<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 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 January 20, 1998, 17,107,056 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 January 20, 1998 was approximately
$760,271,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual shareholders' meeting to be held
on or about April 21, 1998, are incorporated by reference into Part III.
The exhibit index appears on page 65.
This report, including the cover page, contains a total of 74 pages.
-1-
<PAGE> 2
FORT WAYNE NATIONAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
ITEM 1. BUSINESS............................................... 3
Item 2. PROPERTIES............................................. 13
Item 3. LEGAL PROCEEDINGS...................................... 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................... 14
Item 6. SELECTED FINANCIAL DATA................................ 15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 25
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 60
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..... 61
Item 11. EXECUTIVE COMPENSATION................................. 63
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................... 63
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 63
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K............................................ 64
EXHIBIT INDEX...................................................... 65
SIGNATURES......................................................... 68
</TABLE>
- 2 -
<PAGE> 3
Part I
Item 1. BUSINESS
Fort Wayne National Corporation (Company), organized under the laws of the
State of Indiana, is the owner of all issued and outstanding stock of seven
commercial banks. Four of these banks; Fort Wayne National Bank (FWNB),
located in Fort Wayne, Indiana; 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, are
national banking associations. The other three banks; 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, are charted under the laws of the State of Indiana. The Company also
owns all of the issued and outstanding stock of Fort Wayne National Life
Insurance Company, domiciled in Phoenix, Arizona, and 100% of Fort Wayne Capital
Trust I, a statutory business trust created under the laws of the State of
Delaware.
The Company entered into an Agreement and Plan of Merger (the Agreement) dated
January 12, 1998 providing for the merger of the Company with and into National
City Corporation (National City). As of the effective time of the merger, each
outstanding share of the Company's common stock will be converted into .75
shares of National City common stock. Each outstanding share of the Company's
Class B Series 1 6% convertible preferred stock will receive one share of
National City's preferred stock. Based on the January 9, 1998 market price of
National City stock, the transaction has a value of $44.44 per share for a
total of approximately $826 million. Consummation of the merger is subject to
a number of conditions including receipt of approval of the Agreement by
shareholders of the Company, receipt of all required regulatory approvals and
fairness opinions. Under the Agreement, the Company will operate its business
in the ordinary course and use its commercially reasonable efforts to preserve
intact its business organization. The transaction is expected to close in the
second quarter of 1998. The merger will be accounted for as a purchase.
The Company 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, 1997, the Company had a
total of $3.4 billion in assets and a total of $2.6 billion in deposits.
The Company'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
- 3 -
<PAGE> 4
specific allocations of the allowance for possible loan losses may be made if so
warranted.
Each of the Company's subsidiary banks is subject, at a minimum, to annual
reviews or examinations, as applicable, by the Federal Reserve Bank System, the
Office of the Comptroller of the Currency, the Indiana Department of Financial
Institution, and the Federal Deposit Insurance Corporation. In addition, the
Company 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, 1997, the Company and its subsidiaries had approximately
1,355 full-time equivalent employees. Management considers employee relations to
be good. None of the Company'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.
- 4 -
<PAGE> 5
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>
1997 1996 1995
-------------------------- --------------------------- ---------------------------
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
deposits with banks $ 1,281 $ 55 4.29% $ 333 $ 20 6.01% $ 205 $ 8 3.90%
Federal funds sold and
securities purchased
under agreements
to resell 34,455 2,360 6.85 33,984 1,597 4.70 26,097 1,322 5.07
Investment
securities(1):
Taxable 739,213 47,905 6.51 706,307 45,086 6.43 541,572 34,919 6.44
Nontaxable 208,081 17,838 8.88 199,686 17,546 9.10 176,262 16,122 9.48
Loans, net of
unearned income(2) 1,949,627 174,841 8.97 1,591,147 141,790 8.91 1,255,991 114,338 9.10
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Total Interest-earning
Assets 2,932,657 $242,999 8.32 2,531,457 $206,039 8.16 2,000,127 $166,709 8.36
Noninterest-earning
assets:
Cash and due from
banks 143,773 137,967 119,372
Other assets 128,479 96,466 53,210
---------- ---------- ----------
Total Assets $3,204,909 $2,765,890 $2,172,709
========== ========== ==========
Liabilities And
Shareholders' Equity
Interest-bearing
liabilities
Deposits:
Demand $ 187,401 $ 3,167 1.69% $ 204,620 $ 3,802 1.86% $ 203,751 $ 5,186 2.55%
Savings 270,322 6,483 2.40 303,685 8,191 2.70 312,888 10,409 3.33
Time deposits 1,597,137 82,914 5.19 1,277,846 67,660 5.29 910,175 49,819 5.47
Federal funds
purchased and
securities sold
under agreements
to repurchase 355,402 18,235 5.13 324,164 15,976 4.93 244,714 13,346 5.45
Notes payable -
U.S. Treasury and
other borrowings 30,499 1,640 5.38 22,570 1,183 5.24 23,586 1,348 5.72
Subordinated and
other long-term
notes 83,531 6,289 7.53 37,529 2,757 7.35 6,714 868 12.93
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total Interest-bearing
Liabilities 2,524,292 $118,728 4.70 2,170,414 $ 99,569 4.59 1,701,828 $ 80,976 4.76
Noninterest-bearing
liabilities:
Demand deposits 355,462 305,111 230,842
Other liabilities 29,152 25,992 22,956
Shareholders' equity 296,003 264,373 217,083
---------- ---------- ----------
Total Liabilities And
Shareholders' Equity $3,204,909 $2,765,890 $2,172,709
========== ========== ==========
</TABLE>
- 5 -
<PAGE> 6
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income/earning
assets $242,999 8.32% $206,039 8.16% $166,709 8.36%
Interest expense/
earning assets 118,728 4.07 99,569 3.94 80,976 4.06
-------- ------- -------- ------- -------- -------
Net Interest Income /
Earning Assets 124,271 4.25% 106,470 4.22% 85,733 4.30%
Tax equivalent
adjustment(3) 6,724 6,674 6,377
-------- -------- --------
Net Interest Income $117,547 $ 99,796 $ 79,356
======== ======== ========
<FN>
(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>
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
-----------------------------------------------
1997 over 1996 1996 over 1995
----------------------- -----------------------
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 $ 43 $ (8)$ 35 $ 7 $ 5 $ 12
Federal funds sold and
securities purchased under
agreements to resell 22 741 763 376 (101) 275
Investment securities:
Taxable 2,225 594 2,819 10,211 (44) 10,167
Nontaxable 743 (451) 292 2,123 (699) 1,424
Loans, net of unearned
income(1) 32,110 941 33,051 29,927 (2,475) 27,452
------- ------- ------- ------- ------- -------
Total Interest Income $35,143 $ 1,817 $36,960 $42,644 $(3,314)$39,330
Interest expense:
Demand deposits $ (334)$ (301)$ (635)$ 22 $(1,406)$(1,384)
Savings deposits (947) (761) (1,708) (313) (1,905) (2,218)
Time deposits 16,617 (1,363) 15,254 19,559 (1,718) 17,841
Federal funds purchased
and securities sold
under agreements to
repurchase 1,586 673 2,259 4,008 (1,378) 2,630
Notes payable -
U.S. Treasury
and other borrowings 425 32 457 (60) (105) (165)
Subordinated and other
long-term notes 3,461 71 3,532 2,412 (523) 1,889
------- ------- ------- ------- ------- -------
Total Interest Expense $20,808 $(1,649)$19,159 $25,628 $(7,035)$18,593
------- ------- ------- ------- ------- -------
Increase In
Interest Differential $14,335 $ 3,466 $17,801 $17,016 $ 3,721 $20,737
======= ======= ======= ======= ======= =======
<FN>
(1) Nonaccrual loans were included in the average outstanding balances.
</TABLE>
- 6 -
<PAGE> 7
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
------------------------------------------------------
1997 1996 1995
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $254,759 26% $320,313 33% $191,263(1) 25%
U.S. Federal agencies 383,413 40 335,218 34 279,309 36
U.S. Federal agency
mortgage backed
securities 33,823 3 38,437 4 34,735 5
States and political
subdivisions 220,723 23 217,823 22 198,179 26
Corporate debt
securities 57,114 6 47,195 5 50,718 7
Other 20,459 2 15,622 2 10,356 1
-------- ------- -------- ------- -------- -------
Total $970,291 100% $974,608 100% $764,560 100%
======== ======= ======== ======= ======== =======
<FN>
(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, 1997 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 $ 69,347 6.01% $160,400 6.41% $ 25,012 6.19% $ -- --% $254,759
U.S. Federal
agencies 63,316 5.88 306,964 6.50 13,133 6.31 -- -- 383,413
U.S. Federal
agency mortgage
backed
securities -- -- 9,967 6.67 15,643 6.54 8,213 6.02 33,823
States and
political
subdivisions 18,912 9.63 61,787 9.15 82,478 8.84 57,546 6.16 220,723
Corporate debt
securities 23,993 4.92 28,970 7.11 2,048 6.26 2,103 8.92 57,114
Other 993 5.82 270 7.87 172 7.04 19,024 7.83 20,459
-------- ------ -------- ------ -------- ------ ------- ----- --------
Total $176,561 6.20 $568,358 6.80 $138,486 7.82 $86,886 6.58 $970,291
======== ====== ======== ====== ======== ====== ======= ===== ========
</TABLE>
Tax-equivalent adjustments (using a 35% rate) have been made in calculating
yields on obligations of states and political subdivisions. Equity securities
totaling $18,954,000 are included in the after ten years category.
- 7 -
<PAGE> 8
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
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial $ 712,035 $ 660,215 $ 453,208 $ 408,706 $ 391,836
Real estate -
construction 54,241 49,693 31,312 23,686 36,022
Real estate -
mortgage 974,528 897,734 590,599 575,648 530,451
Installment 276,888 257,408 192,307 204,707 183,709
Financing leases 38,653 10,915 9,141 7,229 455
---------- ---------- ---------- ---------- ----------
Total $2,056,345 $1,875,965 $1,276,567 $1,219,976 $1,142,473
========== ========== ========== ========== ==========
</TABLE>
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, 1997. 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 $576,095 $ 83,578 $31,116 $ 18,218 $ 3,028 $ 712,035
Real estate -
construction 50,550 3,691 -- -- -- 54,241
Real estate -
mortgage 170,426 77,098 39,037 85,505 10,209 382,275
Financing leases 7,280 28,150 -- 3,223 -- 38,653
-------- -------- ------- -------- ------- ----------
Total $804,351 $192,517 $70,153 $106,946 $13,237 $1,187,204
======== ======== ======= ======== ======= ==========
</TABLE>
- 8 -
<PAGE> 9
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
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $10,689 $ 7,717 $18,450 $11,282 $13,691
Accruing loans past due
90 days or more 1,472 1,804 1,467 944 1,640
Restructured loans 111 2,534 -- 8,750 979
------- ------- ------- ------- -------
Total Nonperforming Loans 12,272 12,055 19,917 20,976 16,310
Other real estate owned 1,232 1,736 319 631 754
------- ------- ------- ------- -------
Total Nonperforming Assets $13,504 $13,791 $20,236 $21,607 $17,064
======= ======= ======= ======= =======
Nonperforming loans to total
loans outstanding .60% .64% 1.56% 1.72% 1.43%
======= ======= ======= ======= =======
Nonperforming assets to total
assets .40% .43% .88% 1.01% .81%
======= ======= ======= ======= =======
<FN>
(1) In addition to loans classified as nonperforming at December 31, 1997, there
were loans aggregating $9,258,000 where management is closely monitoring the
borrowers' ability to comply with payment terms.
(2) Gross interest income of $567,000 would have been recorded in 1997 for
nonaccrual and restructured loans at December 31, 1997 assuming these loans
had been accruing interest throughout the year in accordance with their
original terms. The amount of interest actually included in 1997 income was
$387,000.
</TABLE>
- 9 -
<PAGE> 10
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
------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans
outstanding, net of
unearned income $1,949,627 $1,591,147 $1,255,991 $1,179,828 $1,097,483
========== ========== ========== ========== ==========
Amount of loans
outstanding at the end
of the period, net of
unearned income $2,049,697 $1,873,745 $1,273,394 $1,217,218 $1,140,813
========== ========== ========== ========== ==========
Balance of allowance
for possible loan
losses at beginning
of period $ 30,307 $ 20,047 $ 21,795 $ 21,876 $ 16,682
Add: Allowance of
acquired subsidiary -- 11,800 -- -- --
Loans charged-off:
Commercial 2,179 2,896 178 2,520 794
Real estate-
construction -- -- 3,000 61 --
Real estate-
mortgage 1,340 1,339 24 244 329
Installment 3,091 2,409 1,754 1,163 1,336
---------- ---------- ---------- ---------- ----------
Total Loans Charged-Off 6,610 6,644 4,956 3,988 2,459
Recoveries of loans
previously
charged-off:
Commercial 400 430 82 572 781
Real estate-
construction -- -- -- -- --
Real estate-mortgage 13 48 147 74 145
Installment 790 673 534 638 667
---------- ---------- ---------- ---------- ----------
Total Recoveries 1,203 1,151 763 1,284 1,593
---------- ---------- ---------- ---------- ----------
Net loans charged-off 5,407 5,493 4,193 2,704 866
Additions to allowance
charged to expense 4,587 3,953 2,445 2,623 6,060
---------- ---------- ---------- ---------- ----------
Balance At End Of Period$ 29,487 $ 30,307 $ 20,047 $ 21,795 $ 21,876
========== ========== ========== ========== ==========
Ratio of net charge-offs
during the period to
average loans
outstanding .28% .35% .33% .23% .08%
========== ========== ========== ========== ==========
</TABLE>
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.
