-----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, TdiuGDUPIPO/wTc0rMexE9vJkHciQobI7ru80Tc9zJvuKSI/RsMdKzqO4wSjWHJ1 ctsVV2G5LDjUwnYItYGAeg== 0000034782-00-000024.txt : 20000317 0000034782-00-000024.hdr.sgml : 20000317 ACCESSION NUMBER: 0000034782-00-000024 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 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-K SEC ACT: SEC FILE NUMBER: 000-06233 FILM NUMBER: 571636 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-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 0-6233 ------ 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 N. Michigan Street, South Bend, Indiana 46601 - ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 219/235-2000 ------------ Securities registered pursuant to Section 12(b) of the Act: None ------ Securities registered pursuant to Section 12(g) of the Act: 9% Cumulative Trust Preferred Securities and related guarantee - $25 par value - ------------------------------------------------------------------------------- (Title of Class) Floating Rate Cumulative Trust Preferred Securities and related guarantee - $25 par value - -------------------------------------------------------------------------------- (Title of Class) Common Stock - 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, 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 herein, 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 14, 2000. Common Stock, without par value - $197,728,604. - -------------------------------------------------------------------------------- The number of shares outstanding of each of the registrant's classes of stock as of February 14, 2000. Common Stock, without par value - 19,043,741 shares. - -------------------------------------------------------------------------------- 9% Cumulative Trust Preferred Securities and related guarantee, $25 par value - 1,100,000 shares. - -------------------------------------------------------------------------------- Floating Rate Cumulative Trust Preferred Securities and related guarantee, $25 par value - 690,000 shares. - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended December 31, 1999, are incorporated by reference into Part II. Portions of the annual proxy statement for the 2000 annual meeting of shareholders are incorporated by reference into Parts II and III. 1ST SOURCE CORPORATION AND SUBSIDIARIES FORM 10-K Index Part I Page ------ ---- Item 1. Business .................................................... 3 Item 2. Properties .................................................. 21 Item 3. Legal Proceedings ........................................... 21 Item 4. Submission of Matters to a Vote of Security Holders ......... 21 Part II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ......................................... 21 Item 6. Selected Financial Data ..................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 21 Item 7A. Quantitative and Qualitative Disclosures about Market Risk .. 22 Item 8. Financial Statements and Supplementary Data ................. 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................... 22 Part III -------- Item 10. Directors and Executive Officers of the Registrant .......... 22 Item 11. Executive Compensation ...................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management ....................................... 22 Item 13. Certain Relationships and Related Transactions .............. 22 Part IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................................. 23 Signatures ............................................................. 24 2 PART I ITEM 1. BUSINESS GENERAL 1st Source Corporation is an Indiana corporation and registered bank holding company headquartered in South Bend, Indiana which commenced operations as a bank holding company in 1971. As used herein, unless the context otherwise requires, the term "1st Source" refers to 1st Source Corporation and its subsidiaries. At December 31, 1999, 1st Source had assets of $2.87 billion, deposits of $2.13 billion and total shareholders' equity of $238.8 million. Pages 20 through 41 of 1st Source's Annual Report to Shareholders for the year ended December 31, 1999 are incorporated herein by reference. 1st Source, through its principal subsidiary 1st Source Bank (the "Bank"), delivers a comprehensive range of consumer and commercial banking services to individual and business customers through 50 banking locations in the northern Indiana/southwestern Michigan market area. The Bank also competes for business nationwide by offering specialized financing services for used private aircraft, automobiles for leasing and rental agencies, heavy duty trucks and construction equipment. The Bank, which was chartered as an Indiana state bank in 1922, is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by law. The Bank is headquartered in South Bend, Indiana, which is in northern Indiana, approximately 95 miles east of Chicago and 140 miles north of Indianapolis. Its principal market area consists of nine counties in northern Indiana and three counties in southwestern lower Michigan. South Bend, in St. Joseph County, is the largest city in its market area, and is a regional center for educational institutions, health care, financial, accounting and legal services and retailing. 