148 1,124
Accrued income and other assets..................... 4,335 4,222 4,401 4,200 4,207
------- ------- ------- ------- -------
Total assets.................................. $82,691 $83,369 $85,520 $84,208 $81,062
======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
NOW and money market accounts..................... $16,742 $16,997 $16,899 $18,181 $17,890
Savings accounts.................................. 3,795 3,922 3,955 4,033 4,157
Time deposits of individuals...................... 14,461 14,883 15,581 16,126 16,572
Other time deposits............................... 2,908 2,857 3,311 4,141 4,155
Deposits in overseas offices...................... 2,389 2,342 3,030 2,050 1,785
Federal funds borrowed............................ 2,889 2,467 3,970 3,730 3,397
Security repurchase agreements.................... 4,814 4,910 5,034 5,465 4,034
Borrowed funds.................................... 2,808 2,977 2,838 2,515 2,644
Long-term debt and capital securities............. 13,532 13,305 11,301 9,292 7,962
------- ------- ------- ------- -------
Total interest bearing liabilities/
Total interest expense/rates............... 64,338 64,660 65,919 65,533 62,596
Noninterest bearing deposits...................... 11,338 11,542 11,681 10,168 10,051
Accrued expenses and other liabilities............ 1,046 951 1,159 1,144 1,195
------- ------- ------- ------- -------
Total liabilities............................. 76,722 77,153 78,759 76,845 73,842
Stockholders' equity................................ 5,969 6,216 6,761 7,363 7,220
------- ------- ------- ------- -------
Total liabilities and stockholders' equity.... $82,691 $83,369 $85,520 $84,208 $81,062
======= ======= ======= ======= =======
Net interest income..................................................................................
Interest spread......................................................................................
Contribution of noninterest bearing sources of funds.................................................
Net interest margin..................................................................................
</TABLE>
(1) Includes mortgage loans held for sale.
22
<PAGE> 24
<TABLE>
<CAPTION>
Quarterly Interest Average Annualized Rate
---------------------------------------------------- -----------------------------------------------
1999 1998 1999 1998
------------------------------ ------------------- --------------------------- -----------------
THIRD Second First Fourth Third THIRD Second First Fourth Third
QUARTER Quarter Quarter Quarter Quarter QUARTER Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 434.9 $ 423.4 $ 420.0 $ 420.7 $ 419.2 7.82% 7.64% 7.69% 7.72% 8.23%
135.8 133.8 133.6 139.7 148.3 8.63 8.55 8.60 8.78 9.10
198.4 202.5 215.3 221.6 226.1 7.54 7.48 7.24 7.20 7.52
318.5 317.5 313.3 315.6 305.6 8.40 8.42 8.50 8.64 8.68
70.3 65.5 59.6 63.6 62.9 13.36 13.45 13.22 13.88 13.72
70.6 66.2 72.0 71.4 72.4 8.40 8.32 9.27 8.87 9.14
-------- -------- -------- -------- --------
1,228.5 1,208.9 1,213.8 1,232.6 1,234.5 8.23 8.13 8.14 8.20 8.51
217.2 208.4 223.9 215.4 205.8 6.20 6.06 6.30 6.35 6.50
17.5 19.3 17.3 19.9 18.7 8.24 8.80 7.68 8.42 7.76
-------- -------- -------- -------- --------
234.7 227.7 241.2 235.3 224.5 6.32 6.22 6.38 6.48 6.59
1.5 .9 .5 1.8 3.0 5.55 4.84 4.79 4.93 6.71