- 10 -
<PAGE> 11
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
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
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 $20,101 37% $20,660 36% $10,149 36% $12,719 34% $13,386 34%
Real estate -
construction 708 2 728 2 679 3 1,353 2 1,485 3
Real estate -
mortgage 5,085 47 5,226 48 5,731 46 3,920 47 4,167 47
Installment 3,593 14 3,693 14 3,488 15 3,803 17 2,838 16
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $29,487 100% $30,307 100% $20,047 100% $21,795 100% $21,876 100%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
<FN>
(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
-----------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
---------- ------ ---------- ------ ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 355,462 $ 305,111 $ 230,842
Interest-bearing
demand deposits 187,401 1.69% 204,620 1.86% 203,751 2.55%
Savings deposits 270,322 2.40% 303,685 2.70% 312,888 3.33%
Time deposits 1,597,137 5.19% 1,277,846 5.29% 910,175 5.47%
---------- ---------- ----------
Total $2,410,322 $2,091,262 $1,657,656
========== ========== ==========
</TABLE>
- 11 -
<PAGE> 12
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,
1997.
<TABLE>
<CAPTION>
Time Other
Certificates Time
of Deposits Deposits Total
------------ -------- --------
(In thousands)
<S> <C> <C> <C>
Time remaining to maturity:
Within three months $223,536 $ -- $223,536
Over three through six 36,960 -- 36,960
Over six through twelve 32,225 -- 32,225
Over twelve months 30,358 -- 30,358
-------- ------ --------
Total $323,079 $ -- $323,079
======== ====== ========
</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
-------------------------- ----------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31 $328,049 $387,357 $241,263 $35,179 $37,628 $26,381
Weighted average
interest rate at
year end 4.20% 5.26% 4.69% 5.58% 5.07% 5.51%
Maximum amount
outstanding at any
month's end $410,521 $433,965 $292,275 $62,883 $49,256 $48,219
Average amount
outstanding during
the year $355,402 $324,164 $244,714 $30,499 $22,570 $23,586
Weighted average
interest rate during
the year 5.13% 4.93% 5.45% 5.38% 5.24% 5.72%
</TABLE>
- 12 -
<PAGE> 13
Item 2. PROPERTIES
The Company's principal offices and FWNB's banking headquarters are located
at 110 West Berry Street, Fort Wayne, Indiana, in a 26-story building.
Approximately 33% of the building is occupied by FWNB under the terms of a lease
agreement, which has lease terms through March 2008. See Note 7 to the
consolidated financial statements relating to premises and equipment and lease
agreements of the Company.
FWNB has 18 fully utilized branch offices in Allen County, Indiana, in addition
to its main office. FWNB owns 11 of its offices. Five other offices are part of
land lease arrangements under which the buildings are owned by FWNB. Three
offices sites are wholly leased. Valley owns its main office facility located in
Mishawaka, Indiana. In addition Valley American Bank and Trust Company (Valley)
has 24 branch offices, of which 9 are owned by Valley, 3 are part of land lease
arrangements under which the buildings are owned by Valley, and 12 offices which
are wholly leased. Each of the Company's other banking subsidiaries owns its
respective main office in its home community. The Auburn State Bank has 1 branch
office, Old-First National Bank in Bluffton has 3 branch offices, First National
Bank of Huntington has 4 branch offices, and First National Bank of Warsaw has 9
branch offices.
Management of the Company believes that the properties used by its banking
subsidiaries are suitable and adequate for current as well as future needs.
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in various legal proceedings.
With respect to each of these suits, it is either the opinion of legal counsel
that it is without merit or the opinion of management of the Company that even
if the plaintiff prevails therein the disposition thereof will not have a
material affect on the financial condition of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders from September 30, 1997 to
December 31, 1997.
- 13 -
<PAGE> 14
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
A market exists for Fort Wayne National Corporation common stock in the national
over-the-counter market. The following table sets forth to the Company's best
knowledge the high and low sales prices per share from January 1, 1996 through
December 31, 1997.
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ----- -------- -------- -------- --------
<S> <C> <C> <C> <C>
High $ 30.17 $ 31.50 $ 37.25 $ 46.88
======== ======== ======== ========
Low 24.50 27.00 30.50 34.25
======== ======== ======== ========
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- ----- -------- -------- -------- --------
High $ 21.50 $ 21.33 $ 22.00 $ 27.83
======== ======== ======== ========
Low 19.67 19.33 19.83 21.33
======== ======== ======== ========
</TABLE>
The Company's common stock is traded in the national market system of the
National Association of Securities Dealers (NASDAQ) under the symbol FWNC. As of
December 31, 1997 and 1996 there were 3,550 and 3,664 shareholders of record,
respectively.
On January 16, 1998, the closing price for the Company's common stock, as
reported by NASDAQ, was $44.88.
Market Makers: The Chicago Corporation Merrill Lynch
Everen Securities, Inc. F. J. Morrissey & Co. Inc.
Herzog, Heine, Geduld, Inc. NatCity Investments, Inc.
Keefe, Bruyette & Woods, Inc. Paine Webber, Inc.
McDonald & Company UBS Securities, Inc.
- 14 -
<PAGE> 15
Item 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
Interest and fees
on loans $ 174,360 $ 141,257 $ 113,604 $ 96,538 $ 89,783
Interest and
dividends on
investments 59,500 56,491 45,398 44,581 49,865
Other interest
income 2,415 1,617 1,330 455 1,199
--------- --------- --------- --------- ---------
Total Interest
Income 236,275 199,365 160,332 141,574 140,847
Interest expense 118,728 99,569 80,976 62,759 62,382
--------- --------- --------- --------- ---------
Net Interest Income
Before Provision
For Possible Loan
Losses 117,547 99,796 79,356 78,815 78,465
Provision for
possible loan
losses 4,587 3,953 2,445 2,623 6,060
--------- --------- --------- --------- ---------
Net Interest Income
After Provision
For Possible Loan
Losses 112,960 95,843 76,911 76,192 72,405
Fiduciary fees 14,258 12,459 9,749 8,950 8,060
Other 17,639 12,500 9,763 10,156 10,400
Net securities gains 232 392 87 5 402
--------- --------- --------- --------- ---------
Total Noninterest
Income 32,129 25,351 19,599 19,111 18,862
Noninterest expense
Salaries and
benefits 47,200 39,724 31,237 29,798 28,878
Other 43,136 33,453 27,840 27,639 27,747
--------- --------- --------- --------- ---------
Total Noninterest
Expense 90,336 73,177 59,077 57,437 56,625
--------- --------- --------- --------- ---------
Income Before
Income Taxes 54,753 48,017 37,433 37,866 34,642
Applicable income
taxes 17,907 15,515 10,726 11,654 10,509
--------- --------- --------- --------- ---------
Net Income $ 36,846 $ 32,502 $ 26,707 $ 26,212 $ 24,133
========= ========= ========= ========= =========
</TABLE>
- 15 -
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C> <C>
Cash dividends
declared $ 15,975 $ 13,250 $ 10,758 $ 9,952 $ 9,302
Per share(2):
Basic earnings 1.98 1.79 1.56 1.52 1.41
Diluted earnings 1.92 1.74 1.53 1.51 1.38
Cash dividends
declared per
common share .79 .68 .63 .58 .54
FINANCIAL CONDITION
Total assets $3,393,471 $3,221,297 $2,296,107 $2,135,961 $2,094,425
Average daily assets 3,204,909 2,765,890 2,172,709 2,092,875 2,065,636
Average daily
deposits 2,410,322 2,091,262 1,657,656 1,621,652 1,612,786
Average daily loans 1,949,627 1,591,147 1,255,991 1,179,828 1,097,483
Average
shareholders'
equity 296,003 264,373 217,083 202,538 182,884
Subordinated and
other long-term
debt 117,551 58,341 6,400 7,160 7,920
OTHER DATA
Average common
shares outstanding 17,456,525 17,480,178 17,173,916 17,220,558 17,148,935
Number of employees
at year end (1) 1,531 1,467 1,083 1,052 1,027
Allowance to
nonperforming
loans 240.28% 251.41% 100.65% 103.90% 134.13%
Tax equivalent yield
on earning assets 8.32% 8.16% 8.36% 7.72% 7.77%
Cost of supporting
liabilities 4.07% 3.94% 4.06% 3.28% 3.30%
Net interest margin
on earning assets 4.25% 4.22% 4.30% 4.44% 4.47%
Efficiency ratio 57.85% 55.68% 56.13% 55.14% 54.94%
Return on average
assets 1.15% 1.18% 1.23% 1.25% 1.17%
Return on average
equity 12.45% 12.29% 12.30% 12.94% 13.20%
Common dividend
payout ratio 37.33% 36.31% 40.28% 37.97% 38.54%
Average equity to
average asset ratio 9.24% 9.56% 9.99% 9.68% 8.85%
Market value to book
value per common
share at year end 301.64% 174.31% 154.03% 150.20% 148.58%
Price earnings ratio 23.2 14.2 13.5 11.4 11.8
<FN>
(1) Includes part-time employees.
(2) The earnings per share amounts prior to 1997 have been restated required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share." For further discussion of earnings per share and the impact of
Statement No. 128, see the notes to the consolidated financial statements.
</TABLE>
- 16 -
<PAGE> 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Fort Wayne National Corporation (the Company) entered into an Agreement and Plan
of Merger (the Agreement) dated January 12, 1998 providing for the merger of the
Company with and into National City Corporation (National City). As of the
effective time of the merger, each outstanding share of the Company's common
stock will be converted into .75 shares of National City common stock. Each
outstanding share of the Company's Class B Series 1 6% convertible preferred
stock will receive one share of National City's preferred stock. Based on the
January 9, 1998 market price of National City stock, the transaction has a value
of $44.44 per share for a total of $826 million. Consummation of the merger is
subject to a number of conditions including receipt of approval of the Agreement
by shareholders of the Company, receipt of all required regulatory approvals and
fairness opinions. Under the Agreement, the Company will operate its business in
the ordinary course and use its commercially reasonable efforts to preserve
intact its business organization. The transaction is expected to close in the
second quarter of 1998. The merger will be accounted for as a purchase.
National City is a registered bank holding company with headquarters in
Cleveland, Ohio. At December 31, 1997, National City had total consolidated
assets of $55 billion, total consolidated loans of $40 billion, and total
consolidated deposits of $37 billion. National City conducts a general retail
and commercial banking business through its bank subsidiaries, which operate in
Ohio, Indiana, Kentucky and Pennsylvania.
On June 1, 1996, the Company acquired Valley Financial Services, Inc. (Valley).
This acquisition was accounted for as a purchase. The Company's consolidated
statements reflect the operations of Valley from the date of acquisition.
The Company announced a three-for-two stock split in the second quarter of 1997.
All share and per share data has been adjusted to reflect this stock split which
became effective July 15, 1997.
Results of Operations
Earnings
The Company reported record net income of $36.8 million in 1997 compared to
$32.5 million in 1996 and $26.7 million in 1995. Basic earnings per share
increased 11% in 1997 to $1.98, compared to $1.79 in 1996 and $1.56 in 1995.
Diluted earnings per share in 1997 totaled $1.92 compared to $1.74 in 1996 and
$1.53 in 1995.
Cash earnings of $39.7 million in 1997 reflected a 16% increase compared to
$34.3 million in 1996 and $26.9 million in 1995. Cash earnings adjusts reported
net income for the non-cash impact of intangible amortization expense which
primarily includes goodwill. Cash earnings per share increased 14% in 1997 from
$1.89 in 1996 to $2.15 in 1997. Diluted cash earnings per share of $2.07 in 1997
compares to $1.84 in 1996 and $1.54 in 1995
Return on average common equity was 13.37% in 1997, up from 12.85% in 1996 and
12.30% in 1995. Return on average assets was 1.15% in 1997 compared to 1.18% in
1996 and 1.23% in 1995.
Net income for the fourth quarter of 1997 was a record $9.6 million or $.53 per
share compared to $.48 in the third quarter of 1997 and $.51 in the fourth
quarter of 1996. Fourth quarter 1997 diluted earnings per share were $.50, up
from $.46 in the third quarter of 1997 and $.49 in the fourth quarter of 1996.
- 17 -
<PAGE> 18
The Company repurchased 600,000 shares of common stock late in the third quarter
of 1997. The full effect of this transaction was not completely realized until
the fourth quarter of 1997. Annualized return on average common equity was
14.12% in the fourth quarter of 1997, compared to 12.61% in the third quarter of
1997 and 14.22% in the fourth quarter of 1996. Annualized return on average
assets for the fourth quarter of 1997 was 1.15% compared to 1.12% in the third
quarter 1997 and 1.21% in the fourth quarter 1996.
Net Interest Income
Net interest income is the difference between interest and fees earned on assets
and the interest paid on deposits and other funding sources and represents the
primary source of revenue for the Company. Certain investments of the Company
are nontaxable. To compare nontaxable yields to taxable yields, amounts are
adjusted to pretax equivalents based on the marginal corporate tax rate of 35%.
Fully taxable equivalent (FTE) net interest income in 1997 of $124.3 million
increased 17% from $106.5 million in 1996 and $85.7 million in 1995. The
significant increase in FTE net interest income is attributed to an increase of
$14.3 million due to volume and $3.5 million due to rates. This follows an
increase of $17.0 million in 1996 over 1995 due to volume variances and $3.7
million due to rate changes. The primary reason for the favorable variances in
volume is the result of the Valley acquisition in 1996. While Valley was not
included in the 1995 financial results, Valley added $442 million of average
earning assets in 1996 and $785 million in 1997.