1st Source's other subsidiaries include 1st Source Leasing, Inc., an originator and servicer of personal property leases to businesses nationwide, 1st Source Insurance, Inc., a general property and casualty insurance agency in South Bend, 1st Source Capital Corporation, a licensed small business investment company, 1st Source Capital Trust I and II, subsidiaries created to issue $44.75 million of Trust Preferred Securities, Michigan Transportation Finance Corporation, a company which manages the non-Indiana assets of our national niche lending businesses, 1st Source Funding Corporation, a qualified special purpose entity established for purposes of administering securitization activity, and Trustcorp Mortgage Company, a mortgage banking company with eight offices in Indiana, Ohio and Kentucky. 1st Source's inactive subsidiaries include 1st Source Travel, Inc., 1st Source Auto Leasing, Inc., and FBT Capital Corporation. The principal executive office of 1st Source is located at 100 North Michigan Street, South Bend, Indiana 46601 and its telephone number is (219) 235-2000. BUSINESS STRATEGY AND OBJECTIVES 1st Source, as part of its "Vision 2000" strategic planning process commenced in 1995, has identified several business objectives and strategies which focus on growth and customer service. The principal objectives of 1st Source under Vision 2000 have been to (i) increase financial performance and market share, (ii) provide exceptional customer service, (iii) enhance credit quality, and (iv) maintain cost controls. 1st Source has employed the following strategies to further its Vision 2000 objectives: 1. Increase market share in each market served and as a percentage of each customer's relationship. 1st Source has opened 17 new banking locations from 1995 through 1999 as part of its banking center expansion program designed to maintain its position as one of the dominant financial institutions in its market area -- which 3 includes nine counties in northern Indiana and three counties in southwestern lower Michigan. Management believes that such a strategy allows the most effective and efficient use of 1st Source's marketing resources and assures that 1st Source's banking offices are accessible to a majority of the people residing in the markets served. 1st Source's goal is to deliver highly personal and superior customer services through each of its banking facilities and to meet a higher percentage of each customer's financial needs through personal relationship management. 2. Expand fee-based businesses. 1st Source currently provides a number of fee-based services to its clients, the major services being trust, mortgage banking, and insurance. 1st Source believes that additional sources of fee income are available from existing relationships and that existing fee-based product lines can be used effectively in developing new relationships with customers. 1st Source also believes that customers are more loyal and responsive to its products and services when a large percentage of a customer's financial services are provided directly by 1st Source. 1st Source's fee-based businesses are designed to strengthen the relationship between 1st Source and its customers. 3. Expand the national niche businesses across the United States taking advantage of specialized opportunities. 1st Source caters to specialized national market niches that management believes are not being well served by either the credit subsidiaries of manufacturers or by other financial institutions. Asset-based lending and personal relationship management of the customer base, together with an efficient method of operation, is the focus of the Bank's Specialty Finance Group, which provides such services. Additional experienced sales people have been and will be added to ensure better geographic coverage in areas of opportunity. 1st Source has also pursued a strategy of securitizing loan receivables so that this Group's business growth is not totally dependent on deposit funding. 4. Actively managing credit quality. 1st Source has adopted a proactive credit management process with loan officers maintaining responsibility for the quality of the credits they originate and manage. The credit management process is supported by a collective and collaborative review and approval process and is balanced by a review, evaluation and grading process undertaken by an objective third party. Senior management is actively involved in the management of the process and incentive compensation is based on 1st Source's overall credit experience. BANKING AND FINANCIAL SERVICES The organization offers a broad range of consumer and commercial banking services through its lending operations, retail branches and fee based businesses. Loans and Leases - 1st Source's commercial and agriculture loans at December 31, 1999, were approximately $441 million and were 21.4% of total loans outstanding. The primary focus of this lending area is with privately-held or closely-controlled firms in 1st Source's regional market area of Northern Indiana and Southwest Michigan. - Commercial loans secured by transportation and construction equipment totaled $897 million, or 43.5% of total loans outstanding, at December 31, 1999. This loan area concentrates on specialty finance lending for automobile leasing and rental companies, truck leasing companies, privately- owned aircraft for businesses and individuals and heavy duty trucks and other equipment used in the construction business. Currently, 1st Source has 15 locations nationwide supporting these lending activities. Loan sale and servicing income resulting from loan securitizations from these specialty finance lending activities totaled $12.07 million in 1999. 