-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MeZuOVf9jqBkrKPFKqLZ8T8MBPCaFthYQcegQm5wYbYgHQjXzrQKsW/zF008sGYq D7z7KW+Te3MwWpaaqlQ8HA== 0000034782-00-000023.txt : 20000317 0000034782-00-000023.hdr.sgml : 20000317 ACCESSION NUMBER: 0000034782-00-000023 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 1ST SOURCE CORP CENTRAL INDEX KEY: 0000034782 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351068133 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-06233 FILM NUMBER: 571305 BUSINESS ADDRESS: STREET 1: 100 N MICHIGAN ST CITY: SOUTH BEND STATE: IN ZIP: 46601 BUSINESS PHONE: 2192352702 MAIL ADDRESS: STREET 1: P O BOX 1602 STREET 2: P O BOX 1602 CITY: SOUTH BEND STATE: IN ZIP: 46634 FORMER COMPANY: FORMER CONFORMED NAME: FBT BANCORP INC DATE OF NAME CHANGE: 19820818 10-Q/A 1 AMENDED FORM 10-Q FOR SEPTEMBER 30, 1999 FORM 10-Q/A (Amendment No. 1) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1999 ------------------ OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-5907 -------- 1st SOURCE CORPORATION ---------------------- (Exact name of registrant as specified in its charter) INDIANA 35-1068133 ------- ---------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 North Michigan Street South Bend, Indiana 46601 - ----------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (219) 235-2702 -------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name, former address and former fiscal year, if changed since last report.) 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 ----- ----- Number of shares of common stock outstanding as of September 30, 1999 - 18,895,137 shares. INTRODUCTORY STATEMENT 1st Source is filing this Form 10-Q/A for the quarterly period ended September 30, 1999 to restate the financial information pertaining to income recognition on securitized loans in accordance with SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This restatement had the effect of decreasing loan servicing and sale income by $821,000 and net income by $504,000, or $0.02 per diluted common share, for the three months ended September 30, 1999. For the nine months ended September 30, 1999, this restatement had the effect of decreasing loan servicing and sale income by $504,000 and net income by $309,000, or $0.01 per diluted common share. As of September 30, 1999, this restatement reduced retained interest assets by $4,258,000, decreased the reserve for loan losses by $5,089,000 and increased shareholders' equity by $485,000. See Note 2 to Item 1, below. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Page Consolidated statements of financial condition -- September 30, 1999, and December 31, 1998 3 Consolidated statements of income -- three months and nine months ended September 30, 1999 and 1998 4 Consolidated statements of cash flows -- nine months ended September 30, 1999 and 1998 5 Notes to the Consolidated Financial Statements 6 - 2 - CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 1st Source Corporation and Subsidiaries (Dollars in thousands) September 30, December 31, 1999 1998 ------------- ------------ (Restated) (Restated) ASSETS Cash and due from banks ......................... $ 118,275 $ 132,514 Federal funds sold and interest bearing deposits with other banks .... 3,661 41,951 Investment securities: Securities available-for-sale, at fair value (amortized cost of $431,420 and $440,147 at September 30, 1999 and December 31, 1998) 429,539 443,691 Securities held-to-maturity, at amortized cost (fair value of $81,194 and $99,734 at September 30, 1999 and December 31, 1998) ... 83,284 96,008 ----------- ----------- Total Investment Securities ..................... 512,823 539,699 Loans - net of unearned discount ................ 1,956,696 1,881,696 Reserve for loan losses ....................... (39,814) (38,629) ----------- ----------- Net Loans ....................................... 1,916,882 1,843,067 Equipment owned under operating leases, net of accumulated depreciation 66,261 54,170 Premises and equipment, net of accumulated depreciation .............. 32,374 31,227 Other assets .................................... 93,751 90,964 ----------- ----------- Total Assets .................................... $ 2,744,027 $ 2,733,592 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing ........................... $ 281,122 $ 294,810 Interest bearing .............................. 1,831,148 1,882,297 ----------- ----------- Total Deposits .................................. 2,112,270 2,177,107 Federal funds purchased and securities sold under agreements to repurchase ........... 179,034 159,478 Other short-term borrowings ..................... 119,684 82,681 Other liabilities ............................... 45,006 39,594 Long-term debt .................................. 11,814 13,189 ----------- ----------- Total Liabilities ............................... 2,467,808 2,472,049 Guaranteed preferred beneficial interests in the Company's subordinated debentures ...... 44,750 44,750 Shareholders' equity: Common stock-no par value ..................... 6,883 6,270 Capital surplus ............................... 179,905 121,456 Retained earnings ............................. 59,187 98,300 Less cost of common stock in treasury ......... (14,539) (12,723) Net unrealized appreciation (depreciation) of securities available-for-sale ............ 33 3,490 ----------- ----------- Total Shareholders' Equity ...................... 231,469 216,793 ----------- ----------- Total Liabilities and Shareholders' Equity ...... $ 2,744,027 $ 2,733,592 =========== =========== The accompanying notes are a part of the consolidated financial statements. - 3 -