The flattening yield curve and the highly competitive market for loans and
deposits continued to add pressure to the Company's net interest margin. The net
interest margin of 4.25% in 1997 was relatively consistent with 4.22% in 1996
and 4.30% in 1995. The yield on earning assets increased in 1997 from 8.16% in
1996 to 8.32% in 1997. The 1997 yield on earning assets was comparable to the
8.36% realized in 1995. The Company's loan portfolio continued to grow in 1997
and this improvement in the mix of earning assets contributed to the increased
yield on earning assets. However, the cost of interest-bearing liabilities also
increased 11 basis points from 4.59% in 1996 to 4.70% in 1997 after decreasing
17 basis points in 1996 from 4.76% in 1995. On a relative basis comparing 1997
to 1996, the majority of the growth in the Company's funding sources was
reflected in short-term borrowings and money market deposits. Both of these
categories reflect higher costs than other traditional savings and checking
products.
Noninterest Income and Expense
A ratio often used to evaluate the Company's noninterest income and expense
performance is the efficiency ratio. This is calculated by dividing total
noninterest expense by the total of FTE net interest income and noninterest
income less securities transactions. The lower the ratio, the more efficient the
Company is at generating income in relation to expenses incurred to obtain that
income. While the efficiency ratio increased in 1997 to 57.9% from 55.7% in
1996, these results are still below peer ratios of approximately 61.0%. On a
cash basis, the efficiency ratio in 1997 of 56.0% is consistent with 55.9% in
1995 and only slightly higher than 1996's 54.3%.
Total noninterest income increased $6.8 million or 27% in 1997. Fiduciary fees
is the largest single category of noninterest income representing 44%. This
category increased 14% in 1997 from 1996. Valley contributed $829,000 of
fiduciary fees in 1996 and $1.7 million in 1997 accounting for half of the
increase. In addition, the Company's market value of assets under supervision
increased from $3.8 billion in 1996 to $4.2 billion in 1997.
Service charges on deposits increased 18% in 1997 or $1.2 million. During 1997,
the Company standardized all retail deposit products. This resulted in an
enhanced service charge structure. The Company has also improved its collection
of various deposit fees in the last few years.
- 18 -
<PAGE> 19
Other service charges increased $1.8 million or 57%. Valley contributed $687,000
in this category in 1996 and $1.3 million in 1997 or 36% of the variance. The
Company realized a $540,000 increase in credit life insurance income in 1997
excluding the effect of Valley. Also, the Company's new lease accounting company
generated $207,000 of processing fees in 1997.
Other income increased $2.2 million or 78%. While Valley accounted for 11% of
the increase, the primary reason for the variance was an increase in electronic
banking fees of $1.6 million primarily as a result of the Company's new debit
card introduced in early 1997 along with a new ATM noncustomer convenience fee.
Total noninterest expense increased $17.2 million or 23% in 1997 from 1996.
Valley's noninterest expense in 1996 of $12.5 million compared to $23.4 million
in 1997 accounting for 63% of the increase. Personnel expense including salaries
and employee benefits represent over 50% of total noninterest expense. Total
personnel expense increased 19% or $7.5 million in 1997 compared to 1996. The
full year effect of Valley in 1997 contributed $5.7 million or 76% of the
increase. The majority of the increases in all other categories of noninterest
expense were also attributed to the Valley transaction.
Income Taxes
The Company's effective tax rate of 33% in 1997 compares to 32% in 1996 and 29%
in 1995. The Company's effective tax rate for financial reporting purposes
differs from the marginal federal (35%) and state (8.5%) rates. This difference
is attributable principally to the tax-exempt income earned on various earning
assets and the disallowance of tax deductions on certain expenses.
Analysis of Financial Condition
The Company's total assets at December 31, 1997 increased by $172 million or 5%
from 1996 to $3.4 billion. Loans outstanding increased $176 million or 9%
totaling $2.1 billion. Total deposits increased 6% to a record $2.6 billion.
Loans
The Company's loan portfolio is concentrated in commercial activity. Total
commercial and industrial loans, including financing leases increased $80
million or 12% in 1997 compared to 1996. Consumer loans increased $19 million
or 8%. Approximately 47% of the Company's loans are real estate mortgages,
including residential, commercial, and other equity lines. 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
sells the majority of its fixed rate real estate loans in the secondary market
and generally retains the right to service the loans providing a continuing
source of noninterest income. During 1997 the Company sold $41 million of
residential mortgages to the secondary market.
Asset Quality
The Company performs a periodic evaluation on the adequacy of the allowance for
possible loan losses. A loan grading system is used that allows the Company to
identify, monitor, and address asset quality problems in an accurate and timely
manner. Credits of a significant nature are reviewed on an individual basis and
a specific allocation of the allowance may be made if so warranted.
The Company's charge to earnings for possible loan losses of $4.6 million in
1997 is up from $4.0 million in 1996 and $2.4 million in 1995. Approximately 45%
of the increase in 1997 is attributed to Valley. Net charge-offs in 1997 of $5.4
million was consistent with 1996. Net charge-offs as a percentage of loans
decreased 7 basis points from .35% in 1996 to .28% in 1997.
- 19 -
<PAGE> 20
Nonperforming assets remained relatively constant at year-end 1997.
Nonperforming assets to total assets of .40% continued to improve in 1997. This
ratio has averaged .71% over the last five years after reaching a high of 1.01%
in 1994. The allowance for possible loan losses was 240% of nonperforming loans
in 1997 compared to 251% in 1996 and 101% in 1995.
Other than those loans included in the Nonperforming Assets table and related
notes, 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.
Investment Securities
The Company classifies its entire investment portfolio as available-for-sale.
Therefore, the securities portfolio is recorded at market value. The Company's
securities portfolio decreased $4.3 million at December 31, 1997 compared to
December 31, 1996. The decrease in the securities portfolio was used to finance
growth in the loan portfolio. The decrease was primarily realized in U.S.
Treasury securities.
The Company's securities portfolio continues to be of high quality as evidenced
by U.S. Government and other federal agencies representing over 60% of the total
outstandings in each of the last three years. The Company's holdings of states
and other political subdivisions represented 23% of the total portfolio in 1997
compared to 22% in 1996 and 26% in 1995. Other securities, including U.S. agency
mortgage backed securities, corporate debt securities and other securities
represented 13% or less at the end of 1997, 1996, and 1995.
Deposits and Other Interest-Bearing Liabilities
The primary source of funds for the Company comes from demand and time
deposits generated at the Company's affiliate banks. Total deposits in 1997
averaged $2.4 billion or 15% over 1996. The effect of Valley's average deposits
in 1996 of $331 million increased to $589 million in 1997 and represents
approximately 80% of the reported increase.
The majority of the growth in average deposits continued to come from the
Company's Anyday/Everyday money market deposit product. This category increased
$188 million or 57%. Excluding the effect of Valley, the Anyday/Everyday product
increased $111 million or 38%. Noninterest-bearing demand deposits also
increased in 1997 while other categories remained relatively constant or
decreased slightly when considering the effect of Valley.
Federal funds purchased and securities sold under agreements to repurchase
consists primarily of repurchase arrangements commercial customers of the
Company's affiliate banks utilize for cash management services.
Long-term debt increased to $118 million in 1997 up from $58 million in 1996. In
the second quarter of 1997, the Company completed a private placement of $30
million of 9.85% Capital Securities due April 15, 2027. These securities qualify
as Tier I capital for purposes of risk-based capital calculations. The Company
also increased its use of Federal Home Loan Bank borrowings from $34 million in
1996 to $67 million in 1997.
Capital Resources
Total shareholder's equity was $298 million at December 31, 1997. The Company
continues to maintain well-capitalized risk-based capital ratios. The total Tier
I and Tier II capital ratio at December 31, 1997 was 13.34% compared to 12.95%
at December 31, 1996. Average equity was 9.24% of average assets in 1997
compared to 9.56% in 1996.
- 20 -
<PAGE> 21
On April 22, 1997, the Company's shareholders approved an increase from
20,000,000 to 50,000,000 in the total authorized shares of common stock. The
shareholders also approved an increase from 1,000,000 to 2,000,000 in the total
authorized shares of Class A Voting preferred stock and the Class B Nonvoting
preferred stock. This action enabled the Company to effect a three-for-two
common stock split that was declared by the Board of Directors on May 20, 1997.
The split was paid on July 15, 1997 to shareholders of record on June 16, 1997.
The Board of Directors approved the repurchase of up to 5% of the common shares
outstanding as of January 1, 1997. In September 1997, the Company repurchased
600,000 shares of common stock through an accelerated repurchase agreement at an
initial cost of approximately $21 million. The repurchase is expected to be
completed by March 1998. The agreement obligates the Company to settle the
difference between the sum of the weighted average daily price during the buy
back term and the initial price.
Book value per common share at December 31, 1997 was $15.25 compared to $14.53
at December 31, 1996. Cash dividends declared in 1997 totaled $16.0 million,
including $2.2 million of preferred dividends. The common dividend payout ratio
in 1997 was 37.3% compared to 36.3% in 1996.
Forward-Looking Statements
The sections that follow, Market Risk Management and Other, contain certain
forward-looking statements (as defined in the Private Securities Litigation
Reform of Act of 1995). These forward-looking statements may involve significant
risks and uncertainties. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, actual results may
differ materially from the results discussed in these forward-looking
statements.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates, and
equity prices. The Company's market risk is composed primarily of interest rate
risk.
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.
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, 1997 was 88%. Company guidelines establish an acceptable range of between
75% and 110%.
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 static 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.
- 21 -
<PAGE> 22
The Company runs simulation models numerous times throughout the year comparing
baseline results (earnings under a flat rate 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 300 basis point rate shock
decrease in the prime rate, net interest income would be expected to increase
approximately 1%. Policy limits restrict this amount to 5% for each 100 basis
point movement in interest rates.
- 22 -
<PAGE> 23
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,
1997.
<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 $ 882,370 $ 102,864 $ 185,121 $1,170,355 $ 505,143 $374,199 $2,049,697
Investment
securities(1) 101,232 50,253 89,923 241,408 559,237 169,646 970,291
Other earning
assets 60,264 -- -- 60,264 -- -- 60,264
---------- --------- --------- ---------- ---------- -------- ----------
Total Interest-
earning Assets 1,043,866 153,117 275,044 1,472,027 1,064,380 543,845 3,080,252
Other assets -- -- -- -- -- 313,219 313,219
---------- --------- --------- ---------- ---------- -------- ----------
Total Assets $1,043,866 $ 153,117 $ 275,044 $1,472,027 $1,064,380 $857,064 $3,393,471
========== ========= ========= ========== ========== ======== ==========
Interest-bearing
liabilities:
Interest-
bearing
deposits $1,120,395 $ 155,230 $ 222,436 $1,498,061 $ 476,387 $174,916 $2,149,364
Short-term
borrowings 362,511 538 179 363,228 -- -- 363,228
Long-term
notes 746 1,717 8,335 10,798 70,677 36,076 117,551
Hedged
interest-
bearing
liabilities (195,000) -- -- (195,000) -- -- (195,000)
---------- --------- --------- --------- -------- -------- ----------
Total Interest-
Bearing
Liabilities 1,288,652 157,485 230,950 1,677,087 547,064 210,992 2,435,143
Demand
deposits -- -- -- -- -- 429,822 429,822
Other
liabilities -- -- -- -- -- 35,709 35,709
Shareholders'
equity -- -- -- -- -- 297,797 297,797
---------- --------- --------- --------- -------- -------- ----------
Total
Liabilities
and
Shareholder's
Equity $1,288,652 $ 157,485 $ 230,950 $1,677,087 $ 547,064 $974,320 $3,198,471
========== ======== ======== ========= ======== ======== ==========
Rate
sensitivity
gap $ (244,786)$ (4,368)$ 44,094 $ (205,060)
========== ========= ========= ==========
Cumulative rate
sensitivity
gap $ (244,786)$(249,154)$(205,060)
=========== ========= =========
Cumulative rate
sensitivity
gap ratio .81 .83 .88
=========== ========= =========
<FN>
(1) The sensitivity of investment securities is based on the earlier of call
dates or scheduled maturities.
</TABLE>
- 23 -
<PAGE> 24
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
relatively 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 69% 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. In 1998, there is $172 million of investments scheduled
to mature that can be used to meet additional liquidity demands.
Other
During 1997, the Company engaged outside consultants to assist in addressing the
potential effect of Year 2000 on operating systems, processes, and facilities. A
report identifying the potential costs and remediation effort necessary to
become Year 2000 compliant by 1999 was completed in early 1998. The potential
merger of the Company with National City and the expected conversion of all
critical operating systems to the National City standards may require
modification to the Company's Year 2000 plan. Merger integration plans will
include provisions to ensure that all Year 2000 issues are addressed and
contingency plans developed to ensure that all critical systems are compliant
prior to their anticipated exposure dates.
- 24 -
<PAGE> 25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Responsibilities for Financial Statements...................... 26
Report of Ernst & Young LLP, Independent Auditors.............. 27
Consolidated Balance Sheet as of December 31, 1997 and 1996.... 28
Consolidated Statement of Income for the years ended
December 31, 1997, 1996, and 1995............................ 30
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996, and 1995............................ 32
Consolidated Statement of Changes in Shareholders' Equity for
the years ended December 31, 1997, 1996, and 1995............ 34
Notes to Consolidated Financial Statements..................... 35
Quarterly Financial Information (Unaudited).................... 59
</TABLE>
- 25 -
<PAGE> 26
Responsibilities for Financial Statements
The accompanying consolidated financial statements of Fort Wayne National
Corporation and subsidiaries were prepared by the management which is
responsible for their integrity and objectivity. The statements have been
prepared in conformity with generally accepted accounting principles and, as
such, include amounts based on judgments of management.
The system of internal controls of Fort Wayne National Corporation and its
subsidiaries is designed to safeguard the assets, and to assure that the books
and records reflect the transactions of the companies and that its policies and
procedures are followed. This system is augmented by a strong program of
internal audit and the careful selection and training of qualified personnel.