1st Source also generates equipment rental 4 income through the leasing of various automobiles, construction equipment and other equipment to customers through operating leases, where 1st Source retains ownership of the property being leased. Total equipment rental income for 1999 totaled $17.4 million with depreciation on this equipment amounting to $13.0 million. - Loans secured by real estate amounted to $591 million, which was approximately 28.6% of total loans outstanding, at December 31, 1999. The primary focus of this lending area is commercial real estate and residential mortgage lending in the regional market area of Northern Indiana and Southwest Michigan. Most of the residential mortgages are sold into the secondary market and serviced by 1st Source's mortgage subsidiary, Trustcorp Mortgage Company. - 1st Source's consumer loans at December 31, 1999, amounted to $134 million and 6.5% of total loans outstanding. Consumer loans are primarily all other non-real estate loans to individuals in 1st Source's regional market area. Deposits Through its network of 50 branches in 12 counties in Indiana and Michigan, 1st Source generates deposits to fund its lending activities. Total deposits at December 31, 1999 were $2.13 billion. Enhancing customer service, 1st Source offers banking services, in addition to its traditional branches, through its network of 52 automatic teller machines, bank by phone services and through the internet. Service charges on deposit accounts totaled $6.90 million for 1999. Fee Based Businesses 1st Source maintains various fee based businesses to complement net interest income. - Trust fees are generated from employee benefit services, personal and agency trusts and estate planning. In 1999, trust fees were approximately $8.95 million. - Mortgage loan sale and servicing income for 1999 amounted to $7.42 million. Income from loan sale and servicing is generated from the mortgage banking operations of Trustcorp Mortgage Company. Trustcorp serviced approximately $2.21 billion of mortgage loans at December 31, 1999. - Insurance commissions from 1st Source's property and casualty insurance agency totaled $1.51 million for 1999. COMPETITION The activities in which 1st Source and the Bank engage are highly competitive. Those activities and the geographic markets served involve primarily competition with other banks, some of which are affiliated with large bank holding companies headquartered outside of 1st Source's principal market. Larger financial institutions competing within 1st Source's principal market, but headquartered elsewhere, include Key Bank, Wells Fargo Bank, Banc One, Fifth Third Bank, Standard Federal Bank, Old Kent Bank and National City Corporation. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. In addition to competing with other banks within its primary service areas, the Bank also competes with 5 other financial intermediaries, such as credit unions, industrial loan associations, securities firms, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit organizations and other enterprises. Additional competition for depositors' funds comes from United States Government securities, private issuers of debt obligations and suppliers of other investment alternatives for depositors. Many of 1st Source's non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and banks. Such non-bank competitors may, as a result, have certain advantages over 1st Source in providing some services. 1st Source competes against these financial institutions by offering innovative products and highly personalized services. 1st Source also relies on a history in the market dating back to 1863, relationships that long- term employees have with their customers, and the capacity for quick local decision-making. EMPLOYEES 1st Source employs approximately 1,083 persons on a full-time equivalent basis. 1st Source provides a wide range of employee benefits and considers employee relations to be good. REGULATION AND SUPERVISION GENERAL. 1st Source and the Bank are extensively regulated under federal and state law. These laws and regulations are intended to protect depositors, not shareholders. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of 1st Source. The operations of 1st Source may be affected by legislative changes and by the policies of various regulatory authorities. 1st Source is unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future. 