THE PURPOSE OF THIS FILING IS TO CORRECT THE FOLLOWING ERRORS CONTAINED IN THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996:
1. The line for Corporate debt securities was erroneously omitted from
the MATURITY DISTRIBUTION AND YIELDS OF INVESTMENT SECURITIES table
included in response to Item 1. Business.
2. The Net income for 1996 under the subcategory "FOR THE YEAR" of the
FINANCIAL HIGHLIGHTS table included in response to Item 7. Management's
Discussion and Analysis of Results of Operations and Finanacial Condition
was incorrectly typed as $32,505 instead of the correct $32,502.
PAGE
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 0-10869
FORT WAYNE NATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Indiana 35-1502812
(State of Incorporation) (I.R.S Employer Identification No.)
110 West Berry Street, Fort Wayne, Indiana 46801
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (219) 426-0555
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common shares, without Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained here, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of February 25, 1997, 11,715,855 shares of Common Stock, without Par Value
were outstanding. The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of February 25, 1997 was approximately
$466,311,000.
DOCUMENTS INCORPORATED BY REFERENCE
There are no documents incorporated by reference into this Form 10-K/A.
This Report contains 29 pages.
<PAGE>
<PAGE>
FORT WAYNE NATIONAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K/A
AMENDMENT NO. 1
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
Item 1. BUSINESS............................................... 3
PART II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.................. 15
SIGNATURES......................................................... 29
</TABLE>
<PAGE>
<PAGE>
Part I
Item 1. BUSINESS
Fort Wayne National Corporation (Registrant), organized under the laws of the
State of Indiana, is the owner of all issued and outstanding stock of seven
commercial banks. The Registrant's principal banking subsidiary is Fort Wayne
National Bank ("FWNB"), located in Fort Wayne, Indiana. The Registrant also
owns all of the issued and outstanding stock of Old-First National Bank in
Bluffton, located in Bluffton, Indiana; First National Bank of Huntington,
located in Huntington, Indiana; and First National Bank of Warsaw, located in
Warsaw, Indiana. All four banks are national banking associations. In
addition, the Registrant owns all of the issued and outstanding stock of
The Auburn State Bank, located in Auburn, Indiana; Churubusco State Bank,
located in Churubusco, Indiana; and Valley American Bank and Trust Company,
located in Mishawaka, Indiana. The Registrant also owns all of the issued and
outstanding stock of Fort Wayne National Life Insurance Company, domiciled in
Phoenix, Arizona.
The Registrant is a bank holding company as defined under the BHC Act and is
not engaged in any material business activity other than as incident to its
ownership of its subsidiary banks. As of December 31, 1996, the Registrant
had a total of $3,221,297,000 in assets and a total of $2,421,891,000 in
deposits.
The Registrant's subsidiary banks engage in a wide range of commercial and
personal banking activities, including accepting demand and time deposits;
making secured and unsecured loans to corporations, individuals and others;
issuing letters of credit; and financial counseling for institutions and
individuals. The banks' lending services include making commercial,
industrial, real estate, installment, and credit card loans. Interest and
fees on commercial loans constitute the largest contribution to the banks'
operating revenues. In addition, the banks provide a wide range of trust and
trust related services, including serving as executor of estates and as
trustee under testamentary and inter vivos trusts and various pension and
other employee benefit plans. Corporate trust services include serving as
registrar and transfer agent for corporate securities and as corporate trustee
under corporate trust indentures.
Credit risk is inherent in the banks' lending activities. The allowance for
possible loan losses represents management's estimate of potential credit
losses associated with the loan portfolio, including all off-balance-sheet
lending commitments. To mitigate its exposure to credit risk, the Company
utilizes a loan grading system that helps identify, monitor and address asset
quality problems, should they arise, in an accurate and timely manner.
Credits of a significant nature are reviewed on an individual basis and
specific allocations of the allowance for possible loan losses may be made if
so warranted.
Each of the Registrant's subsidiary banks is subject, at a minimum, to annual
reviews or examinations, as applicable, by the Federal Reserve Bank System,
<PAGE>
<PAGE>
the Office of the Comptroller of the Currency, the Indiana Department of
Financial Institution, and the Federal Deposit Insurance Corporation. In
addition, the Registrant is subject to annual reviews by the Federal Reserve
Bank System.
The banks actively compete on the local and regional levels with other
commercial banks and financial institutions for all types of deposits, loans,
and trust accounts and in providing financial and other services traditionally
offered by banks. They also compete for the banking business of local and
regional offices of national companies. With respect to certain banking
services, the banks compete with insurance companies, savings and loan
associations, credit unions, brokerage firms, and other financial
institutions.
At December 31, 1996, the Registrant had approximately 1,191 full-time and 276
part-time employees. Management considers employee relations to be good.
None of the Registrant's employees is covered by a collective bargaining
agreement.
The earnings of commercial banks are affected not only by general economic
conditions, but also by the policies of various governmental regulatory
authorities. In particular, the Federal Reserve Bank (FRB) regulates money
and credit conditions and interest rates in order to influence general
economic conditions, primarily through open-market operations in U.S.
Government securities, the discount rate on bank borrowings, and setting the
reserves that banks must maintain against certain bank deposits. These
policies have a significant effect on the overall growth and distribution of
bank loans, investments and deposits. They influence interest rates charged
on loans, earned on investments and paid for time and savings deposits. FRB
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to exert similar influence in
the future. The general effect, if any, of such policies upon the future
business and earnings of the Company cannot be reasonably predicted.
<PAGE>
<PAGE>
STATISTICAL DISCLOSURES
AVERAGE BALANCES AND INTEREST RATES
An analysis of net interest income on a fully taxable equivalent basis is
summarized for each of the periods included in the following table.