Ernst & Young LLP, independent auditors, are engaged to audit the consolidated
financial statements of Fort Wayne National Corporation and its subsidiaries and
issue reports thereon. Their audit is conducted in accordance with generally
accepted auditing standards which include an understanding of the Company's
accounting and financial controls. They conduct such tests and related
procedures as they deem necessary to arrive at an opinion on the fairness of the
financial statements.
The Board of Directors, through the Audit Committee of the Board, is responsible
for assuring that management fulfills its responsibilities in the preparation of
the financial statements and for engaging independent auditors, with whom the
Committee reviews the scope of the audits conducted and the accounting
principles applied in financial reporting. The Audit Committee meets separately
and jointly with the independent auditors, representatives of management, and
the internal auditors to review the activities of each and to ensure that each
is properly discharging its responsibilities. To ensure complete independence,
Ernst & Young LLP, periodically meets with the Audit Committee, without
management representatives present, to discuss internal accounting control,
auditing, and financial reporting matters.
Fort Wayne National Corporation
- 26 -
<PAGE> 27
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Fort Wayne National Corporation
We have audited the accompanying consolidated balance sheet of Fort Wayne
National Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, cash flows, and changes in
shareholders' equity for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Fort Wayne
National Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
January 19, 1998
Fort Wayne, Indiana
- 27 -
<PAGE> 28
FORT WAYNE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
As of December 31
1997 1996
----------- -----------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 181,481 $ 191,913
Federal funds sold and securities
purchased under agreements to resell 57,615 56,075
Interest-bearing deposits with banks 2,649 376
Investment securities, at fair value 970,291 974,608
Loans 2,056,345 1,875,965
Less: Unearned income (6,648) (2,220)
Allowance for possible loan losses (29,487) (30,307)
---------- ----------
NET LOANS 2,020,210 1,843,438
Premises and equipment 57,894 55,234
Other assets 103,331 99,653
---------- ----------
TOTAL ASSETS $3,393,471 $3,221,297
========== ==========
</TABLE>
See accompanying notes.
- 28 -
<PAGE> 29
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 429,822 $ 419,118
Interest-bearing 2,149,364 2,002,773
---------- ----------
TOTAL DEPOSITS 2,579,186 2,421,891
Federal funds purchased and securities
sold under agreements to repurchase 328,049 387,357
Notes payable - U.S. Treasury and
other borrowings 35,179 37,628
Dividends payable 3,972 3,602
Accrued liabilities 31,042 19,360
Subordinated and other long-term notes 117,551 58,341
---------- ----------
TOTAL LIABILITIES 3,094,979 2,928,179
Deferred gain on sale of premises 695 961
Shareholders' equity:
Preferred stock, without par value:
Class A Voting - 2,000,000 shares
authorized but unissued
Class B Nonvoting - 2,000,000 shares
authorized:
Series 1 6% convertible shares
outstanding: 739,976 36,999 36,999
Common stock, without par value:
Authorized shares: 50,000,000
Issued and outstanding shares:
1997 - 17,098,932; 1996 - 17,560,251 18,999 19,511
Capital surplus 47,455 49,367
Retained earnings 183,871 179,052
Unrealized gain on securities
available-for-sale 10,473 7,228
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 297,797 292,157
---------- ----------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $3,393,471 $3,221,297
========== ==========
</TABLE>
See accompanying notes.
- 29 -
<PAGE> 30
FORT WAYNE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For The Years Ended December 31
-------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $173,467 $140,269 $112,241
Tax-exempt 893 988 1,363
Interest and dividends on
investment securities:
Taxable 47,905 45,086 34,919
Tax-exempt 11,595 11,405 10,479
Interest on federal funds sold
and securities purchased under
agreements to resell 2,360 1,597 1,322
Interest on deposits with banks 55 20 8
------- ------- -------
TOTAL INTEREST INCOME 236,275 199,365 160,332
INTEREST EXPENSE
Interest on deposits 92,564 79,653 65,414
Interest on federal funds
purchased and securities sold
under agreements to repurchase 18,235 15,976 13,346
Interest on notes payable -
U.S. Treasury and other
borrowings 1,640 1,183 1,348
Interest on subordinated and
other long-term notes 6,289 2,757 868
------- ------- -------
TOTAL INTEREST EXPENSE 118,728 99,569 80,976
------- ------- -------
NET INTEREST INCOME
BEFORE PROVISION FOR
POSSIBLE LOAN LOSSES 117,547 99,796 79,356
Provision for possible loan losses 4,587 3,953 2,445
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE
LOAN LOSSES 112,960 95,843 76,911
</TABLE>
- 30 -
<PAGE> 31
<TABLE>
<S> <C> <C> <C>
NONINTEREST INCOME
Fiduciary fees 14,258 12,459 9,749
Service charges on deposit
accounts 7,667 6,515 4,705
Other service charges 5,004 3,197 2,880
Net securities gains 232 392 87
Other income 4,968 2,788 2,178
------- ------- -------
TOTAL NONINTEREST INCOME 32,129 25,351 19,599
NONINTEREST EXPENSE
Salaries and wages 38,204 32,218 25,231
Employee benefits 8,996 7,506 6,006
Net occupancy expense 7,622 6,360 5,032
Equipment expense 7,027 5,228 4,213
FDIC assessment 311 (116) 1,939
Amortization of goodwill and
other intangibles 2,880 1,772 232
Other expense 25,296 20,209 16,424
------- ------- -------
TOTAL NONINTEREST EXPENSE 90,336 73,177 59,077
------- ------- -------
INCOME BEFORE INCOME TAXES 54,753 48,017 37,433
Applicable income taxes 17,907 15,515 10,726
------- ------- -------
NET INCOME $36,846 $32,502 $26,707
======= ======= =======
Basic earnings per share $ 1.98 $ 1.79 $ 1.56
======= ======= =======
Diluted earnings per share $ 1.92 $ 1.74 $ 1.53
======= ======= =======
</TABLE>
See accompanying notes.
- 31 -
<PAGE> 32
FORT WAYNE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 36,846 $ 32,502 $ 26,707
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for possible loan losses 4,587 3,953 2,445
Net accretion and amortization of
investment securities (17) 241 210
Net accretion and amortization of loans (19) (23) (26)
Provision for depreciation and amortization
of premises and equipment 6,239 4,691 3,522
Deferred income taxes (216) 1,726 1,433
Capitalized originated mortgage servicing rights (169) (189) --
Amortization of capitalized originated mortgage
servicing rights 37 17 --
Amortization of goodwill and other intangibles 2,880 1,772 232
Amortization of deferred gain on sale of premises (266) (266) (266)
Gain on sale of investment securities
available-for-sale (241) (421) (90)
Loss on sale of investment securities
available-for-sale 9 29 3
Market value adjustment of investment securities
held for trading -- 715 (715)
Net (gain) loss on sale of investment
securities held for trading -- 749 (255)
Proceeds from sale of investment securities
held for trading -- 69,323 5,172
Purchase of investment securities held
for trading -- (49,528) (25,716)
Loans originated for resale (35,781) (27,997) (12,341)
Unrealized (gain)loss on loans held for sale -- -- (31)
Proceeds from sales of loans 41,163 29,310 11,732
Net (gain) loss on sale of loans 45 (5) (101)
Net (gain) loss on disposals of premises
and equipment (39) -- 21
(Increase)decrease in other assets (8,293) 2,477 (7,566)
Increase (decrease) in other liabilities 11,682 (3,114) 305
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 58,447 65,962 4,675
INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold and
securities purchased under agreements to resell (1,540) 47,675 (25,250)
Net (increase) decrease in interest-bearing
deposits with banks (2,273) 68 --
Proceeds from sales of investment securities
available-for-sale 16,396 4,500 1,478
Proceeds from maturities of investment securities
available-for-sale 188,902 (195,404) 172,275
Purchase of investment securities available-for-sale (195,404) (285,483) (180,068)
Net increase in loans (186,767) (74,876) (59,602)
Proceeds from disposals of premises and equipment 86 43 32
Purchase of premises and equipment (8,946) (8,157) (4,483)
Purchase of net assets of Valley Financial
Services, Inc., net of cash acquired -- (62,637) --
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (189,546) (180,957) (95,618)
FINANCING ACTIVITIES
Net increase in deposits 157,295 90,729 135,188
Net decrease in short-term borrowings (61,757) (4,053) (9,250)
Issuance of long-term debt 90,358 15,817 --
Principal payment on long-term debt (31,148) (4,923) (760)
Issuance of preferred stock -- 36,999 --
Issuance of common stock -- 20,057 --
Cash dividends paid on common stock (13,385) (11,661) (10,544)
Cash dividends paid on preferred stock (2,220) (740) --
Proceeds from exercise of stock options 2,449 1,277 453
Repurchase of common stock (20,925) (14,196) (2,826)
</TABLE>
- 32 -
<PAGE> 33
<TABLE>
<S> <C> <C> <C>
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 120,667 129,306 112,261
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,432) 14,311 21,318
Cash and cash equivalents at beginning of period 191,913 177,602 156,284
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $181,481 $191,913 $177,602
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $118,241 $100,528 $ 79,878
======== ======== ========
Income taxes paid $ 14,797 $ 14,793 $ 9,764
======== ======== ========
</TABLE>
See accompanying notes.
- 33 -
<PAGE> 34
<TABLE>
<CAPTION>
FORT WAYNE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For The Years Ended December 31, 1995, 1996, and 1997
(Dollars in thousands, except per share data)
Net
Unrealized
Gain (Loss)
On Total
Securities Share-
Preferred Common Capital Retained Available- holders'
Stock Stock Surplus Earnings For-Sale Equity
--------- ------- ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ -- $19,157 $31,618 $157,189 $(8,968)$198,996
Net income -- -- -- 26,707 -- 26,707
Issuance of 59,624 shares
of common stock -- 66 387 -- -- 453
Repurchase of 157,500 shares
of common stock -- (175) (503) (2,148) -- (2,826)
Cash dividends -
$.63 per common share -- -- -- (10,758) -- (10,758)
Net unrealized gain
on securities
available-for-sale -- -- -- -- 21,139 21,139
------- ------- ------- -------- ---------- --------
Balance at December 31, 1995 -- 19,048 31,502 170,990 12,171 233,711
Net income -- -- -- 32,502 -- 32,502
Issuance of 739,976 shares
of Class B Nonvoting
Series 1 6% convertible
preferred stock 36,999 -- -- -- -- 36,999
Issuance of 1,083,510 shares
of common stock -- 1,203 19,990 -- -- 21,193
Repurchase of 666,335 shares
of common stock -- (740) (2,266) (11,190) -- (14,196)
Cash dividends:
Common stock -
$.68 per share -- -- -- (11,955) -- (11,955)
Preferred stock -
$1.75 per share -- -- -- (1,295) -- (1,295)
Tax benefit of nonqualified
stock options exercised -- -- 141 -- -- 141
Net unrealized loss
on securities
available-for-sale acquired -- -- -- -- (311) (311)
Net unrealized loss
on securities
available-for-sale -- -- -- -- (4,632) (4,632)
------- ------- ------- -------- ---------- --------
Balance at December 31, 1996 36,999 19,511 49,367 179,052 7,228 292,157
Net income -- -- -- 36,846 -- 36,846
Issuance of 138,681 shares
of common stock -- 154 2,107 (8) -- 2,253
Repurchase of 600,000 shares
of common stock -- (666) (4,215) (16,044) -- (20,925)
Cash dividends:
Common stock -
$.79 per share -- -- -- (13,755) -- (13,755)
Preferred stock -
$3.00 per share -- -- -- (2,220) -- (2,220)
Tax benefit of nonqualified
stock options exercised -- -- 196 -- -- 196
Net unrealized gain
on securities
available-for-sale -- -- -- -- 3,245 3,245
------- ------- ------- -------- ---------- --------
Balance at December 31, 1997 $ 36,999 $18,999 $47,455 $183,871 $ 10,473 $297,797
======= ======= ======= ======== ========== ========
</TABLE>
See accompanying notes.
- 34 -
<PAGE> 35
Fort Wayne National Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. Significant Accounting Policies
The accounting principles followed by the Company and the methods of applying
those principles conform with generally accepted accounting principles and with
general practice within the banking industry. The principles which materially
affect the determination of financial position, results of operations, or cash
flows are summarized below.
Organization
Fort Wayne National Corporation (the Company) and its subsidiaries engage in a
wide range of commercial and personal banking and trust activities primarily in
northeast and north central Indiana.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
Cash Flow Information
For purposes of the statement of cash flows, the Company considers cash and due
from banks as cash and cash equivalents.
Investment Securities
Debt securities that the Company has both the positive intent and ability to
hold to maturity are carried at amortized cost. Debt securities that the Company
does not have the positive intent and ability to hold to maturity and all
marketable equity securities are classified as available-for-sale or trading and
are carried at fair value, as determined by the closing sales prices in an
active market. Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of shareholders' equity.
Unrealized holding gains and losses on securities classified as trading are
reported in earnings.
Gains or losses on the disposition of available-for-sale securities,
representing the difference between the selling price and the amortized cost of
the specific security, are recorded as realized and are disclosed separately in
the statement of income.
- 35 -
<PAGE> 36
Loans
Interest on commercial, installment, and real estate mortgage loans is accrued
on a daily basis based on the principal outstanding. Discounts on installment
and commercial loans are amortized and included in interest income using the
interest method.
Generally, a loan is classified as nonaccrual and the accrual of interest income
is generally discontinued when a loan becomes 90 days past due as to principal
or interest. When interest accruals are discontinued, unpaid interest credited
to income in the current year is reversed, and interest accrued in the prior
year is charged to the allowance for possible loan losses. Management may elect
to continue the accrual of interest when the estimated net realizable value of
collateral is sufficient to cover the principal and accrued interest, and the
loan is in the process of collection.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established through a provision for
possible loan losses charged against income. Loans deemed to be uncollectible
are charged against the allowance for possible loan losses, and subsequent
recoveries, if any, are credited to the allowance.