CONSOLIDATED STATEMENTS OF INCOME 1st Source Corporation and Subsidiaries (Dollars in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (Restated) (Restated) (Restated) (Restated) Interest Income: Loans, including fees ................................... $ 43,813 $ 42,459 $ 127,393 $ 127,184 Investment securities: Taxable ............................................. 4,763 4,160 14,713 12,336 Tax-exempt .......................................... 1,993 1,982 5,888 5,961 Other ............................................... 29 754 374 1,084 ------------ ------------ ------------ ------------ Total Interest Income ....................................... 50,598 49,355 148,368 146,565 Interest Expense: Deposits ................................................ 20,483 22,259 62,954 64,170 Short-term borrowings ................................... 4,273 3,352 10,756 11,340 Long-term debt .......................................... 216 232 670 688 ------------ ------------ ------------ ------------ Total Interest Expense ...................................... 24,972 25,843 74,380 76,198 ------------ ------------ ------------ ------------ Net Interest Income ......................................... 25,626 23,512 73,988 70,367 Provision for Loan Losses ................................... 2,232 2,042 4,968 7,132 ------------ ------------ ------------ ------------ Net Interest Income After Provision for Loan Losses ............................... 23,394 21,470 69,020 63,235 Noninterest Income: Trust fees .............................................. 2,158 2,191 6,726 6,351 Service charges on deposit accounts ..................... 1,818 1,482 5,054 4,320 Loan servicing and sale income .......................... 4,932 4,868 14,410 10,904 Equipment rental income ................................. 4,846 3,602 12,349 8,885 Other income ............................................ 2,702 2,578 7,749 7,405 Investment securities and other investment (losses) ..... -- -- (476) (706) ------------ ------------ ------------ ------------ Total Noninterest Income .................................... 16,456 14,721 45,812 37,159 ------------ ------------ ------------ ------------ Noninterest Expense: Salaries and employee benefits .......................... 13,770 11,905 39,824 35,266 Net occupancy expense ................................... 1,332 1,250 3,900 3,695 Furniture and equipment expense ......................... 1,895 1,826 5,866 5,165 Depreciation - leased equipment ......................... 3,359 2,354 9,436 6,336 Business development and marketing expense .............. 1,329 861 3,113 2,381 Other expense ........................................... 4,108 4,064 11,955 9,758 ------------ ------------ ------------ ------------ Total Noninterest Expense ................................... 25,793 22,260 74,094 62,601 ------------ ------------ ------------ ------------ Income Before Income Taxes and Subsidiary Trust Distributions 14,057 13,931 40,738 37,793 Income taxes ................................................ 4,883 5,041 14,057 13,276 Distribution on preferred securities of subsidiary trusts, net of income tax benefit ............ 561 554 1,666 1,679 ------------ ------------ ------------ ------------ Net Income .................................................. $ 8,613 $ 8,336 $ 25,015 $ 22,838 ============ ============ ============ ============ Other Comprehensive Income, Net of Tax: Change in unrealized appreciation (depreciation) of available-for-sale securities ........................... (320) 1,583 (3,457) 1,925 ------------ ------------ ------------ ------------ Total Comprehensive Income .................................. $ 8,293 $ 9,919 $ 21,558 $ 24,763 ============ ============ ============ ============ Per Common Share: (1) Basic Net Income Per Common Share ........................ $ 0.46 $ 0.45 $ 1.32 $ 1.21 ============ ============ ============ ============ Diluted Net Income Per Common Share ...................... $ 0.45 $ 0.43 $ 1.30 $ 1.17 ============ ============ ============ ============ Dividends ................................................ $ 0.080 $ 0.073 $ 0.233 $ 0.205 ============ ============ ============ ============ Basic Weighted Average Common Shares Outstanding ............ 18,924,119 18,944,008 18,948,904 19,022,153 ============ ============ ============ ============ Diluted Weighted Average Common Shares Outstanding .......... 19,222,334 19,314,508 19,262,305 19,406,878 ============ ============ ============ ============ (1) The computation of per share data gives retroactive recognition to a 10% stock dividend declared on January 14, 1999. The accompanying notes are a part of the consolidated financial statements.