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- --------------------------- ---------------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Interest (%) Balance Interest (%) Balance Interest (%)
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Interest-bearing
deposit $ 333 $ 20 6.00% $ 205 $ 8 3.90% $ 550 $ 24 4.36%
Federal funds sold and
securities purchased
under agreement
to resell 33,984 1,597 4.70 26,097 1,322 5.07 10,543 431 4.09
Investment
securities(1)
Taxable 706,307 45,086 6.43 541,572 34,919 6.44 549,895 34,179 6.21
Nontaxable 199,686 17,546 9.10 176,262 16,122 9.48 180,749 16,003 9.19
Loans, net of
unearned income(2) 1,591,147 141,790 8.91 1,255,991 114,338 9.10 1,179,828 97,180 8.24
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Total Interest-earning
Assets 2,531,457 $206,039 8.16 2,000,127 $166,709 8.36 1,921,565 $147,817 7.72
Noninterest-earning
assets:
Cash and due from
banks 137,967 119,372 125,751
Other assets 96,466 53,210 45,559
---------- ---------- ----------
Total Assets $2,765,890 $2,172,709 $2,092,875
========== ========== ==========
Liabilities And
Shareholders' Equity
Interest-bearing
liabilities
Deposits:
Demand $ 204,620 $ 3,802 1.86% $ 203,751 $ 5,186 2.55% $ 209,788 $ 5,370 2.56%
Savings 303,685 8,191 2.70 312,888 10,409 3.33 342,583 10,584 3.09
Time deposits 1,277,846 67,660 5.29 910,175 49,819 5.47 842,887 36,211 4.30
Federal funds
purchased and
securities sold
under agreements
to repurchase 324,164 15,976 4.93 244,714 13,346 5.45 220,106 8,922 4.05
Notes payable -
U.S. Treasury and
other borrowings 22,570 1,183 5.24 23,586 1,348 5.72 18,797 709 3.77
Subordinated and
other long-term
notes 37,529 2,757 7.35 6,714 868 12.93 7,474 963 12.88
---------- ------- ------ ---------- ------- ------ ---------- -------- ------
Total Interest-bearing
Liabilities 2,170,414 $99,569 4.59 1,701,828 $80,976 4.76 1,641,635 $62,759 3.82
Noninterest-bearing
liabilities:
Demand deposits 305,111 230,842 226,394
Other liabilities 25,992 22,956 22,308
Shareholders' equity 264,373 217,083 202,538
---------- ---------- ----------
Total Liabilities And
Shareholders' Equity $2,765,890 $2,172,709 $2,092,875
========== ========== ==========
<PAGE>
<PAGE>
Interest income/earning
assets $206,039 8.16% $166,709 8.36% $147,817 7.72%
Interest expense/
earning assets 99,569 3.94 80,976 4.06 62,759 3.28
-------- ------- -------- ------- -------- -------
Net Interest Income /
Earning Assets 106,470 4.22% 85,733 4.30% 85,058 4.44%
Tax equivalent
adjustment(3) 6,674 6,377 6,243
-------- -------- --------
Net Interest Income $ 99,796 $ 79,356 $ 78,815
======== ======== ========
(1) For the purpose of these computations, unrealized gains/(losses) are
excluded from the average rate calculations.
(2) For the purpose of these computations, nonaccrual loans are included in
the daily average loan amounts outstanding.
(3) The tax equivalent adjustment is calculated using a statutory rate of 35%.
</TABLE>
<PAGE>
<PAGE>
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
The following table attributes changes in the Company's net interest income
(on a fully taxable equivalent basis) to changes in either average daily
balances or average rates. Changes which are attributable in part to volume
and in part to rate are allocated in direct proportion to the change in the
absolute dollar amounts of each.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1996 over 1995 1995 over 1994
----------------------- -----------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income:
Interest-bearing deposits
with banks $ 7 $ 5 $ 12 $ (17)$ 1 $ (16)
Federal funds sold and
securities purchased under
agreements to resell 376 (101) 275 766 125 891
Investment securities:
Taxable 10,211 (44) 10,167 (507) 1,247 740
Nontaxable 2,123 (699) 1,424 (415) 534 119
Loans, net of unearned
income(1) 29,927 (2,475) 27,452 6,540 10,618 17,158
------- ------- ------- ------- ------- -------
Total Interest Income $42,644 $(3,314)$39,330 $ 6,367 $12,525 $18,892
Interest expense:
Demand deposits $ 22 $(1,406)$(1,384)$ (147)$ (37)$ (184)
Savings deposits (313) (1,905) (2,218) (874) 699 (175)
Time deposits 19,559 (1,378) 17,841 3,077 10,531 13,608
Federal funds purchased
and securities sold
under agreements to
repurchase 4,008 (1,378) 2,630 1,083 3,341 4,424
Notes payable -
U.S. Treasury
and other borrowings (60) (105) (165) 211 428 639
Subordinated and other
long-term notes 2,412 (523) 1,889 (98) 3 (95)
------- ------- ------- ------- ------- -------
Total Interest Expense $25,628 $(7,035)$18,593 $ 3,252 $14,965 $18,217
------- ------- ------- ------- ------- -------
Increase In
Interest Differential $17,016 $ 3,721 $20,737 $ 3,115 $(2,440)$ 675
======= ======= ======= ======= ======= =======
(1) Nonaccrual loans were included in the average outstanding balances.
</TABLE>
<PAGE>
<PAGE>
INVESTMENT SECURITIES
The carrying values of the Company's investment securities are summarized for
the periods indicated in the following table.
<TABLE>
<CAPTION>
December 31
------------------------------------------------------
1996 1995 1994
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $320,313 33% $191,263(1) 25% $182,802 27%
U.S. Federal agencies 335,218 34 279,309 36 252,040 36
U.S. Federal agency
mortgage backed
securities 38,437 4 34,735 5 31,196 4
States and political
subdivisions 217,823 22 198,179 26 177,420 25
Corporate debt
securities 47,195 5 50,718 7 49,933 7
Other 15,622 2 10,356 1 7,920 1
-------- ------- -------- ------- -------- -------
Total $974,608 100% $764,560 100% $701,311 100%
======== ======= ======== ======= ======== =======
(1) Includes $21,259,000 of U.S. Treasury securities held for trading
purposes.
</TABLE>
MATURITY DISTRIBUTION AND YIELDS OF INVESTMENT SECURITIES
The following table sets forth the maturities of the Company's investment
securities as of December 31, 1996 and the weighted average yields of such
securities on the basis of amortized cost and effective yields weighted for
the scheduled maturity of each security.
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Total
-------- ------ -------- ------ ------- ------ ------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 76,674 6.42% $202,907 6.29% $ 40,732 6.27% $ -- --% $320,313
U.S. Federal
agencies 34,467 6.60 283,958 6.49 16,793 6.46 -- -- 335,218
U.S. Federal
agency mortgage
backed
securities 129 5.36 10,249 6.87 16,827 6.48 11,232 6.09 38,437
States and
political
subdivisions 20,273 10.08 62,202 9.71 81,428 8.93 53,920 8.77 217,823
Corporate debt
securities 17,030 7.46 27,033 7.33 2,249 7.42 883 8.81 47,195
Other -- -- 50 7.87 100 7.58 15,472 6.37 15,622
-------- ------ -------- ------ -------- ------ ------- ----- --------
Total $148,573 7.08 $586,399 6.81 $158,129 7.70 $81,507 7.95 $974,608
======== ====== ======== ====== ======== ====== ======= ===== ========
</TABLE>
<PAGE>
<PAGE>
Tax-equivalent adjustments (using a 35% rate) have been made in calculating
yields on obligations of states and political subdivisions. Equity securities
totaling $14,181,000 are included in the after ten years category.
DISTRIBUTION OF LOANS
The composition of the Company's loan portfolio is summarized for the periods
indicated in the following table.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial $ 660,215 $ 453,208 $ 408,706 $ 391,836 $ 379,173
Real estate -
construction 49,693 31,312 23,686 36,022 31,494
Real estate -
mortgage 897,734 590,599 575,648 530,451 514,730
Installment 257,408 192,307 204,707 183,709 164,473
Financing leases 10,915 9,141 7,229 455 950
---------- ---------- ---------- ---------- ----------
Total $1,875,965 $1,276,567 $1,219,976 $1,142,473 $1,090,820
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<PAGE>
MATURITIES OF LOANS AND SENSITIVITIES TO CHANGES IN INTEREST RATES
The following table shows the maturity of the Company's loan portfolio
(excluding mortgages on 1-4 family residences and installment loans)
outstanding as of December 31, 1996 Also shown are the amounts due
after one year classified according to their sensitivity to changes in
interest rates.