7.1 9.0 10.5 11.0 13.7 5.08 4.66 4.73 4.34 5.42
3.1 3.0 3.1 2.2 4.3 9.15 7.87 8.38 8.48 15.49
-------- -------- -------- -------- --------
$1,474.9 $1,449.5 $1,469.1 $1,482.9 $1,480.0 7.83% 7.72% 7.75% 7.81% 8.11%
$ 131.2 $ 126.7 $ 126.5 $ 133.2 $ 143.9 3.11% 2.99% 3.04% 2.91% 3.19%
16.0 16.6 16.9 18.6 20.8 1.67 1.70 1.73 1.83 1.99
183.5 187.7 200.1 219.3 229.8 5.04 5.06 5.19 5.42 5.51
36.7 34.4 40.6 55.5 57.2 5.00 4.84 4.98 5.32 5.46
30.1 27.7 35.0 25.2 24.2 5.00 4.74 4.68 4.86 5.39
37.5 29.6 47.8 46.4 48.2 5.16 4.82 4.89 4.93 5.63
50.3 49.8 51.9 56.3 48.2 4.15 4.06 4.18 4.08 4.74
37.7 36.9 28.5 30.5 38.1 5.32 4.98 4.22 4.81 5.71
194.2 181.9 157.1 140.0 123.8 5.69 5.48 5.60 5.99 6.16
-------- -------- -------- -------- --------
$ 717.2 $ 691.3 $ 704.4 $ 725.0 $ 734.2 4.42% 4.29% 4.33% 4.38% 4.65%
$ 757.7 $ 758.2 $ 764.7 $ 757.9 $ 745.8
======== ======== ======== ======== ========
........................................................ 3.41% 3.43% 3.42% 3.43% 3.46%
........................................................ .62 .61 .60 .57 .64
----- ----- ----- ----- -----
........................................................ 4.03% 4.04% 4.02% 4.00% 4.10%
===== ===== ===== ===== =====
</TABLE>
23
<PAGE> 25
CORPORATE INVESTOR INFORMATION
CORPORATE HEADQUARTERS
National City Center
1900 East Ninth Street
Cleveland, Ohio 44114-3484
(216) 575-2000
www.national-city.com
TRANSFER AGENT AND REGISTRAR
National City Bank
Corporate Trust Operations
Department 5352
P.O. Box 92301
Cleveland, Ohio 44193-0900
1-800-622-6757
INVESTOR INFORMATION
Jeffrey C. Douglas
Vice President and Assistant Treasurer
Department 2101
P.O. Box 5756
Cleveland, Ohio 44101-0756
1-800-622-4204
COMMON STOCK LISTING
National City Corporation common stock
is traded on the New York Stock
Exchange under the symbol NCC. The
stock is abbreviated in financial
publications as NTLCITY.
DIVIDEND REINVESTMENT AND STOCK
PURCHASE PLAN
Participating common stockholders receive a three percent discount from
market price when reinvesting their National City dividends in additional
shares. Participants may also make optional cash purchases of common stock
at a three percent discount from market price and pay no brokerage
commissions. To obtain our Plan prospectus and authorization card, call,
1-800-622-6757.
DEBT RATINGS
<TABLE>
<CAPTION>
MOODY'S
INVESTORS STANDARD DUFF & THOMSON
SERVICE & POOR'S PHELPS BANKWATCH
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National City Corporation............................... A/B
Commercial paper (short-term debt).................... P-1 A-1 D-1+ TBW1
Senior debt........................................... A1 A AA-
Subordinated debt..................................... A2 A- A+ A
Bank Subsidiaries:*
Certificates of deposit............................... Aa3 A+ AA
Subordinated bank notes............................... A1 A AA- A+
</TABLE>
* Includes the following subsidiaries:
<TABLE>
<S> <C> <C> <C> <C>
National City Bank
National City Bank of Indiana
National City Bank of Kentucky
National City Bank of Pennsylvania
National City Bank of Michigan/Illinois
</TABLE>
Duff & Phelps ratings for certificates of deposit apply only to the banks
in Ohio, Kentucky and Indiana. Duff & Phelps subordinated bank note ratings
apply only to the Ohio banking subsidiary.