- 4 - CONSOLIDATED STATEMENTS OF CASH FLOWS 1st Source Corporation and Subsidiaries (Dollars in thousands) Nine Months Ended September 30 1999 1998 --------- --------- (Restated) (Restated) Operating Activities: Net income ...................................... $ 25,015 $ 22,838 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ....................... 4,968 7,132 Depreciation of premises and equipment and leased equipment ........................ 12,361 9,071 Amortization of investment security premiums and accretion of discounts, net ............. 1,224 711 Deferred income taxes ........................... 193 3,521 Realized investment securities losses ........... 476 706 Realized (gains) on securitized loans ........... (4,117) (1,917) Increase in interest receivable ................. (727) (682) Increase in interest payable .................... 1,057 6,880 Other ........................................... 2,959 7,351 --------- --------- Net Cash Provided by Operating Activities ......... 43,409 55,611 Investing Activities: Proceeds from sales and maturities of investment securities 212,503 148,977 Purchases of investment securities .............. (192,752) (206,304) Net (increase) decrease in short-term investments 38,290 (37,644) Loans sold or participated to others ............ 267,421 307,097 Net increase in loans made to customers and principal collections on loans .......... (346,356) (296,646) Net increase in operating leases ................ (9,970) (16,112) Purchases of premises and equipment ............. (3,163) (2,380) Increase in other assets ........................ (1,804) (13,100) Other ........................................... (1,124) (6,806) --------- --------- Net Cash Used in Investing Activities ............. (36,955) (122,918) Financing Activities: Net increase (decrease) in demand deposits, NOW accounts and savings accounts ............... (74,127) 12,416 Net increase in certificates of deposit ......... 9,290 90,405 Net increase (decrease) in short-term borrowings 56,560 (18,297) Proceeds from issuance of long-term debt ........ 862 522 Payments on long-term debt ...................... (2,237) (4,169) Acquisition of treasury stock ................... (6,614) (5,474) Cash dividends .................................. (4,427) (3,919) Other ........................................... -- 12 --------- --------- Net Cash Provided by (Used in) Financing Activities (20,693) 71,496 Increase (Decrease) in Cash and Cash Equivalents .. (14,239) 4,189 Cash and Cash Equivalents, Beginning of Year ...... 132,514 90,864 --------- --------- Cash and Cash Equivalents, End of Period .......... $ 118,275 $ 95,053 ========= ========= The accompanying notes are a part of the consolidated financial statements. - 5 - Notes to the Consolidated Financial Statements 1. The unaudited consolidated condensed financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The information furnished herein reflects all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods for which this report is submitted. The restated 1998 1st Source Corporation Annual Report on Form 10-K/A and restated quarterly reports on Form 10-Q/A for the quarters ended March 31, and June 30, 1999 should be read in conjunction with these statements. 2. The financial information for the three months and nine months ended September 30, 1999 has been restated for adjustments to revise the income recognition on securitized loans in accordance with SFAS No. 125. Since July 1, 1998, 1st Source has sold capital equipment loans into a securitization facility. As a result of a review of its accounting policies and procedures relating to securitized loans, 1st Source refined its method of estimating the timing of cash flows and the underlying key assumptions of the securitized loans and the value of its retained interests in the loans. These changes resulted only in a difference in timing of the revenue recognition from its securitized loans and has no effect on the total cash flows of the securitized transactions. The changes were applied retroactively to the commencement of this securitization program in the third quarter of 1998. The following summarizes the impact of these adjustments on the assets and liabilities as of September 30, 1999 and to the results of operations for the three months and nine months ended September 30, 1999: September 30, 1999 ------------------ As reported As restated ----------- ----------- BALANCE SHEET ------------- Reserve for Loan Losses $ 44,903 $ 39,814 Net Loans 1,911,793 1,916,882 Retained Interest Assets 16,175 11,917 Total Assets 2,743,196 2,744,027 Total Liabilities 2,467,462 2,467,808 Shareholders' Equity 230,984 231,469 Total Liabilities and Shareholders' Equity 2,743,196 2,744,027 - 6 -