<TABLE>
<CAPTION>
Maturing
-----------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
--------- ----------------- ----------------- ----------
Fixed Variable Fixed Variable
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $509,517 $ 71,004 $37,293 $ 42,397 $ 4 $ 660,215
Real estate -
construction 45,803 2,436 -- 1,454 -- 49,693
Real estate -
mortgage 122,443 82,727 49,936 103,298 11,563 363,967
Financing leases 521 9,263 1,131 -- -- 10,915
-------- -------- ------- -------- ------- ----------
Total $678,284 $165,430 $82,360 $147,149 $11,567 $1,084,790
======== ======== ======= ======== ======= ==========
</TABLE>
<PAGE>
<PAGE>
NONPERFORMING ASSETS
The Company's nonaccrual loans, accruing loans past due 90 days or more,
restructured loans and other real estate owned are summarized for the periods
indicated in the following
table.(1)
<TABLE>
<CAPTION>
December 31
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 7,717 $18,450 $11,282 $13,691 $15,285
Accruing loans past due
90 days or more 1,804 1,467 944 1,640 1,215
Restructured loans 2,534 -- 8,750 979 245
------- ------- ------- ------- -------
Total Nonperforming Loans 12,055 19,917 20,976 16,310 16,745
Other real estate owned 1,736 319 631 754 4,227
------- ------- ------- ------- -------
Total Nonperforming Assets $13,791 $20,236 $21,607 $17,064 $20,972
======= ======= ======= ======= =======
Nonperforming loans to total
loans outstanding .64% 1.56% 1.72% 1.43% 1.54%
======= ======= ======= ======= =======
Nonperforming assets to total
assets .43% .88% 1.01% .81% 1.03%
======= ======= ======= ======= =======
</TABLE>
(1) In addition to loans classified as nonperforming at December 31, 1996,
there were loans aggregating $14,900,000 where management is closely
monitoring the borrowers' ability to comply with payment terms.
(2) Gross interest income of $698,000 would have been recorded in 1996 for
nonaccrual and restructured loans at December 31, 1996 assuming these
loans had been accruing interest throughout the year in accordance with
their original terms. The amount of interest actually included in 1996
income was $52,000.
<PAGE>
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
Activity in the Company's allowance for possible loan losses is summarized for
the periods indicated in the following table.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans
outstanding, net of
unearned income $1,591,147 $1,255,991 $1,179,828 $1,097,483 $1,049,271
========== ========== ========== ========== ==========
Amount of loans
outstanding at the end
of the period, net of
unearned income $1,873,745 $1,273,394 $1,217,218 $1,140,813 $1,089,382
========== ========== ========== ========== ==========
Balance of allowance
for possible loan
losses at beginning
of period $ 20,047 $ 21,795 $ 21,876 $ 16,682 $ 15,376
Add: Allowance of
acquired subsidiary 11,800 -- -- -- --
Loans charged-off:
Commercial 2,896 178 2,520 794 3,025
Real estate-
construction -- 3,000 61 -- --
Real estate-
mortgage 1,339 24 244 329 681
Installment 2,409 1,754 1,163 1,336 1,967
---------- ---------- ---------- ---------- ----------
Total Loans Charged-Off 6,644 4,956 3,988 5,459 5,673
Recoveries of loans
previously
charged-off:
Commercial 430 82 572 781 165
Real estate-mortgage -- 147 74 145 71
Installment 48 534 668 667 676
---------- ---------- ---------- ---------- ----------
Total Recoveries 1,151 763 1,284 1,593 912
---------- ---------- ---------- ---------- ----------
Net loans charged-off 5,493 4,193 2,704 866 4,761
Additions to allowance
charged to expense 3,953 2,445 2,623 6,060 6,067
---------- ---------- ---------- ---------- ----------
Balance At End Of Period$ 30,307 $ 20,047 $ 21,795 $ 21,876 $ 16,682
========== ========== ========== ========== ==========
Ratio of net charge-offs
during the period to
average loans
outstanding .35% .33% .23% .08% .45%
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<PAGE>
Factors affecting management's judgment in determining additions to the
allowance charged to operating expense are outlined under the subcaption
"Allowance for Possible Loan Losses" in Note 1 to the Company's consolidated
financial statements.
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
An allocation of the Company's allowance for possible loan losses is
summarized for the periods indicated in the following table. In addition to
an allocation for specific problem loans, each category includes an
unallocated portion of the allowance for possible loan losses based on loans
outstanding, credit risks and historical charge-offs. Notwithstanding the
following allocations, the entire allowance for possible loan losses is
available to absorb charge-offs in any category of loans.
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
Balance at end
of period Per- Per- Per- Per- Per-
applicable to Amount cent(1) Amount cent(1) Amount cent(1) Amount cent(1) Amount cent(1)
- ---------------- ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $20,660 36% $10,149 36% $12,719 34% $13,386 34% $ 7,381 35%
Real estate -
construction 728 2 679 3 1,353 2 1,485 3 145 3
Real estate -
mortgage 5,226 48 5,731 46 3,920 47 4,167 47 5,625 47
Installment 3,693 14 3,488 15 3,803 17 2,838 16 3,531 15
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $30,307 100% $26,047 100% $21,795 100% $21,876 100% $16,682 100%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Represents the percentage of loans outstanding in each category to total
loans outstanding.
</TABLE>
DEPOSITS
The average daily amount of the Company's deposits and the rates paid on such
deposits is summarized for the periods indicated in the following table.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
---------- ------ ---------- ------ ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 305,111 $ 230,842 $ 226,394
Interest-bearing
demand deposits 204,620 1.86% 203,751 2.55% 209,788 2.56%
Savings deposits 303,685 2.70% 312,888 3.33% 342,583 3.09%
Time deposits 1,277,846 5.29% 910,175 5.47% 842,887 4.30%
---------- ---------- ----------
Total $2,091,262 $1,657,656 $1,621,652
========== ========== ==========
</TABLE>
<PAGE>
<PAGE>
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
The following table shows the maturities of the Company's outstanding domestic
CDs and other time deposits in denominations of $100,000 or more at
December 31, 1996.
<TABLE>
<CAPTION>
Time Other
Certificates Time
of Deposits Deposits Total
------------ -------- --------
(In thousands)
<S> <C> <C> <C>
Time remaining to maturity:
Within three months $168,145 $3,508 $171,653
Over three through six 37,209 -- 37,209
Over six through twelve 26,451 -- 26,451
Over twelve months 36,418 -- 36,418
-------- ------ --------
Total $268,223 $3,508 $271,731
======== ====== ========
</TABLE>
SHORT-TERM BORROWINGS
The following table shows the distribution of the Company's short-term
borrowings and the weighted average interest rates thereof for the periods
indicated. Also provided are the maximum amount of borrowings and the
average amount of borrowings, as well as weighted average interest rates for
the periods indicated. (Federal funds purchased and securities sold under
agreements to repurchase are borrowings of the Company which generally mature
within 1 to 30 days. Notes payable, U.S. Treasury and other borrowings range
in maturity from 1 to 7 days.)