The allowance for possible loan losses is maintained at a level believed
adequate by management to absorb estimated probable loan losses. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the timing
of future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions, and other
relevant factors. This evaluation is inherently subjective as it requires
material estimates including amount and timing of future cash flows expected to
be received on impaired loans that may be susceptible to significant change.
Premises and Equipment
Premises and equipment are stated at cost less allowances for depreciation and
amortization. Provisions for depreciation are computed primarily by the
straight-line method based upon the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the estimated useful
lives of the assets or the terms of the underlying leases.
Intangible Assets
Goodwill and other intangibles of $50,424,000 and $53,094,000 at December 31,
1997 and 1996, respectively, net of accumulated amortization of $6,185,000 and
$3,305,000, respectively, are amortized using the straight-line method over
periods ranging from 15 to 25 years. The carrying value of goodwill and other
intangibles is reviewed regularly for indicators of impairment of value.
Loan Origination Fees and Costs
Loan origination and commitment fees and certain direct loan origination costs
are deferred and amortized as a net adjustment to the related loan's yield. The
Company is generally amortizing these amounts over the contractual life of such
loans. Commitment fees based on a percentage of a customer's unused line of
credit and fees related to standby letters of
- 36 -
<PAGE> 37
credit are recognized over the commitment period.
Interest Rate Futures and Options
The Company uses exchange traded interest rate futures and option contracts as
part of its overall interest rate risk management strategy. Gains and losses on
futures contracts used to hedge identified positions are deferred and amortized
over the remaining lives of the hedged assets or liabilities as an adjustment to
interest income or expense. Gains and losses (both realized and unrealized) on
futures and option contracts used to hedge trading activities are included in
interest and dividends on investment securities. Futures and option contracts
used to hedge trading activities are carried at market value and included in
other assets. Any deferred realized or unrealized gains or losses of the
interest rate futures or options are immediately recognized in the statement of
income if the specified criteria of a hedged position is not
met, the designated item matures or is liquidated, or if the anticipated
transaction is no longer likely to occur.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of shares at the date of grant. The
Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
(APB 25) and, accordingly, recognizes no compensation for the stock option
grants.
2. Acquisition of Valley Financial Services, Inc.
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. The merger was completed in accordance with an Agreement and Plan
of Merger between VFS and the Company, dated November 6, 1995. Merger
consideration consisted of $53 million in cash, $20 million in common stock and
$37 million in preferred stock. Goodwill and other intangibles of $52.8 million
recorded in connection with this acquisition are being amortized over periods up
to 25 years. VFS had assets of $824 million at June 1, 1996. This acquisition
has been accounted for as a purchase, and accordingly, the results of operations
of VFS have been included in the consolidated results of operations of the
Company from the date of acquisition.
- 37 -
<PAGE> 38
The following pro forma data reflects the consolidated results of operations of
the Company as though VFS had been combined as of the beginning of each period
presented:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(In thousands,
except per share data)
<S> <C> <C>
Interest income $223,725 $217,608
Interest expense 112,563 111,375
-------- --------
Net interest income $111,162 $106,233
======== ========
Net income $ 29,666 $ 29,058
======== ========
Basic earnings per share $1.53 $1.48
======== ========
Diluted earnings per share $1.51 $1.46
======== ========
</TABLE>
3. Restrictions on Cash and Due From Bank Accounts
The Company's subsidiary banks are required to maintain average reserve balances
at the Federal Reserve Bank. The amount of those required reserve balances as of
December 31, 1997 was approximately $15,455,000.
- 38 -
<PAGE> 39
4. Investment Securities
A summary of available-for-sale investment securities is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury $251,529 $ 3,309 $ 79 $254,759
U.S. Federal agencies 380,164 3,596 347 383,413
U.S. Federal agency
mortgage-backed securities 33,463 384 24 33,823
States and political
subdivisions 210,780 10,047 104 220,723
Corporate debt securities 56,454 717 57 57,114
Other 20,109 359 9 20,459
-------- ------- -------- --------
Total $952,499 $18,412 $ 620 $970,291
======== ======= ======== ========
December 31, 1996:
U.S. Treasury $318,297 $ 2,368 $ 352 $320,313
U.S. Federal agencies 333,413 3,015 1,210 335,218
U.S. Federal agency
mortgage-backed securities 38,377 296 236 38,437
States and political
subdivisions 210,451 7,992 620 217,823
Corporate debt securities 46,315 987 107 47,195
Other 15,079 551 8 15,622
-------- ------- -------- --------
Total $961,932 $15,209 $ 2,533 $974,608
======== ======= ======== ========
</TABLE>
The amortized cost and fair value of available-for-sale investment securities at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ---------
(In thousands)
<S> <C> <C>
Due in one year or less $ 176,238 $ 176,561
Due after one year through five years 559,633 568,358
Due after five years through ten years 133,239 138,486
Due after ten years 64,795 67,932
--------- ---------
Total Debt Securities 933,905 951,337
Investments in equity securities 18,594 18,954
--------- ---------
Total $952,499 $970,291
========= =========
</TABLE>
- 39 -
<PAGE> 40
Investment securities with a carrying value of approximately $753,973,000 and
$566,304,000 at December 31, 1997 and 1996, respectively, were pledged as
collateral for public and trust deposits, securities sold under agreements to
repurchase, and for other purposes as required by law or contract.
5. Loans
Loans by classification as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Commercial $ 712,035 $ 660,215
Real estate - construction 54,241 49,693
Real estate - mortgage 974,528 897,734
Installment 276,888 257,408
Financing leases 38,653 10,915
---------- ----------
Gross Loans $2,056,345 $1,875,965
========== ==========
</TABLE>
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired under Statement 114 was $13,967,000 and $18,559,000,
respectively, for which the related allowance for possible loan losses was
$6,618,000 and $5,047,000, respectively. The average investment in impaired
loans during the years ended December 31, 1997, 1996, and 1995 were
approximately $15,483,000, $23,840,000, and $21,160,000, respectively. Interest
income recognized by the Company on those impaired loans was $1,247,000 in 1997,
$1,051,000 in 1996 and $1,141,000 in 1995, which included zero, $220,000, and
zero, respectively, of interest recognized using the cash basis method of income
recognition.
Certain directors and executive officers of the Company and its significant
subsidiaries, their families, and certain entities in which they have an
ownership interest were customers of the Company's subsidiary banks. Loans with
these parties were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. The aggregate dollar amounts of these loans were $50,118,000 and
$35,382,000 at December 31, 1997 and 1996, respectively.
During 1997, $70,597,000 of new loans were made and repayments and loan
reductions totaled $55,861,000.
- 40 -
<PAGE> 41
6. Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $30,307 $20,047 $21,795
Add (deduct):
Allowance of acquired subsidiary -- 11,800 --
Provisions 4,587 3,953 2,445
Recoveries 1,203 1,151 763
Loan charge-offs (6,610) (6,644) (4,956)
------- ------- -------
Balance At End Of Year $29,487 $30,307 $20,047
======= ======= =======
</TABLE>
7. Premises and Equipment and Lease Agreements
Premises and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Land $ 7,070 $ 6,773
Buildings 38,914 37,873
Equipment 52,725 45,677
Leasehold improvements 13,407 13,241
------- -------
Total Cost 112,116 103,564
Allowances for depreciation
and amortization (54,222) (48,330)
------- -------
Net Premises And Equipment $57,894 $55,234
======= =======
</TABLE>
Total rental expense (principally buildings and equipment), net of sublease
income of $1,103,000 in 1997, $984,000 in 1996 and $813,000 in 1995, amounted to
$2,928,000, $2,175,000, and $1,467,000 in 1997, 1996 and 1995, respectively.
Future minimum rental commitments under noncancelable operating leases as of
December 31, 1997, net of future sublease rentals of approximately 28% of the
total in each period, are as follows (In thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $2,922
1999 2,887
2000 2,694
2001 1,738
2002 1,553
Thereafter 8,283
</TABLE>
The Company's lease agreements on its main office facility have lease terms
through March 2008 with options to extend the lease term through 2069 and to
purchase the property at its fair market value. The lease agreements also
provide for rent escalations based upon the Company's share of any increases in
the operating expenses of the building.
- 41 -
<PAGE> 42
Details of net occupancy expense for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Gross occupancy expense $ 8,745 $7,613 $6,100
Rental income (1,123) (1,253) (1,068)
------- ------- ------
Net Occupancy Expense $ 7,622 $6,360 $5,032
======= ======= ======
</TABLE>
8. Deposits
Time certificates of deposit of $100,000 or more amounted to $323,079,000 at
December 31, 1997 and $268,223,000 at December 31, 1996.
9. Income Taxes
Deferred tax assets and liabilities at December 31 are comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $11,950 $12,282
Deferred gain on sale of premises 274 379
Accrued pension liability 687 234
Benefits restoration plan 425 473
Other 1,097 1,402
------- -------
Total Deferred Tax Assets 14,433 14,770
Deferred tax liabilities:
Net unrealized gain on securities
available-for-sale 7,008 5,051
Tax over book depreciation 935 1,183
Direct financing leases 1,489 1,834
Purchase accounting adjustments 1,913 1,967
Accreted discount on bonds 754 683
Other 710 687
------- -------
Total Deferred Tax Liabilities 12,809 11,405
------- -------
Net Deferred Tax Assets $ 1,624 $ 3,365
======= =======
</TABLE>
- 42 -
<PAGE> 43
The components of income tax expense (credit) for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $14,207 $ 9,775 $ 6,534
State 3,916 4,014 2,759
------- ------- -------
Total Current Taxes 18,123 13,789 9,293
Deferred:
Federal (135) 1,674 1,132
State (81) 52 301
------- ------- -------
Total Deferred Taxes (216) 1,726 1,433
------- ------- -------
Total Tax Expense $17,907 $15,515 $10,726
======= ======= =======
</TABLE>
Included in income tax expense are applicable income taxes of $94,000, $159,000
and $35,000 relating to investment securities gains for 1997, 1996 and 1995,
respectively.
A reconciliation of income taxes computed at the statutory federal income tax
rate (35%) to income tax expense is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Federal income tax $19,163 $16,806 $13,101
Add (deduct) tax effects of:
Tax-exempt income (4,371) (4,327) (4,145)
State income tax,
net of federal tax benefit 2,493 2,643 1,989
Amortization of goodwill and
other intangibles 1,008 620 81
Other - net (386) (227) (300)
------- ------- -------
Total $17,907 $15,515 $10,726
======= ======= =======
</TABLE>
- 43 -
<PAGE> 44
10. Debt Arrangements
The Company has a revolving line of credit with another bank totaling
$15,000,000, of which no amounts were outstanding at December 31, 1997.
Subordinated and other long-term notes at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
9.85% Capital Securities $ 30,000 $ --
Federal Home Loan Bank borrowings:
5.5552% variable rate note -- 4,000
6.403% fixed rate note -- 5,000
6.19% fixed rate note -- 1,999
5.5513% variable rate note -- 11,000
5.16% fixed rate note, due September 15, 1998 4,998 4,996
6.64% fixed rate note, due July 16, 1999 2,998 2,997
5.555% fixed rate note through July 30, 1998,
and variable thereafter until
final maturity July 31, 2000 30,000 --
5.686% fixed rate note through December 10, 1998,
and variable thereafter until final maturity
December 11, 2000 25,000 --
5.79% fixed rate note, final maturity
July 15, 2003 3,243 3,682
6.88% fixed rate note, final maturity
November 15, 2016 810 817
Other 20,502 23,850
------- -------
Total $117,551 $58,341
======= =======
</TABLE>
Principal maturities of subordinated and long-term notes are as follows (In
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $10,798
1999 6,090
2000 57,960
2001 3,327
2002 3,300
Thereafter 36,076
</TABLE>
The 9.85% Capital Securities which are due on April 15, 2027 were issued by the
Company's recently formed subsidiary, Fort Wayne Capital Trust I, a statutory
business trust formed under the laws of the State of Delaware. The assets of the
Capital Trust are comprised of $30,000,000 of Junior Subordinated Notes,
maturing April 15, 2027, at a 9.85% interest rate. These notes are unsecured and
are subordinated to all other indebtedness of the Company.
The Federal Home Loan Bank borrowings each require monthly interest payments.
The 5.79% and 6.88% fixed rate notes require annual principal payments. The two
variable rate notes outstanding at December 31, 1997 are adjustable quarterly to
LIBOR, after December 10, 1998 for the current 5.686% note and after July 30,
1998 for the current 5.555% note. All of the Federal Home Loan Bank borrowings
are covered by a blanket collateral arrangement executed with the Federal Home
Loan Bank of Indianapolis. The carrying value of total eligible assets
(primarily 1-4 family mortgage loans) available as collateral to secure current
and future advances as of December 31, 1997 is approximately $333,613,000.
- 44 -
<PAGE> 45
11. Preferred Stock
The Class B Nonvoting Preferred Stock Series 1 (Series 1 Stock)is 6% cumulative
convertible nonvoting preferred stock with a stated value of $50 per share. The
holders of the Series 1 Stock are entitled to receive cumulative preferred
dividends payable quarterly at the annual rate of 6%. The Series 1 Stock may be
redeemed by the Company 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 Series 1 Stock have the right, at their option, to convert each share of
Series 1 Stock into 2.01939 shares of the Company's common stock. The sale of
shares of the Series 1 Stock (or any shares of common stock received upon
conversion of Series 1 Stock) is prohibited for a two year period ending May 31,
1998.
12. Earnings Per Share And Per Share Data
On May 20, 1997, the Company's Board of Directors approved a three-for-two
common stock split. This split was paid July 15, 1997 to common shareholders of
record as of June 16, 1997. All share and per share data has been restated to
reflect the split.
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128 (Statement 128), "Earnings Per Share."