Three Months Ended Nine Months Ended September 30, 1999 September 30, 1999 ------------------ ------------------ As reported As restated As reported As restated ----------- ----------- ----------- ----------- INCOME STATEMENT ---------------- Total Noninterest Income $ 17,277 $ 16,456 $ 46,316 $ 45,812 Income Before Taxes 14,878 14,057 41,242 40,738 Income Taxes 5,200 4,883 14,252 14,057 Net Income 9,117 8,613 25,324 25,015 Comprehensive Income 8,838 8,293 22,007 21,558 Basic EPS 0.49 0.46 1.34 1.32 Diluted EPS 0.47 0.45 1.31 1.30
3. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for 1st Source). This is after the recent deferral of the effective date by SFAS No. 137. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the intended use of the derivative and its resulting designation. 1st Source anticipates that due to its limited use of derivative instruments, the adoption of SFAS No. 133 will not have a significant effect on 1st Source's results of operations or its financial position. - 7 - PART I. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As more fully described in Note 2 to the Consolidated Condensed Financial Statements, certain information related to the activity for the three and nine months ended September 30, 1999 has been restated. This discussion and analysis should be read in conjunction with 1st Source's consolidated condensed financial statements and the financial and statistical data appearing elsewhere in this report and the restated 1998 1st Source Corporation Annual Report on Form 10-K/A and the restated quarterly report on Form 10-Q/A for the quarters ended March 31, and June 30, 1999. Except for historical information contained herein, the matters discussed in this document, and other information contained in 1st Source's SEC filings, may express "forward-looking statements." Those "forward-looking statements" may involve risk and uncertainties, including statements concerning future events, performance and assumptions and other statements that are other than statements of historical facts. 1st Source wishes to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. Readers are advised that various factors--including, but not limited to, changes in laws, regulations or generally accepted accounting principles; 1st Source's competitive position within the markets served; increasing consolidation within the banking industry; certain customers' and vendors' critical systems or services failing to comply with Year 2000 programming issues; unforeseen changes in interest rates; any unforeseen downturns in the local, regional or national economies--could cause 1st Source's actual results or circumstances for future periods to differ materially from those anticipated or projected. 1st Source does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date of such statements. - 8 - COMPARISON OF THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 Net income for the three-month and nine-month periods ended September 30, 1999, was $8,613,000 and $25,015,000 respectively, compared to $8,336,000 and $22,838,000 for the equivalent periods in 1998. The primary reasons for the increase were an increase in net interest income and an increase in noninterest income. This was offset by an increase in noninterest expense. Diluted net income per common share increased to $0.45 and $1.30, respectively, for the three-month and nine-month periods ended September 30, 1999, from $0.43 and $1.17 in 1998. Return on average common shareholders' equity was 14.87% for the nine months ended September 30, 1999, compared to 15.06% in 1998. The return on total average assets was 1.23% for the nine months ended September 30, 1999, compared to 1.22% in 1998. NET INTEREST INCOME The taxable equivalent net interest income for the three-month period ended September 30, 1999, was $26,552,000, an increase of 8.86% over the same period in 1998, resulting in a net yield of 4.24% compared to 4.15% in 1998. The fully taxable equivalent net interest income for the nine-month period ended September 30, 1999, was $76,721,000, an increase of 5.00% over 1998, resulting in a net yield of 4.18% compared to 