<TABLE>
<CAPTION>
Federal Funds Purchased Notes Payable -
and Securities Sold Under U.S. Treasury and
Agreements to Repurchase Other Borrowings
-------------------------- ----------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31 $387,357 $241,263 $255,010 $37,628 $26,381 $21,884
Weighted average
interest rate at
year end 5.26% 4.69% 6.29% 5.07% 5.51% 5.14%
Maximum amount
outstanding at any
month's end $433,965 $292,275 $255,010 $49,256 $48,219 $38,102
Average amount
outstanding during
the year $324,164 $244,714 $220,106 $22,570 $23,586 $18,797
Weighted average
interest rate during
the year 4.93% 5.45% 4.05% 5.24% 5.72% 3.77%
</TABLE>
<PAGE>
<PAGE>
Part II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis are intended to cover significant
factors and conditions affecting the Company's overall performance for the
past three years. It should be read in conjunction with the audited
consolidated financial statements of the Company contained elsewhere herein.
On June 1, 1996 the Company acquired, through merger of Valley Financial
Services, Inc. (VFS) with and into the Company, all of the issued and
outstanding stock of VFS's only banking subsidiary, Valley American Bank and
Trust Company (Valley). This acquisition has been accounted for as a purchase
for accounting purposes, and accordingly, the results of operations of Valley
have been included in the consolidated results of operations of the Company
from the date of acquisition. As of December 31, 1996, Valley had total
assets of $923.6 million which accounts for 29% of the Company's consolidated
total assets at that date. Valley's net income of $5.1 million for the period
from June 1, 1996 to December 31, 1996 accounts for 16% of the Company's
consolidated net income for the full year ended December 31, 1996. The
acquisition of Valley has, therefore, had a material impact on the financial
position and results of operations of the Company as of and for the year ended
December 31, 1996 as compared to prior years.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1996 1995 Change
---------- ---------- -------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C>
FOR THE YEAR
Total interest income $ 199,365 $ 160,332 24.3%
Total interest expense 99,569 80,976 23.0
Net interest income 99,796 79,356 25.8
Provision for possible loan
losses 3,953 2,445 61.7
Applicable income taxes 15,515 10,726 44.6
Net income 32,502 26,707 21.7
PER COMMON SHARE
Net income $ 2.68 $ 2.33 15.0%
Dividends declared 1.02 .94 8.5
Book value at year end 21.80 20.45 6.6
AVERAGES
Assets $2,765,890 $2,172,709 27.3%
Deposits 2,091,262 1,657,656 26.2
Loans (before allowance for
possible loan losses) 1,591,147 1,255,991 26.7
Investments 905,993 717,834 26.2
<PAGE>
<PAGE>
SELECTED FINANCIAL RATIOS
Return on average assets 1.18% 1.23%
Return on average equity 12.29% 12.30%
Net interest margin 4.22% 4.30%
Tier I and Tier II capital ratio 12.95% 16.27%
</TABLE>
COMPARATIVE EARNINGS ANALYSIS
<TABLE>
<CAPTION>
Increase/(Decrease)
--------------------------
1996/1995 1995/1994
------------- -----------
1996 1995 1994 Amount % Amount %
-------- ------- ------- ------- ----- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income
(fully taxable
equivalent basis) $106,470 $85,733 $85,058 $20,737 24.2% $ 675 0.8%
Taxable equivalent
adjustment 6,674 6,377 6,243 297 4.7 134 2.1
------- ------- ------- ------- ----- ------ -----
Net Interest Income 99,796 79,356 78,815 20,440 25.8 541 0.7
Provision for
possible loan losses 3,953 2,445 2,623 1,508 61.7 (178)(6.8)
Noninterest income 25,351 19,599 19,111 5,752 29.3 488 2.6
Noninterest expense 73,177 59,077 57,437 14,100 23.9 1,640 2.9
------- ------- ------- ------- ----- ------ -----
Income Before Income Taxes 48,017 37,433 37,866 10,584 28.3 (433)(1.1)
Applicable income taxes 15,515 10,726 11,654 4,789 44.6 (928)(8.0)
------- ------- ------- ------- ----- ------ -----
Net Income $ 32,502 $26,707 $26,212 $ 5,795 21.7 $ 495 1.9
======== ======= ======= ======= ===== ====== =====
</TABLE>
RESULTS OF OPERATIONS
EARNINGS. Net income in 1996 totaled $32.5 million, an increase of 22% over
the $26.7 million earned in 1995 and 24% over the $26.2 million earned in
1994. Earnings per common share for 1996 were $2.68 compared to $2.33 in 1995
and $2.28 in 1994. Fourth quarter earnings were $9.5 million or $.77 per
share, an increase of 7% over third quarter 1996 and 36% over fourth quarter
1995. Since the acquisition of Valley was accounted for as a purchase, a
significant amount of amortization relating to goodwill and other intangibles
is included in reported earnings. Cash earnings (earnings before amortization
of goodwill and other intangibles) amounted to $34.3 million or $2.83 per
common share in 1996.
The major components of the Company's operating results are summarized in the
Comparative Earnings Analysis table. Net interest income increased 26% in
1996 over 1995 after having increased less than 1% in 1995 over 1994. Without
Valley's net interest income of $18.7 million, net interest income in 1996
would have increased by $1.8 million or 2% over 1995. Net overhead, which is
the amount by which noninterest expense exceeds noninterest income, increased
<PAGE>
<PAGE>
21% in 1996 from 1995 and 3% in 1995 over 1994. Excluding Valley, net
overhead for 1996 would have been below 1995 by $1.2 million or 3%. The
provision for possible loan losses charged to earnings increased 62% in 1996
from 1995 after reflecting a 7% decrease in 1995 from 1994. Without Valley's
provision of $323,000 in 1996, the provision for loan losses would have
increased by 48%. Applicable income taxes increased by $4.8 million or 45%
following an 8% decrease in 1995 over 1994.
NET INTEREST INCOME. Net interest income, which is the difference between
interest and fees earned on assets and the interest paid on deposits and other
funding sources, is the primary source of earnings for the Company. This
component represented approximately 80% of the Company's net revenues in 1996.
A detailed analysis highlighting the changes in net interest income is
provided in the Analysis of Changes in Interest Differential table. Interest
earned on tax-exempt loans and investments is adjusted for comparative
purposes to a taxable equivalent basis using the federal tax rate of 35%,
resulting in a fully taxable equivalent (FTE) net interest income.
Net interest income on a fully taxable equivalent basis totaled $106.5 million
in 1996 compared to $85.7 million in 1995 and $85.1 million in 1994. The
significant increase in net interest income in 1996 includes an increase of
$17.0 million due to volume increases in 1996 following a $3.1 million
increase due to volume in 1995. The 1996 volume increase was fueled by the
earning assets and interest-bearing liabilities added to the Company's balance
sheet in 1996 through the acquisition of Valley. Rate movements also
increased net interest income by $3.7 million in 1996 after negatively
impacting net interest income by $2.4 million in 1995.