24
<PAGE> 26
FORM 10-Q -- SEPTEMBER 30, 1999
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL CITY CORPORATION
Date: October 29, 1999
/s/ ROBERT G. SIEFERS
------------------------
Robert G. Siefers
Vice Chairman and
Chief Financial Officer
(Duly Authorized Signer and
Principal Financial Officer)
25
<PAGE> 27
<TABLE>
<S> <C>
[NATIONAL CITY CORPORATION LOGO] Bulk Rate
National City Center U.S. Postage
1900 East Ninth Street PAID
Cleveland, Ohio 44114-3484 National City
Corporation
</TABLE>
<PAGE> 1
NATIONAL CITY CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30 Years Ended December 31
-------------------------------- --------------------------------------------------
(Dollars in Thousands) 1999 1998 1998 1997 1996
- -------------------------------------------------------------------------- --------------------------------------------------
COMPUTATION EXCLUDING PREFERRED STOCK DIVIDENDS:
<S> <C> <C> <C> <C> <C>
Income before income taxes $ 1,631,507 $ 1,203,006 $ 1,647,277 $ 1,640,033 $ 1,441,787
Interest on non-deposit interest
bearing liabilities 903,247 725,479 998,753 738,923 611,741
Portion of rental expense deemed
representative of interest 22,545 22,746 30,397 27,597 25,053
-------------------------------- --------------------------------------------------
Total income for computation
excluding interest on deposits 2,557,299 1,951,231 2,676,427 2,406,553 2,078,581
Interest on deposits 1,209,684 1,394,476 1,846,276 1,813,251 1,862,084
-------------------------------- --------------------------------------------------
Total income for computation
including interest on deposits $ 3,766,983 $ 3,345,707 $ 4,522,703 $ 4,219,804 $ 3,940,665
================================ ==================================================
Fixed charges excluding interest
on deposits $ 925,792 $ 748,225 $ 1,029,150 $ 766,520 $ 636,794
================================ ==================================================
Fixed charges including interest
on deposits $ 2,135,476 $ 2,142,701 $ 2,875,426 $ 2,579,771 $ 2,498,878
================================ ==================================================
Ratio excluding interest on
deposits 2.76x 2.61x 2.60x 3.14x 3.26x
Ratio including interest on
deposits 1.76x 1.56x 1.57x 1.64x 1.58x
COMPUTATION INCLUDING PREFERRED STOCK DIVIDENDS:
Total income for computation
excluding interest on deposits $ 2,557,299 $ 1,951,231 $ 2,676,427 $ 2,406,553 $ 2,078,581
================================ ==================================================
Total income for computation
including interest on deposits $ 3,766,983 $ 3,345,707 $ 4,522,703 $ 4,219,804 $ 3,940,665
================================ ==================================================
Fixed charges excluding interest
on deposits and dividends on
preferred stock $ 925,792 $ 748,225 $ 1,029,150 $ 766,520 $ 636,794
Pre-tax preferred stock dividends 1,972 2,531 3,357 - 6,197
-------------------------------- --------------------------------------------------
Fixed charges including preferred
stock dividends, excluding
interest on deposits 927,764 750,756 1,032,507 766,520 642,991
Interest on deposits 1,209,684 1,394,476 1,846,276 1,813,251 1,862,084
-------------------------------- --------------------------------------------------
Fixed charges including interest
on deposits and dividends on
preferred stock $ 2,137,448 $ 2,145,232 $ 2,878,783 $ 2,579,771 $ 2,505,075
================================ ==================================================
Ratio excluding interest on
deposits 2.76x 2.60x 2.59x 3.14x 3.23x
Ratio including interest on
deposits 1.76x 1.56x 1.57x 1.64x 1.57x
COMPONENTS OF FIXED CHARGES:
Interest:
Interest on deposits $ 1,209,684 $ 1,394,476 $ 1,846,276 $ 1,813,251 $ 1,862,084
Interest on non-deposit interest
bearing liabilities 903,247 725,479 998,753 738,923 611,741
================================ ==================================================
Total interest charges $ 2,112,931 $ 2,119,955 $ 2,845,029 $ 2,552,174 $ 2,473,825