4.23% in 1998. Total average earning assets increased 6.52% and 6.32%, respectively, for the three-month and nine-month periods ended September 30, 1999, over the comparative periods in 1998. Total average investment securities increased 15.46% and 18.07%, respectively for the three-month and nine-month periods over one year ago primarily due to an increase of investments in U.S. Government Securities. An increase in average loans of 7.42% and 4.53% for the three-month and nine-month periods was achieved despite additional new loan securitizations of $40 million of auto rental fleet and aircraft loans during the last twelve months. The taxable equivalent yields on total average earning assets were 8.23% and 8.55% for the three-month periods ended September 30, 1999, and 1998, and 8.24% and 8.65% for the nine-month periods ended September 30, 1999, and 1998, respectively. Average deposits increased 3.87% and 7.89%, respectively, for the three-month and nine-month periods over the same periods from 1998. The cost rate on average interest-bearing funds was 4.63% and 5.15% for the three- months ended September 30, 1999, and 1998, and 4.70% and 5.16% for the nine-month periods ended September 30, 1999 and 1998. The majority of the growth in deposits from last year has occurred in NOW accounts. The following table sets forth consolidated information regarding average balances and rates. - 9 -
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL (Dollars in thousands) Three Months Ended September 30 ------------------------------------- 1999 1998 -------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- (Restated) (Restated) ASSETS: Investment securities: Taxable ................. $ 337,702 $ 4,763 5.60% $ 282,635 $ 4,160 5.84% Tax exempt (1) .......... 163,064 2,864 6.97% 151,086 2,809 7.37% Net loans (2 & 3) ......... 1,979,307 43,867 8.79% 1,842,592 42,512 9.15% Other investments ......... 2,666 29 4.32% 54,493 753 5.48% ---------- -------- ----- ---------- ------- ---- Total Earning Assets ...... 2,482,739 51,523 8.23% 2,330,806 50,234 8.55% Cash and due from banks ... 112,985 86,283 Reserve for loan losses ... (38,951) (39,385) Other assets .............. 191,124 161,647 ---------- ---------- Total ..................... $2,747,897 $2,539,351 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits . $1,804,569 $20,483 4.50% $1,761,760 $ 22,259 5.01% Short-term borrowings ..... 324,757 4,273 5.22% 214,418 3,352 6.20% Long-term debt ............ 11,835 215 7.22% 13,006 232 7.08% ---------- -------- ----- ---------- ------- ---- Total Interest Bearing Liabilities ............. 2,141,161 24,971 4.63% 1,989,184 25,843 5.15% Noninterest bearing deposits 287,210 252,015 Other liabilities ......... 90,858 91,048 Shareholders' equity ...... 228,668 207,104 ---------- ---------- Total ..................... $2,747,897 $2,539,351 ========== ========== ------- ------- Net Interest Income ....... $26,552 $ 24,391 ======= ======= Net Yield on Earning Assets on a Taxable ----- ----- Equivalent Basis ........ 4.24% 4.15% ===== =====
- 10 -
Nine Months Ended September 30 ------------------------------------ 1999 1998 -------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- (Restated) (Restated) ASSETS: Investment securities: Taxable ................. $ 343,140 $14,713 5.73% $ 276,183 $ 12,336 5.97% Tax exempt (1) .......... 160,583 8,474 7.06% 150,437 8,504 7.56% Net loans (2 & 3) ......... 1,938,355 127,540 8.80% 1,854,384 127,341 9.18% Other investments ......... 11,097 374 4.51% 26,349 1,083 5.50% ---------- -------- ----- ---------- ------- ---- Total Earning Assets ...... 2,453,175 151,101 8.24% 2,307,353 149,264 8.65% Cash and due from banks ... 110,980 83,278 Reserve for loan losses ... (38,759) (37,938) Other assets .............. 184,826 153,021 ---------- ---------- Total ..................... $2,710,222 $2,505,714 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits . $1,833,007 $62,954 4.59% $1,716,770 $ 64,170 5.00% Short-term borrowings ..... 270,800 10,756 5.31% 244,567 11,340 6.20% Long-term debt ............ 12,637 670 7.09% 12,990 688 7.08% ---------- -------- ----- ---------- ------- ---- Total Interest Bearing Liabilities ............. 2,116,444 74,380 4.70% 1,974,327 76,198 5.16% Noninterest bearing deposits 280,125 241,802 Other liabilities ......... 88,778 86,791 Shareholders' equity ...... 