Statement 128 replaced the calculations of primary and fully diluted earnings
per share with basic and diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements.
- 45 -
<PAGE> 46
The following table sets forth the computation of basic and diluted earnings per
share (Dollars in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share:
Net income $36,846 $32,502 $26,707
Less: Preferred stock dividends (2,220) (1,295) --
---------- ---------- ----------
Income applicable to common shares $34,626 $31,207 $26,707
========== ========== ==========
Weighted-average common shares
outstanding 17,456,525 17,480,178 17,173,916
========== ========== ==========
Basic Earnings Per Share $1.98 $1.79 $1.56
========== ========== ==========
Diluted earnings per share:
Net income $36,846 $32,502 $26,707
========== ========== ==========
Weighted-average common shares
outstanding 17,456,525 17,480,178 17,173,916
Dilutive employee stock options 263,049 290,280 274,188
Dilutive convertible
preferred stock 1,494,297 871,673 --
---------- ---------- ----------
Weighted-average common shares
and assumed conversions 19,213,871 18,642,131 17,448,104
========== ========== ==========
Diluted Earnings Per Share $1.92 $1.74 $1.53
========== ========== ==========
</TABLE>
For additional disclosures regarding the outstanding preferred stock and the
employee stock options, see Notes 11 and 14, respectively.
13. Regulatory Matters
Payments of dividends and extensions of credit by the Company's subsidiary banks
to the Company are subject to certain restrictions under banking laws. The
Company's subsidiary banks could have declared additional dividends of
approximately $30,229,000 to the Company in 1997 without obtaining regulatory
approval.
The Federal Reserve Act limits the extensions of credit from a subsidiary bank
to any affiliate to 10% and to all affiliates to 20% of a subsidiary bank's
capital and surplus (net assets) as defined.
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by federal and state banking agencies. Quantitative
measures established by regulation to ensure capital adequacy require the
Company and its subsidiary banks to maintain minimum ratios of 4% for Tier I
risk-based capital, 8% for total risk-based capital and 4% for Tier I leverage.
To be considered well capitalized ratios are 6%, 10% and 5%, respectively.
Management believes, as of December 31, 1997, that the Company meets all capital
adequacy requirements to which it is subject. In addition, each subsidiary bank
had regulatory capital ratios in excess of the levels established for well
capitalized institutions.
- 46 -
<PAGE> 47
The following is a summary of the capital ratios of the Company and its lead
subsidiary bank, Fort Wayne National Bank, as well as a comparison of the
period-end capital balances with related amounts established by the regulators:
<TABLE>
<CAPTION>
Capital Amounts
-------------------------------------
Well
Ratios Actual Minimum Capitalized
------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
As of December 31, 1997:
Tier I risk-based capital
The Company 12.09% $266,870 $ 88,294 $132,441
Fort Wayne National Bank 10.29 124,808 48,510 72,764
Total risk-based capital
The Company 13.34 294,485 176,588 220,735
Fort Wayne National Bank 11.26 136,498 97,019 121,274
Period end Tier I leverage
The Company 7.98 266,870 133,721 167,151
Fort Wayne National Bank 7.17 124,808 69,594 86,992
As of December 31, 1996:
Tier I risk-based capital
The Company 11.70% $231,818 $ 79,246 $118,869
Fort Wayne National Bank 10.85 109,898 40,517 60,776
Total risk-based capital
The Company 12.95 256,649 158,492 198,115
Fort Wayne National Bank 11.99 121,475 81,034 101,293
Period end Tier I leverage
The Company 7.32 231,818 126,727 158,409
Fort Wayne National Bank 7.29 109,898 60,291 75,363
</TABLE>
As of December 31, 1997 the Company was not aware of any known trends, events or
uncertainties that would have or that are reasonably likely to have material
effect on the Company's liquidity, capital resources or operations, nor was the
Company aware of any current recommendations by regulatory authorities which, if
they were implemented, would have such an effect.
14. Stock Incentive Plans
The Company maintains two stock incentive plans under which incentive and
nonqualified stock options may be or have been granted to employees. Under
these plans, options may be granted for periods of up to ten years and are
generally exercisable one year after the date of grant. The option price is
equal to 100% of the fair value of the shares at the date of grant. In addition,
stock appreciation rights may be granted in tandem with options. All options
vest annually on the anniversary date of the grant at the rate of 25% of the
number of options granted. The Company's 1994 Stock Incentive Plan authorizes
the grant of options to key employees for up to 2,025,000 shares of the
Company's common stock.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under Statement 123, "Accounting for Stock-Based
Compensations" requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
- 47 -
<PAGE> 48
A summary of the Company's stock option activity, and related information, for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
Weighted Weighted Weighted
-Average -Average -Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of
year 833,371 $19.32 743,636 $17.31 673,097 $16.38
Options granted 340,468 $28.53 278,547 $21.42 154,645 $17.77
Options
exercised (211,253) $18.58 (184,613) $14.41 (82,794) $10.65
Options
forfeited (6,600) $20.39 (4,199) $18.01 (1,312) $18.45
--------- --------- ---------
Outstanding -
End Of Year 955,986 $22.76 833,371 $19.32 743,636 $17.31
========= ========= =========
Exercisable At
End Of Year 324,274 $18.95 355,850 $18.51 271,586 $16.73
========= ========= =========
Weighted Average
Fair Value Of
Options Granted
During The Year $ 6.69 $ 5.05 $ 4.48
====== ====== ======
</TABLE>
Exercise prices for options outstanding at December 31, 1997 range from $17.25
to $39.81. The weighted-average remaining contractual life of those options is
3.17 years. During 1997, 1996 and 1995, employees surrendered 75,378, 73,264 and
26,185 shares, respectively, for payment to the Company for stock options
exercised.
The fair value of options granted in 1997 and 1996 was estimated at the date of
grant using a Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Risk-free interest rate 6.50% 6.32%
Dividend yield 3.11% 3.24%
Volatility factor 23.65% 24.17%
Expected option life 5 years 5 years
</TABLE>
Because the pro forma effect of applying the fair value method to the Company's
stock options is not material, such pro forma information is not presented.
The Company also maintains a Nonemployee Director Stock Incentive Plan (Director
Plan) which calls for a formula-based grant of stock to active nonemployee
members of the Company's Board of Directors. During 1997, 1996 and 1995, there
were 2,706, 2,880 and 3,015 shares of the Company's Common Stock issued under
the Director Plan, respectively.
- 48 -
<PAGE> 49
15. Employee Benefit Plans
The Company has a non-contributory trusteed defined benefit plan covering
substantially all of its full-time employees who are at least 21 years of age
and have completed one year of continuous service. It is the Company's policy to
fund, at a minimum, pension contributions as required by the Employee Retirement
Income Security Act. Benefits are based on years of service and the employee's
highest average of monthly earnings during any five consecutive years of
credited service.
The following table sets forth the funded status and amount recognized for the
Company's defined benefit pension plan in the consolidated balance sheet at
December 31 (In thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligations, including vested benefits of
$21,051 in 1997 and $17,613 in 1996 $ 23,130 $ 19,268
======== ========
Actuarial present value of projected
benefit obligation for services rendered
to date $(30,077) $(25,070)
Plan assets at fair value, primarily investments
in bond and equity funds 36,745 29,835
-------- --------
Plan assets in excess of projected
benefit obligation 6,668 4,765
Unrecognized prior service cost 10 14
Unrecognized net gain (8,375) (5,356)
-------- --------
Accrued Pension Liability $ (1,697) $ (577)
======== ========
</TABLE>
At December 31, 1997 and 1996, plan assets include 117,000 and 120,000 shares of
the Company's common stock with a fair value of $5,382,000 and $3,040,000,
respectively, investments in the a temporary certificate of deposit fund of
$75,000 and $143,000, respectively, and investments in common trust funds with a
fair value of $31,264,000 and $26,652,000, respectively. Both the temporary
certificate of deposit fund and the common trust funds are administered by Fort
Wayne National Bank. During 1997 and 1996, interest and dividends earned on
these investments amounted to $98,000 and $115,000, respectively.
- 49 -
<PAGE> 50
Net pension cost of the Company's defined benefit pension plan included the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Service cost benefits earned
during the period $ 1,852 $ 1,612 $ 987
Interest cost on projected
benefit obligation 1,796 1,621 1,455
Actual return on plan assets (7,892) (3,191) (5,229)
Net amortization and deferral 5,364 672 3,083
------- ------- -------
Net Pension Expense $ 1,120 $ 714 $ 296
======= ======= =======
</TABLE>
Assumptions used in determining the projected benefit obligations and net
periodic pension expense were:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Discount rate 6.75% 7.25% 7.25%
Rate of increase in future
compensation levels 5.50% 5.50% 5.50%
Expected long-term rate of return
on plan assets 8.00% 8.00% 8.00%
</TABLE>
The Company also sponsors an unfunded Benefits Restoration Plan, which is a
nonqualified plan that provides certain employees, as designated by the
Company's Board of Directors, defined pension benefits in excess of limits
imposed by federal tax law.
The following table sets forth the amount recognized for the Company's unfunded
Benefits Restoration Plan in the consolidated balance sheet at December 31 (In
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligations, including vested benefits of
$1,272 in 1997 and $1,607 in 1996 $ 1,272 $ 1,607
======= =======
Actuarial present value of projected
benefit obligation for services rendered
to date $(1,508) $(1,764)
Unrecognized prior service cost -- 40
Unrecognized net loss 462 421
Unrecognized net obligation -- 137
------- -------
Accrued Benefits Restoration Plan Liability $(1,046) $(1,166)
======= =======
</TABLE>
- 50 -
<PAGE> 51
Net cost of the Company's unfunded Benefits Restoration Plan included the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Service cost benefits earned
during the period $ 18 $ 10 $ 49
Interest cost on projected
benefit obligation 102 121 102
Net amortization and deferral (29) 260 199
------ ------ ------
Net Benefits Restoration Plan Expense $ 90 $ 391 $ 350
====== ====== ======
</TABLE>
Assumptions used in determining the projected benefit obligations and net
periodic expense were:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Discount rate 6.75% 7.25% 7.25%
Rate of increase in future
compensation levels 6.00% 6.00% 6.00%
Expected long-term rate of return
on plan assets 8.00% 8.00% 8.00%
</TABLE>
The Company has an employees' saving and profit sharing plan for all full-time
employees who have completed one year of continuous service. The Company's
contribution to this plan has certain restrictions based on the amount of
capital accounts and earnings (as defined by the Plan) and on the aggregate
basic annual compensation of participating employees. The amount expensed for
this plan amounted to $2,687,000, $2,361,000 and $1,906,000 in 1997, 1996, and
1995, respectively.
16. Concentration of Credit Risk and Loan Commitments
In the normal course of business, the Company's subsidiary banks originate loans
to customers and enter into various commitments and contingent liabilities to
extend credit which are not reflected in the consolidated
financial statements. These customers are located primarily in northeast and
north central Indiana. This area has a broad economic base and the loan
portfolio is diversified with no industry or service sector comprising greater
than 10% of total loans outstanding. Collateral (e.g., securities, receivables,
inventory, equipment, and real estate) is obtained based on management's credit
assessment of the customer.
Loan commitments are made to accommodate the financial needs of the customers of
the Company's subsidiary banks. Standby letters of credit commit the Company's
subsidiary banks to make payments on behalf of customers when certain specified
future events occur and are primarily issued to support commercial paper, and
medium and long-term notes and debentures, including industrial revenue
obligations. Commercial letters of credit are issued to facilitate customer
trade transactions. These various arrangements have credit risk essentially the
same as that involved in extending loans to customers and are subject to the
normal credit policies of the Company's subsidiary banks.
- 51 -
<PAGE> 52
Loan commitments (unfunded loans and unused lines of credit) and standby letters
of credit outstanding amounted to $816,697,000 and $63,473,000, respectively, at
December 31, 1997. Commitments under commercial letters of credit were
$2,642,000 and $4,039,000 at December 31, 1997 and 1996, respectively.
17. Interest Rate Futures and Options
The Company uses exchange traded financial futures and option contracts as a
part of its overall interest rate risk management. Financial futures represent a
standardized commitment to receive or pay interest calculated based on the
notional amount of the underlying contract. Call options give the Company the
right, but not the obligation, to buy a specified instrument at a specified
price. Put options give the Company the right to sell a specified instrument at
the strike or exercise price specified by the contract.
Hedges are undertaken to adjust for differences in the maturities of specific
assets and liabilities. Maturity differences create exposure to changes in
interest rates in net interest income. The Company has employed two different
strategies using futures and option contracts to manage this exposure.
Eurodollar futures contracts are used by the Company to hedge interest rate
exposure on specific short-term liabilities. Each contract represents an
obligation to pay changes in the interest expense on a notional $1,000,000 three
month Eurodollar time deposit. The Company's futures exposure increases in the
event that interest rates decrease, and at present is limited to approximately
$14,500 per contract. This maximum exposure represents the change in interest
expense on a three month $1,000,000 time deposit which
would result if interest rates dropped from current levels of 5.8% to zero. At
year end the Company had 693 Eurodollar contracts outstanding with a maximum
possible exposure of $10 million.
Deferred losses totaling $241,000 at December 31, 1997, resulting from
Eurodollar futures contracts, are included in interest-bearing liabilities and
will be amortized as an increase to interest expense on the Company's short-term
obligations over various periods up to two years.
A reconciliation of the gross contract amounts of Eurodollar futures contracts
and the effect on net interest income recorded for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Contracts at beginning of year 704 653 458
New Contracts 2,212 1,679 909
Closed Contracts (2,223) (1,628) (714)
--------- --------- ----------
Contracts At End Of Year 693 704 653
========= ========= ==========
Decrease To Net
Interest Income $ 586 $ 599 $ 152
========= ========= ==========
</TABLE>
- 52 -
<PAGE> 53
During 1996 and 1995, the Company also utilized U.S. Treasury note and bond
futures and option contracts to hedge against price changes of specific U.S.