Average earning assets increased by $531.3 million or 27% for 1996 with
increases of $335.2 million in loans, net of unearned income, and $188.2
million in investment securities. The 1996 average earning assets include
$309.7 million of loans, net of unearned income, and $112.8 million of
investment securities of Valley. Interest-bearing liabilities increased
$468.6 million or 28% for 1996 with Valley adding $369.0 million in
interest-bearing liabilities. Absent Valley, interest-bearing liabilities
increased by $99.6 million: the net of increases of $172.9 million in time
deposits, and $10.9 million in subordinated and other long-term notes; offset
by decreases of $2.3 million in short-term borrowings, $33.5 million in
interest-bearing demand deposits and $48.4 million in savings deposits.
The increase in time deposits in 1996 continues the trend which began in 1995.
During 1995, the Company introduced its AnydayEveryday account which is
priced to yield a return above the average money market rate. This product
continues to be very successful in terms of generating time deposits for the
Company.
The Company's net interest margin measured on a fully taxable equivalent basis
decreased to 4.22% in 1996 from 4.30% in 1995 and 4.44% in 1994. Although the
Company continues to experience significant pressure on net interest margin,
the net interest margin for the fourth quarter of 1996 was 4.33% compared to
4.19% in the third quarter of 1996 and 4.21% in the fourth quarter of 1995.
<PAGE>
<PAGE>
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible
loan losses is maintained at a level believed adequate by management to absorb
estimated probable loan losses. To facilitate the periodic evaluation of the
adequacy of the allowance for possible loan losses, the Company utilizes a
loan grading system that helps identify, monitor and address asset quality
problems, should they arise, in an accurate and timely manner. Credits of a
significant nature are reviewed on an individual basis and a specific
allocation of the allowance for possible loan losses may be made if so
warranted.
The Company's charge to earnings as a provision for possible loan losses was
approximately $4.0 million in 1996, $2.4 million in 1995 and $2.6 million in
1994. Net loan charge-offs amounted to $5.5 million in 1996, $4.2 million
in 1995 and $2.7 million in 1994. Net charge-offs as a percent of average
loans outstanding were .35%, .33% and .23% for the years ended December 31,
1996, 1995 and 1994, respectively.
At December 31, 1996, the Company's allowance for possible loan losses totaled
$30.3 million or 1.62% of total loans outstanding as compared to 1.57% in 1995
and 1.79% in 1994. The ratio of the allowance for possible loan losses to
nonperforming loans of 251% for 1996 compares to 101% at the end of 1995 and
104% at December 31, 1994.
Nonperforming loans (including nonaccrual loans, accruing loans past due 90
days or more, and restructured loans) amounted to $12.1 million at year-end
1996 compared to $19.9 million at year-end 1995 and $21.0 million at year-end
1994. Nonperforming loans represented just .64% of total loans outstanding
at December 31,1996 compared to 1.56% one year ago and 1.72% at the end of
1994. Nonperforming assets (nonperforming loans plus other real estate owned)
represented .43% of total assets, the lowest level in the past five years and
significantly better than the Company's peer ratio of .59%.
Other than those loans included in the Nonperforming Assets table and related
notes thereto, there are no other loans which management is closely
monitoring, or which have been classified by bank regulators, which are being
monitored or classified because of trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity
or capital resources.
<PAGE>
<PAGE>
NONINTEREST INCOME AND EXPENSE ANALYSIS
<TABLE>
<CAPTION>
Increase/(Decrease)
-------------------------------
1996/1995 1995/1994
--------------- ---------------
1996 1995 1994 Amount % Amount %
------- ------- ------- ------- ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest income:
Fiduciary fees $12,459 $ 9,749 $ 8,950 $ 2,710 27.8% $ 799 8.9%
Service charges on
deposit accounts 6,515 4,705 4,561 1,810 38.5 144 3.2
Other service
charges 3,197 2,880 3,943 317 11.0 (1,063) (27.0)
Net securities
gains 392 87 5 305 350.6 82 1,640.0
Other income 2,788 2,178 1,652 610 28.0 526 31.8
------- ------- ------- ------- -------- ------ --------
Total Noninterest
Income $25,351 $19,599 $19,111 $ 5,752 29.3 $ 488 2.6
======= ======= ======= ======= ======== ====== ========
Noninterest expense:
Salaries and wages $32,218 $25,231 $23,829 $ 6,987 27.7% $1,402 5.9%
Employee benefits 7,506 6,006 5,969 1,500 25.0 37 .6
Net occupancy
expense 6,360 5,032 4,952 1,328 26.4 80 1.6
Equipment expense 5,228 4,213 3,882 1,015 24.1 331 8.5
FDIC assessment (116) 1,939 3,649 (2,055) (106.0) (1,710) (46.9)
Amortization of
goodwill and
other intangibles 1,772 232 231 1,540 663.8 1 .4
Other expense 20,209 16,424 14,925 3,785 23.0 1,499 10.0
------- ------- ------- ------- -------- ------ --------
Total Noninterest
Expense $73,177 $59,077 $57,437 $14,100 23.9 $1,640 2.9
======= ======= ======= ======= ======== ====== ========
</TABLE>
NONINTEREST INCOME AND EXPENSE. A ratio often used to evaluate the
noninterest income and expense performance of banking organizations is the
efficiency ratio. This ratio is calculated by dividing total noninterest
expense by the total of net interest income (on a fully taxable equivalent
basis) and noninterest income less securities transactions. The lower the
ratio, the more efficient the organization is at generating income in
relation to the expenses incurred to obtain that income. The Company has
historically outperformed its peers with efficiency ratios of 55.7%, 56.1% and
55.1%, respectively in 1996, 1995 and 1994 compared to peer ratios of 61.0%,
61.8% and 63.4%, respectively for the same periods. Excluding the
amortization of goodwill and other intangibles, the Company's efficiency ratio
would be 54.3%, 55.9% and 54.9%, respectively in 1996, 1995 and 1994.
<PAGE>
<PAGE>
During 1996, fiduciary fees increased $2.7 million or 28% from 1995 following
the 9% increase in 1995 from 1994. Valley contributed less than $1 million to
the 1996 increase. The market value of assets under supervision by the
Company's trust and investment group continues to increase, amounting to $3.8
billion at December 31, 1996, up from $3.4 billion at December 31, 1995 and
$2.8 billion at December 31, 1994.
Service charges on deposits grew $1.8 million or 38% in 1996 after increasing
3% in 1995 over 1994. While Valley added $1.2 million to this category in
1996, the Company continues to realize an improvement in its collection of
various deposit fees.
Other service charges increased $317,000 or 11% in 1996. However, other
service charges at Valley amounted to $687,000. Therefore, this category
decreased by $370,000 or 13% net of Valley. This category also decreased by
$1.1 million in 1995 from 1994. The variance from 1995 to 1996 is attributed
primarily to a decrease in insurance premium income of $82,000, a decrease in
merchant discount fees of $59,000 and a decrease in income generated from
referrals on annuity prospects of $214,000. The 1995 decrease was also
attributed to a decrease in income generated from referrals on annuity
prospects of $340,000.