224,875 202,794 ---------- ---------- Total ..................... $2,710,222 $2,505,714 ========== ========== ------- ------- Net Interest Income ....... $76,721 $73,066 ======= ======= Net Yield on Earning Assets on a Taxable ----- ----- Equivalent Basis ........ 4.18% 4.23% ===== ===== (1) Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1999 and 1998. Tax equivalent adjustments for the three-month periods were $871 in 1999 and $827 in 1998 and for the nine-month periods were $2,586 in 1999 and $2,543 in 1998. (2) Loan income includes fees on loans for the three-month periods of $1,502 in 1999 and $1,279 in 1998 and for the nine-month periods of $4,302 in 1999 and $3,594 in 1998. Loan income also includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1999 and 1998. The tax equivalent adjustments for the three-month periods were $55 in 1999 and $53 in 1998 and for the nine-month periods were $148 in 1999 and $157 in 1998. (3) For purposes of this computation, non-accruing loans are included in the daily average loan amounts outstanding.
- 11 - PROVISION FOR LOAN LOSSES The provision for loan losses for the three-month period ended September 30, 1999, and 1998, was $2,232,000 and $2,042,000, respectively, and was $4,968,000 and $7,132,000 for the nine-month periods ended September 30, 1999 and 1998. Net Charge-offs of $629,000 have been recorded for the three-month period ended September 30, 1999, compared to $1,462,000 of Net Charge-offs for the same period in 1998. Year-to-date Net Charge-offs of $994,000 have been recorded in 1999, compared to Net Charge-offs of $2,267,000 through September 1998. The reserve for loan losses was $39,814,000 or 2.03% of net loans at September 30, 1999, compared to $38,629,000 or 2.05% of net loans at December 31, 1998. Non-performing assets at September 30, 1999, were $11,843,000 compared to $10,571,000 at December 31, 1998, an increase of 12.03%. At September 30, 1999, non-performing assets were 0.61% of net loans compared to 0.56% at December 31, 1998. It is management's opinion that the reserve for loan losses is adequate to absorb anticipated losses in the loan portfolio as of September 30, 1999. NONINTEREST INCOME Noninterest income for the three-month periods ended September 30, 1999, and 1998 was $16,456,000 and $14,721,000, respectively, and for the nine-month periods was $45,812,000 in 1999 and $37,159,000 in 1998. For the nine-month period, trust fees increased 5.91%, service charges on deposit accounts increased 16.99%, loan servicing and sale income increased 32.16%, equipment rental income increased 38.98% and other income increased 4.65%. The increase in servicing and sale income is due to increased loan securitization activity. The increase in equipment rental income was primarily due to growth in operating leases. Investment Security and other net losses for the nine-month period ended September 30, 1999, were $476,000 compared to net losses of $706,000 in 1998. The net losses for both years were primarily attributed to certain partnership and venture capital investments. NONINTEREST EXPENSE Noninterest expense for the three-month period ended September 30, 1999, was $25,793,000, an increase of 15.87% over the same period in 1998 and was $74,094,000 for the nine-month period ended September 30, 1999, an increase of 18.36% over 1998. For the nine-month period ended September 30, 1999, salaries and employee benefits increased 12.92%, net occupancy expense increased 5.54%, furniture and equipment expense increased 13.56%, depreciation on leased equipment increased 48.93%, business development and marketing expense increased 30.75%, and miscellaneous other expenses increased 22.52% over the same period in 1998. The increase in salaries and employee benefits is primarily attributed to an increase in our employee base compared to 1998. The increase in furniture and equipment expense is primarily due to software and computer charges, equipment rental and repair expenses. The increase in depreciation of leased equipment is due to a significant volume increase from the prior year. The miscellaneous other expense increase from one year ago is attributed primarily to Year 2000 consulting expenses. - 12 - INCOME TAXES The provision for income taxes for the three-month and nine-month periods ended September 30, 1999, was $4,883,000 and $14,057,000, respectively, compared to $5,041,000 and $13,276,000 for the comparable periods in 1998. The provision for income taxes for the nine months ended September 30, 1999, and 1998, is at a rate which management believes approximates the effective rate for the year. CAPITAL RESOURCES The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution. These guidelines require all banks to maintain a minimum leverage capital ratio of 4.00% for adequately capitalized banks and 5.00% for well-capitalized banks. 