================================ ==================================================
Rental Expense:
Building rental expense $ 68,318 $ 68,928 $ 92,112 $ 83,627 $ 75,918
Portion of rental expense deemed
representative of interest 22,545 22,746 30,397 27,597 25,053
Preferred Stock Charge:
Preferred stock dividends 1,282 1,645 2,182 - 4,028
Pre-tax preferred dividends 1,972 2,531 3,357 - 6,197
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------
(Dollars in Thousands) 1995 1994
- ----------------------------------------------------------------------------
COMPUTATION EXCLUDING PREFERRED STOCK DIVIDENDS:
<S> <C> <C>
Income before income taxes $ 1,208,000 $ 1,183,000
Interest on non-deposit interest
bearing liabilities 673,000 420,000
Portion of rental expense deemed
representative of interest 23,563 22,050
-----------------------------
Total income for computation
excluding interest on deposits 1,904,563 1,625,050
Interest on deposits 1,975,000 1,478,700
-----------------------------
Total income for computation
including interest on deposits $ 3,879,563 $ 3,103,750
=============================
Fixed charges excluding interest
on deposits $ 696,563 $ 442,050
=============================
Fixed charges including interest
on deposits $ 2,671,563 $ 1,920,750
=============================
Ratio excluding interest on
deposits 2.73x 3.68x
Ratio including interest on
deposits 1.45x 1.62x
COMPUTATION INCLUDING PREFERRED STOCK DIVIDENDS:
Total income for computation
excluding interest on deposits $ 1,904,563 $ 1,625,050
=============================
Total income for computation
including interest on deposits $ 3,879,563 $ 3,103,750
=============================
Fixed charges excluding interest
on deposits and dividends on
preferred stock $ 696,563 $ 442,050
Pre-tax preferred stock dividends 22,815 23,385
-----------------------------
Fixed charges including preferred
stock dividends, excluding
interest on deposits 719,378 465,435
Interest on deposits 1,975,000 1,478,700
-----------------------------
Fixed charges including interest
on deposits and dividends on
preferred stock $ 2,694,378 $ 1,944,135
=============================
Ratio excluding interest on
deposits 2.65x 3.49x
Ratio including interest on
deposits 1.44x 1.60x
COMPONENTS OF FIXED CHARGES:
Interest:
Interest on deposits $ 1,975,000 $ 1,478,700
Interest on non-deposit interest
bearing liabilities 673,000 420,000
=============================
Total interest charges $ 2,648,000 $ 1,898,700
=============================
Rental Expense:
Building rental expense $ 71,403 $ 66,818
Portion of rental expense deemed
representative of interest 23,563 22,050
Preferred Stock Charge:
Preferred stock dividends 14,830 15,200
Pre-tax preferred dividends 22,815 23,385
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,346,593
<INT-BEARING-DEPOSITS> 39,486,284
<FED-FUNDS-SOLD> 727,822
<TRADING-ASSETS> 24,201
<INVESTMENTS-HELD-FOR-SALE> 15,811,453
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 60,439,920
<ALLOWANCE> 970,736
<TOTAL-ASSETS> 85,057,553
<DEPOSITS> 50,395,451
<SHORT-TERM> 12,332,539
<LIABILITIES-OTHER> 1,610,230
<LONG-TERM> 14,805,031
0
30,474
<COMMON> 2,466,259
<OTHER-SE> 3,417,569
<TOTAL-LIABILITIES-AND-EQUITY> 85,057,553
<INTEREST-LOAN> 3,642,298
<INTEREST-INVEST> 684,443
<INTEREST-OTHER> 38,748
<INTEREST-TOTAL> 4,365,489
<INTEREST-DEPOSIT> 1,209,684
<INTEREST-EXPENSE> 2,112,931
<INTEREST-INCOME-NET> 2,252,558
<LOAN-LOSSES> 183,052
<SECURITIES-GAINS> 101,265
<EXPENSE-OTHER> 2,202,400
<INCOME-PRETAX> 1,631,507
<INCOME-PRE-EXTRAORDINARY> 1,061,969
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,061,969
<EPS-BASIC> 1.69
<EPS-DILUTED> 1.67
<YIELD-ACTUAL> 4.03
<LOANS-NON> 233,600
<LOANS-PAST> 244,000
<LOANS-TROUBLED> 2,500
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 970,243
<CHARGE-OFFS> 288,898
<RECOVERIES> 105,944
<ALLOWANCE-CLOSE> 970,736
<ALLOWANCE-DOMESTIC> 970,556
<ALLOWANCE-FOREIGN> 180
<ALLOWANCE-UNALLOCATED> 392,057
</TABLE>