Treasury securities held in the Company's trading accounts.
18. Fair Values of Financial Instruments
Statement 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. Statement 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the balance
sheet for cash and short-term investments approximate those assets' fair values.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for all other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The carrying amount of accrued
interest approximates its fair value.
Deposit Liabilities: The fair values disclosed for demand deposits, including
interest-bearing and noninterest-bearing accounts, savings deposits, and certain
types of money market accounts are, by definition, equal to the amount payable
on demand at the reporting date (i.e., their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
Long-term borrowings: The fair values of the Company's long-term borrowings
(other than deposits) are estimated using discounted cash flow analyses, based
on current incremental borrowing rates for similar types of borrowing
arrangements.
Off-balance-sheet instruments: Fair values of the Company's off-balance-sheet
instruments (futures, guarantees, and loan commitments), are based on quoted
market prices (futures) or fees currently charged to enter into similar
- 53 -
<PAGE> 54
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing (guarantees, loan commitments).
The carrying amount and estimated fair values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due
from banks $ 181,481 $ 181,481 $ 191,913 $ 191,913
Federal funds sold and
securities purchased under
agreements to resell 57,615 57,615 56,075 56,075
Interest-bearing deposits
with banks 2,649 2,649 376 376
Investment securities 970,291 970,291 974,608 974,608
Net loans 2,020,210 2,059,947 1,843,438 1,939,588
Financial Liabilities:
Deposits:
Noninterest-bearing 429,822 429,822 419,118 419,118
Interest-bearing 2,149,364 2,151,766 2,002,773 2,003,170
---------- ---------- ---------- ----------
Total Deposits 2,579,186 2,581,588 2,421,891 2,422,288
Federal funds purchased and
securities sold under
agreements to repurchase 328,049 328,049 387,357 387,357
Notes payable-U.S. Treasury
and other borrowings 35,179 35,179 37,628 37,628
Subordinated and other
long-term notes 117,551 115,560 58,341 58,891
Off-Balance-Sheet Instruments:
Loan commitments -- (1,021) -- (768)
Standby and commercial
letters of credit -- (317) -- (280)
Interest rate futures
contracts -- (272) -- (172)
</TABLE>
- 54 -
<PAGE> 55
19. Fort Wayne National Corporation (Parent Company Only) Financial
Information
Balance Sheet
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Assets
Cash $ 3,973 $ 3,602
Short-term investments 18,811 6,384
Investment in subsidiaries 326,341 304,188
Other assets 4,091 5,856
-------- --------
Total Assets $353,216 $320,030
======== ========
Liabilities and Shareholders' Equity
Dividends payable $ 3,972 $ 3,602
Other liabilities 1,546 421
Subordinated and other long-term notes 49,901 23,850
Shareholders' equity:
Preferred stock 36,999 36,999
Common stock 18,999 19,511
Capital Surplus 47,455 49,367
Retained Earnings 183,871 179,052
Net unrealized gain on
available-for-sale securities 10,473 7,228
-------- --------
Total Shareholders' Equity 297,797 292,157
-------- --------
Total Liabilities And Shareholders' Equity $353,216 $320,030
======== ========
</TABLE>
- 55 -
<PAGE> 56
<TABLE>
<CAPTION>
Statement of Income
For The Years
Ended December 31
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Income
Dividends from subsidiaries $29,447 $ 32,848 $18,897
Interest and dividends on investments 1,917 1,740 2,581
Other income 1 372 20
------- ------- -------
Total Income 31,365 34,960 21,498
Expenses
Interest on subordinated and
other long-term notes 3,979 1,588 868
Other expenses 2,623 1,563 593
------- ------- -------
Total Expenses 6,602 3,151 1,461
------- ------- -------
Income Before Applicable Income
Taxes And Equity In Undistributed
Net Income Of Subsidiaries 24,763 31,809 20,037
Applicable income taxes (credit) (1,903) (713) 350
------- ------- -------
Income Before Equity In Undistributed
Net Income Of Subsidiaries 26,666 32,522 19,687
Equity in undistributed
net income of subsidiaries 10,180 (20) 7,020
------- ------- -------
Net Income $36,846 $ 32,502 $26,707
======= ======= =======
</TABLE>
- 56 -
<PAGE> 57
<TABLE>
<CAPTION>
Statement of Cash Flows
For The Years
Ended December 31
1997 1996 1995
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 36,846 $32,502 $26,707
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net income of
subsidiaries (10,180) 20 (7,020)
Gain on sale of securities (1) (362) --
(Increase) decrease in other assets (565) (406) 343
Increase in other liabilities 909 100 52
-------- ------- -------
Net Cash Provided By Operating Activities 27,009 31,854 20,082
Investing activities
Net (increase) decrease in short-term
investments (12,428) 35,663 (5,187)
Purchase of securities -- (523) (1,004)
Proceeds from sales of securities 2,221 1,372 --
Net assets of Valley Financial
Services, Inc., net of cash acquired -- (110,417) --
Investment in FWNB Asset Management, LLC (8,616) -- --
-------- ------- -------
Net Cash Used In Investing Activities (18,823) (73,905) (6,191)
Financing activities
Net advances from subsidiaries 216 -- --
Issuance of long-term debt 30,000 15,000 --
Principal payments on long-term notes (3,950) (3,826) (760)
Cash dividends paid on common stock (13,385) (11,661) (10,544)
Cash dividends paid on preferred stock (2,220) (740) --
Issuance of preferred stock -- 36,999 --
Issuance of common stock -- 20,057 --
Proceeds from exercise of stock options 2,449 1,277 453
Repurchase of common stock (20,925) (14,196) (2,826)
-------- ------- -------
Net Cash Provided By (Used In)
Financing Activities (7,815) 42,910 (13,677)
-------- ------- -------
Net Increase In Cash 371 859 214
Cash at beginning of year 3,602 2,743 2,529
-------- ------- -------
Cash At End Of Year $ 3,973 $ 3,602 $ 2,743
======== ======= =======
</TABLE>
- 57 -
<PAGE> 58
20. Proposed Merger With National City Corporation
The Company entered into an Agreement and Plan of Merger (the Agreement) dated
January 12, 1998 providing for the merger of the Company with and into National
City Corporation (National City). As of the effective time of the merger, each
outstanding share of the Company's common stock will be converted into .75
shares of National City common stock. Each outstanding share of the Company's
Class B Series 1 6% convertible preferred stock will receive one share of
National City's preferred stock. Based on the January 9, 1998 market price of
National City stock, the transaction has a value of $44.44 per share for a total
of approximately $826 million. Consummation of the merger is subject to a number
of conditions including receipt of approval of the Agreement by shareholders of
the Company, receipt of all required regulatory approvals and fairness opinions.
Under the Agreement, the Company will operate its business in the ordinary
course and use its commercially reasonable efforts to preserve intact its
business organization. The transaction is expected to close in the second
quarter of 1998. The merger will be accounted for as a purchase.
- 58 -
<PAGE> 59
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
(In thousands except per share data)
1997
- ------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 56,786 $ 58,546 $ 59,770 $ 61,173 $236,275
Total interest expense 28,032 29,171 29,946 31,579 118,728
-------- -------- -------- -------- --------
Net Interest Income
Before Provision For
Possible Loan Losses 28,754 29,375 29,824 29,594 117,547
Provision for possible
loan losses 1,070 1,170 1,170 1,177 4,587
-------- -------- -------- -------- --------
Net Interest Income
After Provision For
Possible Loan Losses 27,684 28,205 28,654 28,417 112,960
Noninterest income
Fiduciary fees 3,676 3,310 3,704 3,568 14,258
Other 3,875 4,480 4,301 4,983 17,639
Net securities gains 37 7 54 134 232
-------- -------- -------- -------- --------
Total Noninterest Income 7,588 7,797 8,059 8,685 32,129
Noninterest expense
Salaries and benefits 11,512 11,579 12,119 11,990 47,200
Other 9,678 10,800 11,268 11,390 43,136
-------- -------- -------- -------- --------
Total Noninterest Expense 21,190 22,379 23,387 23,380 90,336
Income Before Income
Taxes 14,082 13,623 13,326 13,722 54,753
Applicable income taxes 4,765 4,586 4,395 4,161 17,907
-------- -------- -------- -------- --------
Net income $ 9,317 $ 9,037 $ 8,931 $ 9,561 $ 36,846
======== ======== ======== ======== ========
Per share:
Basic earnings $ .50 $ .49 $ .48 $ .53 $ 1.98
======== ======== ======== ======== ========
Diluted earnings $ .48 $ .47 $ .46 $ .50 $ 1.92
======== ======== ======== ======== ========
Common dividends
declared $ .19 $ .19 $ .20 $ .20 $ .79
======== ======== ======== ======== ========
</TABLE>
- 59 -
<PAGE> 60
<TABLE>
<CAPTION>
1996
- ------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 39,829 $ 45,276 $ 56,623 $ 57,637 $199,365
Total interest expense 19,993 22,526 28,684 28,366 99,569
-------- -------- -------- -------- --------
Net Interest Income
Before Provision For
Possible Loan Losses 19,836 22,750 27,939 29,271 99,796
Provision for possible
loan losses 880 1,005 940 1,128 3,953
-------- -------- -------- -------- --------
Net Interest Income
After Provision For
Possible Loan Losses 18,956 21,745 26,999 28,143 95,843
Noninterest income
Fiduciary fees 2,901 2,824 3,443 3,291 12,459
Other 2,487 2,831 3,578 3,604 12,500
Net securities gains 378 2 9 3 392
-------- -------- -------- -------- --------
Total Noninterest Income 5,766 5,657 7,030 6,898 25,351
Noninterest expense
Salaries and benefits 8,345 8,854 10,917 11,608 39,724
Other 6,429 7,922 9,914 9,188 33,453
-------- -------- -------- -------- --------
Total Noninterest Expense 14,774 16,776 20,831 20,796 73,177
Income Before Income
Taxes 9,948 10,626 13,198 14,245 48,017
Applicable income taxes 3,057 3,451 4,280 4,727 15,515
-------- -------- -------- -------- --------
Net income $ 6,891 $ 7,175 $ 8,918 $ 9,518 $ 32,502
======== ======== ======== ======== ========
Per share:
Basic earnings $ .40 $ .40 $ .47 $ .51 $ 1.79
======== ======== ======== ======== ========
Diluted earnings $ .40 $ .40 $ .46 $ .49 $ 1.74
======== ======== ======== ======== ========
Common dividends
declared $ .16 $ .17 $ .17 $ .17 $ .68
======== ======== ======== ======== ========
</TABLE>
Note: The earnings per share amounts prior to 1997 have been restated to comply
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
For further discussion of earnings per share and the impact of Statement No.
128, see the notes to the consolidated financial statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent auditors which
resulted in the filing of a Form 8-K, and there has been no change in
independent auditors of the Company during the 24-month period prior to December
31, 1997.
- 60 -
<PAGE> 61
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item, with respect to directors, is
incorporated herein by reference from the March 18, 1998 Proxy Statement under
the caption "Election of Directors."
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers
(All positions are for one year expiring at time of annual meeting)
Name Age Positions Held during the past 5 years
<S> <C> <C>
M. James Johnston 56 Chairman of the Board (1 year) and
Chief Executive Officer (1.5 years)
of the Registrant and Fort Wayne
National Bank. Formerly President and
Chief Administrative Officer of the
Registrant and Fort Wayne National
Bank (5 years).
Stephen R. Gillig 50 President and Chief Administrative
Officer of the Registrant (1 year).
Formerly Executive Vice President,
Chief Financial Officer and Secretary
of the Registrant and Fort Wayne
National Bank (1 year). Formerly
Executive Vice President, Secretary
and Treasurer of the Registrant and
Executive Vice President of Fort Wayne
National Bank (4 years).
Thomas L. Baumgartner 60 Executive Vice President of
Administrative Services of the
Registrant and Fort Wayne National
Bank (1 year). Formerly Executive
Vice President and Chief Operations
Officer of the Registrant and
Executive Vice President and Chief
Operations Officer of Fort Wayne
National Bank (5 years).
Michael J. Eikenberry 56 Executive Vice President of Loan
Administration of the Registrant and
Fort Wayne National Bank (3 years).
Formerly Senior Vice President of
Loan Administration of the Registrant
and Fort Wayne National Bank (2
years).
</TABLE>
- 61 -
<PAGE> 62
<TABLE>
<S> <C> <C>
Karen M. Kasper 42 Executive Vice President, Chief
Financial Officer and Treasurer of the
Registrant and Fort Wayne National
Bank (effective January 1, 1998).
Formerly, Senior Vice President, Chief
Financial Officer and Treasurer of the
Registrant and Fort Wayne National
Bank (1 year). Formerly Senior Vice
President and Treasurer of the
Registrant and Fort Wayne National
Bank (1 year). Formerly Senior Vice
President and Controller of the
Registrant and Fort Wayne National
Bank (4 years).
Thomas E. Elyea 52 Senior Vice President of the
Registrant (2 years) and President
and Chief Administrative Officer of
Fort Wayne National Bank (1 year).
Formerly Senior Vice President
Corporate / Correspondent Banking of
Fort Wayne National Bank (8 months).
Formerly President and Chief Executive
Officer of Firstar Bank Park Forest,
Park Forest, Illinois (5 years).
Jay K. Gardner 50 Senior Vice President and Chief
Operations Officer of the Registrant
and Fort Wayne National Bank
(effective April 14, 1997). Formerly
Senior Vice President and Manager of
Delivery Support and Operations for
Norwest Bank, Inc. (2 years). Formerly
Vice President and Manager of Delivery
Services (1 year). Formerly Vice
President of Community Banking
Services (3 years).