Other income reflected a $610,000 or 28% increase in 1996 from 1995 with
$292,000 contributed by Valley and $318,000 contributed by an increase in
electronic banking income. In addition, the Company recognized $189,000 in
capitalized originated mortgage servicing rights as a result of adopting
Statement 122, "Accounting for Mortgage Servicing Rights - An Amendment to
Statement 65." Other income reflected a $526,000 or 32% increase in 1995 from
1994 as the Company generated net gains on sales of loans of $101,000 in 1995
and net losses on sales of loans of $379,000 in 1994. Sales of loans netted a
gain of $5,000 in 1996.
Securities transactions amounted to a net gain of $392,000 in 1996 compared to
$87,000 in 1995 and $5,000 in 1994. Substantially all of the net securities
gain in 1996 was due to the sale of certain common stock held by the Company.
Total noninterest expense increased 24% in 1996 over 1995, yet just 3% without
Valley's $12.5 million of noninterest expense. Total noninterest expense
increased 3% in 1995 over 1994.
Salaries and wages reflected a $7.0 million or 28% increase in 1996 over 1995
($1.8 million or 7% excluding Valley) and a $1.4 million or 6% increase in
1995 over 1994. The number of full time equivalent employees increased to
1,317 at December 31, 1996 from 977 at year-end 1995 and 964 at year-end 1994.
Valley had 349 full time equivalent employees at December 31, 1996. The
increase in salaries and wages in 1996 is the result of the employees added
with the Valley acquisition, general merit increases and an increase in
incentive and other bonus compensation of $791,000 (exclusive of Valley). The
1995 increase over 1994 resulted from general merit increases and the
additional staff needed to support new products and services and increased
loan and deposit volumes.
<PAGE>
<PAGE>
Employee benefits increased by $1.5 million or 25% in 1996 from 1995,
consistent with the 28% increase in salaries and wages. Employee benefits
reflected only a minor increase in 1995 from 1994 as the result of favorable
claim experience which allowed the Company's health insurance premium rates to
remain the same in 1995 as in 1994.
Net occupancy expense increased $1.3 million or 26% in 1996 over 1995
($245,000 or 5% excluding Valley), reflecting increases in building
depreciation, utilities, insurance and rent. Net occupancy expense increased
just $80,000 or 2% in 1995 over 1994.
Equipment expense increased by $1.0 million or 24% in 1996 from 1995 ($287,000
or 7% excluding Valley) and $331,000 or 9% in 1995 over 1994. Both the 1996
and 1995 increases are due to higher depreciation on equipment as the Company
continues to roll-out its corporate-wide loan documentation / teller station /
platform technology.
The most significant decrease to noninterest expense for 1996 and 1995
occurred in the FDIC insurance expense. This category decreased by $2.1
million or 106% in 1996 and $1.7 million or 47% in 1995. The FDIC insurance
fund met its federally mandated level of 1.25% of insured deposits during the
second quarter of 1995. Therefore, the Company's FDIC insurance expense was
reduced from the prior rate of $.23 per $100 of insured deposits to $.04 per
$100 of insured deposits. Beginning in January of 1996, well capitalized
financial institutions were not assessed a premium. Beginning in January of
1997, the FDIC insurance rate has been increased to $.013 per $100 of insured
deposits and, therefore the Company expects to incur approximately $326,000 in
FDIC insurance premiums in 1997.
Amortization of goodwill and other intangibles increased by $1.5 million in
1996 over 1995, reflecting the amortization of goodwill and other intangibles
recorded in connection with the acquisition of Valley in 1996. The
acquisition of Valley created $52.8 million of goodwill and other intangibles
for which the ongoing annual amortization will be $2.6 million. Amortization
of goodwill and other intangibles relating to previous acquisitions of the
Company accounted for under the purchase method of accounting was virtually
identical in 1996, 1995 and 1994.
Other expense increased by $3.8 million or 23% in 1996 from 1995 ($691,000 or
4% excluding Valley). Professional fees including legal, accounting, and
management consulting, covering such services as acquisition planning,
strategic planning, loan work-out activities, and asset / liability management
activities increased $1.2 million. However, in 1996 certain other expenses
decreased as 1995 was impacted by conversion expenses relating to the
Company's trust software and operating expenses on loan collateral.
<PAGE>
<PAGE>
INCOME TAXES. The Company's effective tax rate was 32% in 1996, 29% in 1995
and 31% in 1994. The Company's effective tax rate for financial reporting
purposes differs from the statutory marginal federal and state tax rates.
This is attributable principally to the tax-exempt income that is earned on
various earning assets and the disallowance of a tax deduction on certain
recorded expenses. See Note 9 to the Company's consolidated financial
statements for a further discussion of income taxes.
ANALYSIS OF FINANCIAL CONDITION
The Company's total assets at December 31, 1996 increased by $925.2 million or
40% from the prior year and totaled over $3.2 billion. Loans outstanding
totaled over $1.8 billion and total deposits exceeded $2.4 billion. These
amounts include the assets, loans and deposits of Valley of $923.6 million,
$539.6 million and $622.0 million, respectively.
LOANS. All categories of lending increased during 1996 both including and
excluding loans outstanding at Valley on December 31, 1996. Excluding Valley,
loans increased by $60.7 million or 5%. Commercial lending increased by
$207.0 million or 46% of which $197.4 million was outstanding at Valley.
Installment loans totaled $257.4 million at December 31, 1996 ($200.3 million
without Valley) compared to $192.3 million at December 31, 1995. Despite
increases in each of the previously mentioned lending categories, real estate
lending, including real estate mortgage and real estate construction loans,
continues to be the major component of the Company's loan portfolio. Real
estate loans represent 51% of the Company's total loan portfolio at year-end
1996. This category of loans increased by $325.5 million or 52% from year-end
1995 with such loans at Valley amounting to $284.7 million. As the Company's
underwriting policy for 1-4 family residential loans follows that of industry
standards and meets the criteria for sale in the secondary market, the
Company's real estate loan portfolio is of high quality. The majority of the
Company's real estate lending is concentrated in the Company's market area of
north central and northeastern Indiana.
INVESTMENTS. Total investment securities increased $210.0 million or 27% from
December 31, 1995 with Valley adding $195.7 million. In 1995, investment
securities increased $63.2 million or 9% over 1994. On average during 1996,
investment securities increased $188.2 million or 26%. Excluding Valley's
average investment securities of $112.8 million, average investment securities
increased by $75.4 million or 10%. This follows a decrease of $12.8 million
or 2% in 1995 from 1994. The increase in average securities in 1996 is
attributable to average funding sources increasing at a faster rate than
average loan growth while in 1995 the opposite was true. Average short-term
investments, including federal funds sold and time deposits with other banks,
increased $8.0 million or 30% in 1996 after increasing $15.2 million or 37% in
1995 from 1994. However, $20.0 million of the 1996 increase was from
short-term investments outstanding at Valley.