1st Source's leverage capital ratio was 9.97% at September 30, 1999. The Federal Reserve Board has established risk-based capital guidelines for U.S. banking organizations. The guidelines established a conceptual framework calling for risk weights to be assigned to on and off-balance sheet items in arriving at risk-adjusted total assets, with the resulting ratio compared to a minimum standard to determine whether a bank has adequate capital. The minimum standard risk-based capital ratios effective in 1999 are 4.00% for adequately capitalized banks and 6.00% for well-capitalized banks for Tier 1 risk-based capital and 8.00% and 10.00%, respectively, for total risk-based capital. 1st Source's Tier 1 risk-based capital ratio on September 30, 1999 was 12.28% and the total risk-based capital ratio was 13.54%. LIQUIDITY AND INTEREST RATE SENSITIVITY Asset and liability management includes the management of interest rate sensitivity and the maintenance of an adequate liquidity position. The purpose of liquidity management is to match the sources and uses of funds to anticipated customers' deposits and withdrawals, to anticipate borrowing requirements and to provide for the cash flow needs of 1st Source. The purpose of interest rate sensitivity management is to stabilize net interest income during periods of changing interest rates. Close attention is given to various interest rate sensitivity gaps and interest rate spreads. Maturities of rate sensitive assets are carefully maintained relative to the maturities of rate sensitive liabilities and interest rate forecasts. At September 30, 1999, the consolidated statement of financial condition was rate sensitive by $113,982,000 more liabilities than assets scheduled to reprice within one year or 92.02%. Management adjusts the composition of its assets and liabilities to manage the interest rate sensitivity gap based upon its expectations of interest rate fluctuations. 1st Source has three off-balance sheet amortizing interest rate swaps as part of its interest rate risk management strategy. The swaps are being used to hedge against 1st Source's prime and LIBOR floating rate loans. The notional amount of the first swap as of September 30, 1999, is $4.2 million. It has a maturity date of January, 2002, and a market value of ($3,696). The second swap has a notional amount of $3.6 million as of September 30, 1999. It has a maturity date of March, 2001, and a market value of $1,672. The third swap has a notional amount of $50.0 million as of September 30, 1999. It has a maturity date of April, 2003, and a market value of ($861,685). - 13 - 1st Source pays a variable interest rate (one-month LIBOR) on each swap and receives a fixed rate. These interest rate swaps are the most efficient means of protecting the bank's net interest rate margin in a declining interest rate environment. Conversely, if interest rates increase, the increased contribution to net interest income from on-balance sheet assets will substantially offset any negative impact on net interest income from these swap transactions. YEAR 2000 The Y2K issue is the result of potential problems with computer systems or any equipment with computer chips that store the year portion of the date as just two digits (e.g., 98 for 1998). Systems using this two-digit approach may not be able to determine whether "00" represents the Year 2000 or 1900. The problem, if not corrected, may make those systems fail altogether or, even worse, allow them to generate incorrect calculations causing a disruption of normal operations. In 1997, a comprehensive project plan to address the Y2K issue as it relates to 1st Source's operations was developed, approved by the Board of Directors and implemented. The scope of the plan had five phases comprising of Awareness, Assessment, Renovation, Validation and Implementation as defined by federal banking regulatory agencies. The project teams assigned assessed our systems and equipment and vendors to ascertain their readiness and to develop the overall plan to bring our systems into compliance, and also assessed the readiness of our customers and determined what risk, if any, our key customers pose to the bank with regards to their Y2K readiness. The scope of the project also included other operational and environmental systems since they may be impacted if embedded computer chips control the functionality of those systems. From the assessment, 1st Source identified and prioritized those systems deemed to be mission critical or those that have a significant impact on normal operations. The project team now feels that 1st Source's Y2K readiness project is complete. Refinement of contingency plans will continue through the century date change. 