Daniel J. Rozelle 50 Senior Vice President and Corporate
Marketing Officer of the Registrant
and Fort Wayne National Bank
(effective June 30, 1997). Formerly
Senior Vice President and Marketing
Group Executive of United Carolina
Bank (10 years).
John W. Tinnemeyer 51 Senior Vice President and Private
Banking Manager (effective July 21,
1997). Formerly Vice President and
Private Banking Manager of First Merit
Corporation (5 years).
John T. Kelley 40 Vice President and Controller of the
Registrant (1 year) and Fort
Wayne National Bank (2 years).
Formerly Assistant Vice President and
Assistant Controller of Fort Wayne
National Bank (4 years).
</TABLE>
- 62 -
<PAGE> 63
Other Executive Officers of Affiliate Banks
(All positions are for one year expiring at time of annual meeting)
Name Age Position Held during the past 5 years
<TABLE>
<S> <C> <C>
Kim Thomas Stacey 53 Executive Vice President and Senior
Trust Officer of Fort Wayne National
Bank (4 years). Formerly Senior Vice
President and Senior Trust Officer of
Fort Wayne National Bank (3.5 years).
Michael C. Haggarty 62 Chairman of the Board, Chief Executive
Officer, and President of The Auburn
State Bank (4 years). Formerly Chief
Executive Officer and President of The
Auburn State Bank (21 years).
Willis E. Alt, Jr. 53 President and Chief Executive Officer
of First National Bank of Warsaw (7
years).
Dennis J. Schwartz 57 President and Chief Executive Officer
of Valley American Bank and Trust
Company (1.5 years). Formerly
President of Valley American Bank and
Trust Company (29 years).
</TABLE>
There is no family relationship between any of the persons named above.
Item 11. EXECUTIVE COMPENSATION
Information required under this item, with respect to executive compensation, is
incorporated herein by reference from the March 18, 1998 Proxy Statement under
the caption "Executive Compensation."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item, with respect to security ownership of
certain beneficial owners and management, is incorporated herein by
reference from the March 18, 1998 Proxy Statement under the caption "Principal
Holders of Common Stock" and under the caption "Election of Directors."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item, with respect to certain relationships
and related transactions, is incorporated herein by reference from the March 18,
1998 Proxy Statement under the caption "Indebtedness of Management."
- 63 -
<PAGE> 64
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements and report of
independent auditors of Fort Wayne National Corporation and
subsidiaries are included in Part II, Item 8:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheet as of December 31, 1997 and 1996
Consolidated Statement of Income for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statement of Changes in Shareholders' Equity for the
years ended December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
(2) Financial statement schedules required by Article 9 of Regulation
S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(3) Listing of Exhibits
Exhibit 21 -- Subsidiaries of the Registrant
Exhibit 23 -- Consent of Ernst and Young LLP
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
No Form 8-K was filed during the fourth quarter of 1997.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report. See the Exhibit Index on page 65.
(d) Financial Statement Schedules
None
- 64 -
<PAGE> 65
FORT WAYNE NATIONAL CORPORATION
FORM 10-K
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number assigned per Sequential Numbering
Regulation S-K Item 601 Description Page Number
<S> <C> <C>
2a Agreement and Plan of Merger between Valley Financial
Services, Inc. and Fort Wayne National Corporation............ 66
2b Agreement and Plan of Merger dated as of January 12, 1998
between National City Corporation and Fort Wayne National
Corporation................................................... 66
2c Stock Option Agreement dated as of January 12, 1998 between
National City Corporation and Fort Wayne National Corporation. 66
3a Amended and Restated Articles of Incorporation.................. 66
3b Amended and Restated By-Laws.................................... 66
10a Fort Wayne National Bank - Capital Note Purchase Agreement...... 66
10b Fort Wayne National Corporation Annual Management
Incentive Compensation Plan................................... 66
10c Supplemental Lease No. 1 (Registrant and FWNB's principal office) 66
10d Purchase Agreement Covering Fort Wayne National Corporation
12.95% Unsubordinated Note Due 2005 and 12.25% Subordinated
Note Due 1995................................................. 66
10e Fort Wayne National Corporation 1985 Stock Incentive Plan
(1989 Edition)................................................ 66
10f Fort Wayne National Corporation Benefit Restoration Plan........ 66
10g Fort Wayne National Corporation 1994 Stock Incentive Plan....... 66
10h Fort Wayne National Corporation 1994 Nonemployee Directors
Stock Incentive Plan.......................................... 66
10i Fort Wayne National Corporation - Term Loan Agreement.......... 67
10j Fort Wayne National Corporation - ISDA Master Agreement dated
as of May 24, 1996............................................ 67
21 Subsidiaries of the Registrant.................................. 71
23 Consent of Ernst & Young LLP.................................... 72
27 Financial Data Schedule......................................... 73
</TABLE>
- 65 -
<PAGE> 66
FORT WAYNE NATIONAL CORPORATION
FORM 10-K
EXHIBITS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
<S> <C>
2a Agreement and Plan of Merger between Valley Financial Services, Inc.
and Fort Wayne National Corporation. Incorporated by reference to
Exhibit 2 contained in the Company's 1995 Form 10-K, File No.
0-10869.
2b Agreement and Plan of Merger dated as of January 12, 1998 between
National City Corporation and Fort Wayne National Corporation.
Incorporated by reference to Exhibit 2.1 contained in the Company's
Form 8-K dated January 23, 1998, File No. 0-10869.
2c Stock Option Agreement dated as of January 12, 1998 between National
City Corporation and Fort Wayne National Corporation. Incorporated by
reference to Exhibit 2.2 contained in the Company's Form 8-K dated
January 23, 1998, File No. 0-10869.
3a Amended and Restated Articles of Incorporation of Fort Wayne National
Corporation. Incorporated by reference to Exhibit 3a contained in the
Company's June 30, 1996 Form 10-Q, File No. 0-10869.
3b Amended and Restated By-Laws. Incorporated by reference to Exhibit 3b
contained in the Company's 1991 Form 10-K, File No. 0-10869.
10a Fort Wayne National Bank - Capital Note Purchase Agreement.
Incorporated by reference to Exhibit 10.1 contained in Amendment
No. 2 to the Company's Registrant Statement on Form S-14, File
No. 2-75725.
10b Fort Wayne National Corporation Annual Management Incentive
Compensation Plan. Incorporated by reference to Exhibit 10b to the
Company's 1987 Form 10-K, File 0-10869.
10c Fort Wayne National Bank - Supplemental Lease No. 1. Incorporated by
reference to Exhibit 10c contained in the Company's 1983 Form 10-K,
File 0-10869.
10d Purchase Agreement Covering Fort Wayne National Corporation 12.95%
Unsubordinated Note due 2005 and 12.25% Subordinated Note due 1995.
Incorporated by reference to Exhibit 4 contained in the Company's June
30, 1985, Form 10-Q, File No. 0-10869.
10e Fort Wayne National Corporation 1985 Stock Incentive Plan (1993
Edition). Incorporated by reference to Amendment No. 1 to the
Company's Registration on Form S-8, Registration No. 33-33123.
10f Fort Wayne National Corporation Benefit Restoration Plan. Incorporated
by reference to Exhibit 10f contained in the Company's 1992 Form 10-K,
File 0-10869.
10g Fort Wayne National Corporation 1994 Stock Incentive Plan. Incorporated
by reference to Exhibit A contained in the Company's Proxy Statement
dated March 22, 1994.
10h Fort Wayne National Corporation 1994 Nonemployee Directors Stock
Incentive Plan. Incorporated by reference to Exhibit B contained in the
Company's Proxy Statement dated March 22, 1994.
</TABLE>
- 66 -
<PAGE> 67
FORT WAYNE NATIONAL CORPORATION
FORM 10-K
EXHIBITS INCORPORATED BY REFERENCE - Continued
<TABLE>
<S> <C>
10i Fort Wayne National Corporation - Term Loan Agreement. Incorporated by
reference to Exhibit 10i contained in the Company's June 30, 1996 Form
10-Q, File No. 0-10869.
10j Fort Wayne National Corporation - ISDA Master Agreement dated as of May
24, 1996. Incorporated by reference to Exhibit 10j contained in the
Company's June 30, 1996 Form 10-Q, File No. 0-10869.
</TABLE>
- 67 -
<PAGE> 68
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)
<TABLE>
<CAPTION>
<S> <C>
By /S/ M. James Johnston January 20, 1998
M. James Johnston, Chairman of the Board (Date)
and Chief Executive Officer
Principal Executive Officers
/S/ M. James Johnston January 20, 1998
M. James Johnston, Chairman of the Board (Date)
and Chief Executive Officer
/S/ Stephen R. Gillig January 20, 1998
Stephen R, Gillig, President (Date)
and Chief Administrative Officer
Principal Financial and Accounting Officer
/S/ Karen M. Kasper January 20, 1998
Karen M. Kasper, Executive Vice President, (Date)
Chief Financial Officer and Treasurer
</TABLE>
- 68 -
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant, Fort
Wayne National Corporation, and in the capacities indicated thereunto duly
authorized on the dates indicated.
<TABLE>
<S> <C>
By /S/ Walter S. Ainsworth January 20, 1998
Walter S. Ainsworth, Director (Date)
By /S/ Willis E. Alt, Jr. January 20, 1998
Willis E. Alt, Jr., Director (Date)
By /S/ Robert A. Anker January 20, 1998
Robert A. Anker, Director (Date)
By /S/ Andrew F. Brooks January 20, 1998
Andrew F. Brooks, Director (Date)
By /S/ Richard B. Doner January 20, 1998
Richard B. Doner, Director (Date)
By January 20, 1998
Jon F. Fuller, Director (Date)
By /S/ Thomas C. Griffith January 20, 1998
Thomas C. Griffith, Director (Date)
By /S/ Michael C. Haggarty January 20, 1998
Michael C. Haggarty, Director (Date)
By /S/ George B. Huber January 20, 1998
George B. Huber (Date)
By /S/ M. James Johnston January 20, 1998
M. James Johnston, Director (Date)
By /S/ Joanne B. Lantz January 20, 1998
Joanne B. Lantz, Director (Date)
By /S/ Jackson R. Lehman January 20, 1998
Jackson R. Lehman, Director (Date)
By /S/ Michael J. McClelland January 20, 1998
Michael J. McClelland, Director (Date)
By /S/ Patrick G. Michaels January 20, 1998
Patrick G. Michaels, Director (Date)
</TABLE>
- 69 -
<PAGE> 70
<TABLE>
<S> <C>
By January 20, 1998
Patricia R. Miller, Director (Date)
By /S/ Dennis J. Schwartz January 20, 1998
Dennis J. Schwartz, Director (Date)
By /S/ Mark P. Shambaugh January 20, 1998
Mark P. Shambaugh, Director (Date)
By /S/ Thomas M. Shoaff January 20, 1998
Thomas M. Shoaff, Director (Date)
By /S/ Jeff H. Towles, M.D. January 20, 1998
Jeff H. Towles, M.D., Director (Date)
By /S/ Julie I. Walda January 20, 1998
Julie I. Walda, Director (Date)
By /S/ Don A. Wolf January 20, 1998
Don A. Wolf, Director (Date)
</TABLE>
- 70 -
<PAGE> 1
FORT WAYNE NATIONAL CORPORATION
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following are wholly owned subsidiaries of the Registrant:
The Auburn State Bank, Auburn, Indiana, chartered by the State of Indiana.
Churubusco State Bank, Churubusco, Indiana, chartered by the State of Indiana.
First National Bank of Huntington, Huntington, Indiana, a national banking
association formed under the laws of the United States.
First National Bank of Warsaw, Warsaw, Indiana, a national banking association
formed under the laws of the United States.
Fort Wayne Capital Trust I, a statutory business trust created under the laws of
the State of Delaware.
Fort Wayne National Bank, Fort Wayne, Indiana, a national banking association
formed under the laws of the United State.
Fort Wayne National Life Insurance Company, Phoenix, Arizona, chartered by the
State of Arizona.
Old-First National Bank in Bluffton, Bluffton, Indiana, a national banking
association formed under the laws of the United States.
Valley American Bank and Trust Company, Mishawaka, Indiana, chartered by the
State of Indiana.
- 71 -
<PAGE> 1
FORT WAYNE NATIONAL CORPORATION
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-33123) pertaining to the Fort Wayne National Corporation 1994 Stock
Incentive Plan of Fort Wayne National Corporation and in the related Prospectus
of our report dated January 19, 1998, with respect to the consolidated financial
statements of Fort Wayne National Corporation included in the Annual Report
(Form 10-K) for the year ended December 31, 1997.
/S/ Ernst & Young LLP
January 27, 1998
Fort Wayne, Indiana
- 72 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORT
WAYNE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS
OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 181,481
<INT-BEARING-DEPOSITS> 2,649
<FED-FUNDS-SOLD> 57,615
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 952,499
<INVESTMENTS-MARKET> 970,291
<LOANS> 2,056,345
<ALLOWANCE> 29,487
<TOTAL-ASSETS> 3,393,471
<DEPOSITS> 2,579,186
<SHORT-TERM> 363,228
<LIABILITIES-OTHER> 35,709
<LONG-TERM> 117,551
36,999
0
<COMMON> 18,999
<OTHER-SE> 241,799
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<INTEREST-INVEST> 59,500
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<INTEREST-TOTAL> 236,275
<INTEREST-DEPOSIT> 92,564
<INTEREST-EXPENSE> 118,728
<INTEREST-INCOME-NET> 117,547
<LOAN-LOSSES> 4,587
<SECURITIES-GAINS> 232
<EXPENSE-OTHER> 90,336
<INCOME-PRETAX> 54,753
<INCOME-PRE-EXTRAORDINARY> 36,846
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<EPS-PRIMARY> 1.98
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<LOANS-NON> 10,689
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