During 1996 and 1995, the Company purchased approximately $49.5 million and
$25.7 million of securities designated as trading, respectively, and sold
<PAGE>
<PAGE>
trading securities with a carrying value of $69.3 million and $5.2 million,
respectively. Realized gains (losses) on sales of trading securities amounted
to $(749,000) in 1996 and $255,000 in 1995. There were no investment
securities held for trading purposes at December 31, 1996. The carrying value
of securities held for trading purposes at December 31, 1995 was $21.3 million
including a recognized unrealized gain of $715,000.
The Company's investment portfolio continues to be of high quality as
evidenced by U.S. Government and other federal agencies representing
approximately two thirds of the total outstanding in each of the past three
years. The Company's holdings of states and other political subdivisions
decreased slightly to 22% of the total portfolio compared to 26% in 1995 and
25% in 1994. Other investments, including U.S. agency mortgage backed
securities, corporate debt securities and other securities represented 13% or
less of the total portfolio at the end of 1996, 1995 and 1994.
DEPOSITS. The primary source of funds for the Company comes from demand and
time deposits generated at the affiliate banks. Total deposits as of December
31, 1996 increased by $654.4 million or 37% with $622.0 million of this
increase attributable to outstanding deposits at Valley on December 31, 1996.
In 1995, total deposits increased by $135.2 million or 8% over the levels
achieved at the end of 1994. As depicted in the Deposits table, total average
deposits increased by $433.6 million or 26% of which Valley contributed $330.8
million. However, as was realized in 1995 and 1994, the Company continues to
experience a shift in the mix of the different deposit categories. While
noninterest-bearing demand deposits as a percent of total average deposits
remained relatively stable at 15% in 1996, 14% in 1995 and 14% in 1994,
interest-bearing demand deposits as a percentage of total average deposits
decreased to 10% in 1996 from 12% in 1995 and 13% in 1994. Average savings
deposits also decreased to 15% in 1996 from 19% in 1995 and 21% in 1994.
Offsetting these decreases were increases in average time deposits to total
average deposits to 61% in 1996 from 55% in 1995 and 52% in 1994. The time
deposits category includes the Company's popular AnydayEveryday account which
averaged $327.5 million in 1996, $149.3 million in 1995 and $122.8 million in
1994.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT. Federal funds purchased and
securities sold under agreements to repurchase consist primarily of repurchase
arrangements commercial customers of the Company's affiliate banks' utilize
for cash management services. In 1996, average federal funds purchased and
securities sold under agreements to repurchase increased $79.5 million or 32%
with $77.8 million of the increase coming from average federal funds purchased
and securities sold under agreements to repurchase of Valley. In 1995, this
funding category increased by $24.6 million or 11% on average from the prior
year.
The other category of short-term funding available to the Company is notes
payable to the U.S. Treasury. As indicated in the Short-Term Borrowings
table, this category can fluctuate significantly during the year. This is a
result of the timing of tax deposits made by customers and the call for these
funds made by the government. This category, however, has been a relatively
small source of funds for the Company.
<PAGE>
<PAGE>
Long-term debt increased to $58.3 million at December 31, 1996. During 1996,
the Company borrowed $15.0 million from another financial institution on a
term basis to help facilitate the payment of the cash portion of the merger
consideration paid to former shareholders of VFS. The Company also assumed
$34.8 million of Federal Home Loan Bank and other long-term debt of Valley and
$6.8 million of junior subordinated notes of VFS. Pay downs on pre-existing,
incurred and acquired debt totaled $4.9 million and $760,000 in 1996 and 1995,
respectively, as a result of scheduled principal payments. For a further
discussion of the Company's long-term debt obligations, maturities, and
related dividend and other restrictions, refer to Notes 10 and 13 in the
Company's accompanying consolidated financial statements.
CAPITAL RESOURCES. Capital adequacy is one of the main measurements used by
bank regulators to determine the strength of a financial institution. A
strong capital position will enable the Company to access capital markets
under more favorable terms. In addition, a strong capital base encourages
depositor and investor confidence in the institution.
On April 25, 1994, the Company's shareholders approved an increase from
10,000,000 to 20,000,000 in the total authorized shares of common stock,
enabling the Company to effect the three-for-two stock split that was declared
by the Board of Directors on January 18, 1994. This split was paid on May 20,
1994 to shareholders of record on April 27, 1994.
In addition, during 1994 the Board of Directors approved the repurchase of up
to 600,000 shares of the Company's common stock. During 1996 and 1995, the
Company repurchased 444,223 and 105,000 shares of its common stock at a total
cost of $14.2 million and $2.8 million, respectively.
In connection with the acquisition of VFS, on June 1, 1996 the Company issued
739,976 shares of Series 1 - 6% convertible Class B Nonvoting preferred stock
with a value of $37 million and 646,187 shares of common stock with a value of
$20 million.
Dividends declared in 1996 totaled $13.3 million, including dividends on
preferred stock of $1.3 million and dividends on common stock of $12.0
million. This compares to dividends declared on common stock of $10.8 million
in 1995 and $10.0 million in 1994. On January 21, 1997, the Company's Board
of Directors increased the annual common dividend to $1.16, up from the $1.02
declared in 1996 and the $.94 declared in 1995. The dividend payout ratio for
1996 was 36.3% compared to 40.3% for 1995 and 38.0% for 1994.
ASSET LIABILITY MANAGEMENT
As the Company's loans and deposits are designed to meet customer preferences,
maturity mismatches will occur within the balance sheet. It is the goal of
the Company's Asset/Liability Management committee to manage these maturity
mismatches in a way to provide a maximum level of net interest income within
established policy guidelines of liquidity and interest rate risk exposure.
<PAGE>
<PAGE>
INTEREST RATE SENSITIVITY. The degree by which net interest income may vary
due to changes in interest rates is measured through interest rate sensitivity
management. A static gap report, measured at a single point in time, measures
the difference between assets and liabilities that reprice in a future given
time period. The Company's gap ratio (the percentage of assets repricing
against liabilities) at December 31, 1996 was 83%. The Company has
historically operated with a liability sensitive position meaning more
liabilities reprice on a cumulative basis than assets. This indicates net
interest income should increase in declining rate scenarios and decrease in
rising rate scenarios. However, as rate movements are rarely parallel, a gap
report can only be considered a rough measurement of the direction a rate
movement could have on net interest income. The effect of a shift in the
yield curve and/or a change in the spread between certain rate indexes is
better measured through the use of simulation modeling.
The Company runs the simulation model numerous times throughout the year
comparing baseline results (earnings under a flat scenario) to earnings under
dynamic rate scenarios. The exposure to these changes are well within the
Company's guidelines. Should exposures be determined outside of tolerance
levels, the Company has tools it can use to minimize the risk to earnings.
Among these tools are specific investment decisions, pricing structures of
deposit funds, and exchange traded financial futures and options. For a
complete discussion of the Company's use of derivative contracts, refer to
Note 17 in the Company's consolidated financial statements.
