To Our Stockholders:
 (Left to Right) David A. Daberko, Chairman & CEO Robert G. Siefers, Vice Chairman & CFO Vincent A. DiGirolamo, Vice Chairman |
It's a pleasure to report that net income (excluding merger and restructuring expenses) was a record $1.33 billion, or $4.00 per share, for the year 1998, up 15% from $1.16 billion, or $3.53 per share for the preceding year. On this basis, 1998 return on average assets was 1.66% and return on average common equity was 19.18%, compared to 1997 returns of 1.61% and 18.77%, respectively. Merger and restructuring expenses were $262 million after-tax or $.78 per share in 1998, and $35 million after-tax or $.11 per share in 1997.
This financial performance is noteworthy in that it was achieved during a period in which we closed and integrated two large acquisitions, completed a functional reorganization of our largest business and maintained the pace of critical initiatives across all business lines.
Merger Integration
The rapid closing and integration of the First of America Bank Corporation and Fort Wayne National Corporation acquisitions enabled the timely and complete capture of significant cost savings and efficiencies, and provided the opportunity to offer the full array of National City products and services to an expanded customer base. The new areas within our six-state "footprint"-Michigan, Illinois and northern Indiana-are very attractive contiguous markets, and we are seeing excellent revenue momentum in virtually all business lines. These acquisitions are working exactly according to plan, and could well be our best yet.
Banking Units
In retail banking, which accounts for over half of our net income, we completed a business reorganization from a geographically-oriented structure to two functional lines: Retail Sales and Distribution, comprising deposit-gathering and direct lending; and Consumer Finance, which includes dealer finance, education finance, non-prime lending and credit cards. The new functional structure will enable us to fully leverage the information advantage inherent in common systems and our enterprise-wide data warehouse. Quality of product offerings and consistency of service levels will be enhanced. The new structure will also foster a more effective sales and marketing culture with the objective of enhancing the value of retail customer relationships on a segmented and individualized basis. As the traditional deposit-gathering business continues to be squeezed by non-bank competitors, this initiative is arguably the most critical one for the company over the next several years.
In corporate banking, we have built upon our strong and reliable middle-market lending capability with a host of expanded products and services, including commercial finance, asset-based lending, payment solutions, syndications and investment banking. Corporate Select, our unique loan product with built-in interest rate protection options introduced in 1997, continues to grow in popularity among smaller corporate borrowers due to its unmatched flexibility and ease of use. Cumulative volume has exceeded $2.5 billion, and the sales pace is accelerating, especially in the new markets of Michigan and Illinois. At the same time, we have not and will not sacrifice credit quality for the sake of growth. National City's credit performance has been clearly superior over repeated business cycles, and we expect that to be the case over the next cycle as well.
Fee-Based Businesses
 "Our objectives for 1999 are straightforward. We must execute the game plan in place for each business." |
With the net interest margin under constant pressure, development of additional fee-based revenue sources has become more critical than ever. The four major fee-based businesses have each been refocused and are all now moving in the right direction.
Personal Wealth Management was established as a separate business several years ago as a melding of personal trust, private banking and retail brokerage under a single management structure. We have moved from a traditional product mindset to a customer-oriented one, with very positive results. New product initiatives such as financial planning and small-business 401(k) plans, as well as improved investment performance, have also been part of this transformation.
In Institutional Trust, an overhaul of the investment function has dramatically improved investment performance. This unit provides investment management and trust services to businesses and organizations and manages the Armada and Parkstone mutual fund families. We are also concentrating on specialized market segments such as charitable foundations, where we can provide unique value-added capabilities.
National City Mortgage is perhaps the most resounding success story of the year. Several years ago, after an extensive strategic review, we began investing in low-cost mortgage origination capacity and simultaneously initiated programs to hedge the economic risks in the servicing side of the business. When mortgage rates plummeted in 1998, triggering waves of refinancing activity, we were perfectly positioned to benefit from the new volume, generating record profits. At the same time, the hedging programs protected the value of the servicing portfolio, in contrast to servicing-related losses reported by a number of other companies in the mortgage business. This is a superb example of effective interest rate risk management-a complex process at which National City has excelled over many years.
Finally, at National Processing, our 88%-owned payment processing subsidiary, we are exploring strategic options with respect to the sale, restructuring, or liquidation of several business lines that have not met our performance criteria. This is still a work in progress, but as we have done in other businesses, we are addressing the issues head-on, and we will take all actions necessary to restore the company to an acceptable level of profitability. We are confident that National Processing will re-emerge as the highly-focused, highly-efficient transaction processor that it once was.
Outlook
All things considered, 1998 was an excellent year for National City, but 1999 has the potential to be even better. With the merger integration effort behind us and Year 2000 systems readiness activities in the "home stretch," we will benefit from significantly lower overhead expenses, while at the same time realizing merger-related revenue enhancements from offering our products and services to the new markets. Our banking businesses have the product set, the informational infrastructure, and the nimble, responsive organizational structure which will help us to sell more of the right things to the right customers at the right time through the optimal delivery channel. The fee businesses also have considerable momentum, and as a group should enjoy a very strong year. The only wild card is the economy and its influence on loan volumes and credit quality, but we feel we are well-positioned in terms of risk management skills to do relatively well in a downturn, should one occur.
Our objectives for 1999 are straightforward. We must execute the game plan in place for each business. These plans are linked to our long-term financial objectives of double-digit earnings per share growth, a return on equity in excess of 20% and frequent dividend increases commensurate with earnings growth. We plan to continue to deploy our substantial excess capital for the benefit of stockholders through further investment in growth initiatives and ongoing share repurchases. Doing these things, and doing them well, will position National City as one of the two or three best large banks in the country, with stockholders, employees, customers and our communities benefiting accordingly.
Thank you for your support.
David A. Daberko
Chairman and Chief Executive Officer
National City acknowledges the contribution of Richard F. Chormann, former Chairman, President and Chief Executive Officer of First of America Bank Corporation, toward building a well-respected, high-quality banking organization over the course of his 41-year career. His leadership and guidance helped make the National City/First of America merger integration one of the most successful on record.
Effective December 1998, Dick retired as Vice Chairman of the Board of Directors of National City Corporation. He will continue to serve as Chairman of National City Bank of Michigan/Illinois. All of us at National City wish him continued success.