1st Source also relies on third-party vendors and service providers for much of its data processing capabilities and to maintain its computer systems. Formal communications with these providers and other external counterparties were initiated in 1997 to assess the Y2K readiness of their products and services. Their responses indicate that all of the significant providers currently have compliant versions operational. However, 1st Source can give no guarantee that the systems of these service providers and vendors on which 1st Source's systems rely will operate error free. Additionally, 1st Source has implemented a plan to manage the potential risk posed by the impact of the Y2K issue on its major borrowing customers. Formal communications have been initiated from normal loan operations, and the assessment was substantially complete on December 31, 1998. Additional monitoring of these borrowers has, and will, continue throughout 1999 in order to assess their Y2K readiness and evaluate any potential risk to 1st Source. Loan losses attributed to the Y2K issue are not anticipated to be material to 1st Source. However, there can be no guarantee that any loss incurred will be immaterial. 1st Source's total cost for the Y2K project is estimated to be between $2,700,000 and $2,800,000. The total amount expended on the project through September 30, 1999, was $2,682,400 of which approximately $2,538,600 related to the cost to repair or replace software. Approximately $132,800 was related to the cost of replacing equipment and approximately $11,000 was related to miscellaneous items such as training for employees and communications with customers. - 14 - Funds have been provided from our normal operating budget and costs are expensed as they are incurred. The total cost to 1st Source of these Year 2000 readiness activities has not been, and is not anticipated to be, material to its financial position or results of operations in any given year. Much of the work done within this project is an acceleration of work that would have been done in the normal course of business. Based upon current information related to the progress of its major vendors and service providers, management has determined that the Y2K issue will not pose significant operational problems for its computer systems. This determination is based on the assertion of those vendors and service providers that they are Y2K ready. However, 1st Source can give no guarantee that the systems of these suppliers will operate error free. Realizing that some disruption may occur despite its best efforts, 1st Source is in the process of refining contingency plans for each critical system in the event that one or more of those systems fail. 1st Source cautions that this Y2K disclosure includes certain "forward-looking statements." The reader should refer to the "forward-looking statements" disclosure at the beginning of Part I, Item 2 for further discussion. - 15 - PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. Exhibit 27 - Restated Financial Data Schedule. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 1st Source Corporation ------------------- DATE 3/14/00 /s/ Christopher J. Murphy III ---------- ---------------------------------------- (Signature) Christopher J. Murphy III Chairman of the Board, President and CEO DATE 3/14/00 /s/ Larry E. Lentych ---------- ---------------------------------------- (Signature) Larry E. Lentych Treasurer and Chief Financial Officer - 16 - EX-27 2
9 1,000 9-MOS DEC-31-1999 SEP-30-1999 118,275 1,911 1,750 0 429,539 83,284 81,194 1,956,696 39,814 2,744,027 2,112,270 298,719 45,006 56,564 0 0 6,883 224,586 2,744,027 127,393 20,601 374 148,368 62,954 74,380 73,988 4,968 (476) 74,094 40,738 25,015 0 0 25,015 1.32 1.30 4.18 9,337 307 0 0 38,629 1,457 (463) 39,814 24,132 0 15,682
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