RATE SENSITIVITY ANALYSIS
The following table presents an analysis of the rate sensitivity of the
Company's earning assets and interest-bearing liabilities as of December 31,
1996.
<TABLE>
<CAPTION>
Maturing or Repricing
---------------------------------------------------------------------
Non-Rate
Total Sensitive
1-90 91-180 181-365 1 Year 1-5 & Over
Days Days Days & Under Years 5 Years Total
----------- -------- --------- --------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Net loans $ 847,707 $ 108,779 $ 161,722 $1,118,208 $ 471,681 $283,856 $1,873,745
Investment
securities(1) 70,698 47,762 94,371 212,831 579,034 182,743 974,608
Other earning
assets 56,351 100 -- 56,451 -- -- 56,451
---------- --------- --------- --------- --------- -------- ----------
Total Interest-
earning Assets 974,756 156,641 256,093 1,387,490 1,050,715 466,599 2,904,804
Other assets -- -- -- -- -- 316,493 316,493
---------- --------- --------- --------- --------- -------- ----------
Total Assets $ 974,756 $ 156,641 $ 256,093 $1,387,490 $1,050,715 $783,092 $3,221,297
========= ======== ======== ========= ========= ======== ==========
<PAGE>
<PAGE>
Interest-bearing
liabilities:
Interest-
bearing
deposits $ 956,748 $ 205,995 $ 191,163 $1,353,906 $ 447,768 $201,099 $2,002,773
Short-term
borrowings 414,275 10,260 450 424,985 -- -- 424,985
Long-term
notes 15,826 5,936 4,442 26,204 22,719 9,418 58,341
Hedged
interest-
bearing
liabilities (143,000) -- -- (143,000) -- -- (143,000)
---------- --------- --------- --------- -------- ------- ----------
Total Interest-
Bearing
Liabilities 1,243,849 222,191 196,055 1,662,095 470,487 210,517 2,343,099
Demand
deposits -- -- -- -- -- 419,118 419,118
Other
liabilities -- -- -- -- -- 22,962 22,962
Deferred gain
on sale of
premises -- -- -- -- -- 961 961
Shareholders'
equity -- -- -- -- -- 292,157 292,157
---------- --------- --------- --------- -------- ------- ----------
Total
Liabilities
and
Shareholder's
Equity $1,243,849 $ 222,191 $ 196,055 $1,662,095 $ 470,487 $945,715 $3,078,297
========= ======== ======== ========= ======== ======= ==========
Rate
sensitivity
gap $ (269,093)$ (65,550)$ 60,038 $ (274,605)
========== ========= ========= ==========
Cumulative rate
sensitivity
gap $ (269,093)$(334,643)$(274,605)
=========== ========= =========
Cumulative rate
sensitivity
gap ratio .78 .77 .83
=========== ========= =========
(1) The sensitivity of investment securities is based on the earlier of call
dates or scheduled maturities.
</TABLE>
<PAGE>
<PAGE>
LIQUIDITY. Guidelines are established through the Asset/Liability Management
committee to ensure a stable source of funding to meet both the expected and
unexpected cash demands of loan and deposit customers. The Company maintains a
stable base of core deposits provided by long-standing customer relationships.
The Company complements this source of liquidity with short-term borrowings
through correspondent bank relationships in addition to other corporate
customers. Many corporate customers utilize the Company's cash management
program sweeping excess deposit funds into repurchase agreements. Therefore,
the Company considers the majority of its repurchase agreements as another
source of stable funds.
The greatest source of liquidity for the Company is its marketable securities.
While the Company classifies all of its investments as available-for-sale, the
investment portfolio is highly liquid as approximately 71% of the portfolio
consists of marketable U.S. Treasury or federal agency securities. In
addition, the Company's investment strategy calls for laddering the maturities
of investments purchased. Therefore, there is another $37 million of other
investments scheduled to mature during 1997 that can also be used to meet
liquidity demands if necessary.
INFLATION AND CHANGING PRICES
Reported earnings are affected by inflation, indirectly through changing
interest rates and directly by increased operating expenses. However, general
price level inflation has not had a material effect on the information
presented herein.
INDUSTRY OUTLOOK AND REGULATORY CHANGES
The Company continues to be optimistic about the future of the banking
industry. Recent legislative developments which the Company sees as
encouraging include the "Depository Institutions Affiliations and Thrift
Conversion Act." This proposed legislation would eliminate the thrift charter
and permit affiliations between commercial banks, insurance companies, and
securities firms under a holding company structure. In addition, the "Deposit
Insurance Funds Act," which became law on September 30, 1996 directs the
Secretary of the Treasury to make recommendations to Congress for the
establishment of a common charter for banks and savings associations. It is
expected that the proposal from the Treasury Department to Congress would
include recommendations that commercial banks be allowed to engage in the full
range of insurance and securities activities. Both of these legislative
initiatives are aimed at modernizing the financial services industry and
eliminating some of the competitive disadvantages which banks must currently
overcome in the financial services marketplace. The Deposit Insurance Funds
Act required certain depository institutions to pay a one-time special
assessment to the FDIC in order to bring the Savings Association Insurance
Fund (SAIF) to its required reserve ratio. It also authorized the Financing
Corporation (FICO) to impose periodic assessments on both SAIF institutions
and institutions that are members of the Bank Insurance Fund (BIF), including
the Company, in order to spread the cost of interest payments on the
outstanding FICO bonds over a larger number of institutions. As a result, the
Company's FDIC insurance premiums were increased from zero to $.013 per $100
<PAGE>
<PAGE>
of insured deposits. This will result in approximately $326,000 of additional
expense to the Company in 1997. While this is not good news for the Company,
the Deposit Insurance Funds Act does call for the merger of the SAIF and BIF
into the new combined Deposit Insurance Fund on January 1, 1999. The strength
of this combined fund along with the movement towards allowing for a common
financial institutions charter are seen by the Company as positive events in
the long-term health of the financial services industry.
Turning from the national level to the local level, the Company continues to
be very excited about the overall business climate in its market area of north
central and northeastern Indiana. This market area is characterized by
increasing economic activity, low unemployment and good prospects for growth.
The Company continually looks for creative ways to attract and retain
customers. The highly successful AnydayEveryday time deposit account is an
example of this creativity. The Company also continually challenges its
operations and its delivery systems to provide higher quality services to its
customers. In the past two years the Company has made significant investments
in technology, such as the new loan documentation / teller station / platform
systems in order to give our employees the best tools to use in servicing our
customers.
The Company has been fortunate to be a very well capitalized company. This
position has allowed for the necessary investments in technology. It also
provides the Company with the ability to expand through strategic
acquisitions, such as the acquisition of Valley. And finally, a strong
capital position has and will continue to give the Company the flexibility to
buy back some of its outstanding stock and increase dividends, both actions
which should enhance shareholder value.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be a signed on its
behalf by the undersigned, thereunto duly authorized.
FORT WAYNE NATIONAL CORPORATION (Registrant)
/S/ Karen M. Kasper March 21, 1997
Karen M. Kasper, Senior Vice President, (Date)
Chief Financial Officer and Treasurer