1st Source is a registered bank holding company under the Bank Holding Company Act of 1956 (the "BHCA") and, as such, is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). 1st Source is required to file annual reports with the Federal Reserve and to provide the Federal Reserve such additional information as it may require. The Bank, as an Indiana state bank, is supervised by the Indiana Department of Financial Institutions (the "DFI") and the Federal Reserve. As such, the Bank is regularly examined by and subject to regulations promulgated by the DFI and the Federal Reserve. Because the FDIC provides deposit insurance to the Bank, the Bank is also subject to supervision and regulation by the FDIC (even though the FDIC is not its primary federal regulator). BANK AND BANK HOLDING COMPANY REGULATION. As noted above, both 1st Source and the Bank are subject to extensive regulation and supervision. Bank Holding Company Act. Under the BHCA, as amended, the activities of a bank holding company, such as 1st Source, are limited to business so closely related to banking, managing or controlling banks as to be a proper incident thereto. 1st Source is also subject to capital requirements applied on a consolidated basis in a form substantially similar to those required of the Bank. The BHCA also requires a bank holding company to obtain approval from the Federal Reserve before (i) acquiring, or holding more than 5% voting interest in any bank or bank holding company, (ii) acquiring all or substantially all of the assets of another bank or bank holding company, or (iii) merging or consolidating with another bank holding company. 6 The BHCA also restricts non-bank activities to those which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") reorganized and reformed the regulatory structure applicable to financial institutions generally. The Federal Deposit Insurance Corporation Improvement Act of 1991. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was adopted to supervise and regulate a wide variety of banking issues. In general, FDICIA provides for the recapitalization of the Bank Insurance Fund ("BIF"), deposit insurance reform, including the implementation of risk-based deposit insurance premiums, the establishment of five capital levels for financial institutions ("well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized") that would impose more scrutiny and restrictions on less capitalized institutions, along with a number of other supervisory and regulatory issues. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") in September 1994. Beginning in September 1995, bank holding companies have the right to expand, by acquiring existing banks, into all states, even those which had theretofore restricted entry. The legislation also provides that, subject to future action by individual states, a holding company has the right to convert the banks which its owns in different states to branches of a single bank. The states of Indiana and Michigan have adopted the interstate branching provisions of the Interstate Act. Economic Growth and Regulatory Paperwork Reduction Act of 1996. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "EGRPRA") was signed into law on September 30, 1996. EGRPRA streamlined the non-banking activities application process for well-capitalized and well-managed bank holding companies. Gramm-Leach-Bliley Act of 1999. The Act is intended to modernize the banking industry by removing barriers to affiliation among banks, insurance companies, the securities industry and other financial service providers. It permits financial organizations flexibility in structuring such affiliations through a holding company structure or a financial subsidiary, with certain limitations on activities and appropriate safeguards. The Act sets forth a system of functional regulation that makes the Board of Governors of the Federal Reserve System (the "Board) the "umbrella supervisor" for holding companies while providing for supervision by other federal and state agencies. The Board and the Secretary of the treasury must coordinate their supervision regarding approval of new financial activities. Banks may not participate in new financial affiliations unless they are well-capitalized and well- managed. Further a bank must have received at least a satisfactory Community Reinvestment Act ("CRA") rating. The Act addresses state regulation of insurance, generally prohibits unitary thrifts from participating in new financial activities, provides privacy protection for nonpublic customer information of financial institutions, modernizes the Federal Home Loan Bank system and makes miscellaneous regulatory improvements. While much of the Act is directed to national banks, state banks will generally be able to undertake the activities permitted by the Act. In addition, the provisions for securities transactions, CRA, and privacy apply whether or not a national or state bank elects to become a financial holding company or form or acquire a financial subsidiary. The Act becomes effective March 11, 2000 for the affiliation provisions and provides for various subsequent effective dates for other sections. Regulations will be issued by the regulatory authorities pursuant to a schedule of effective dates under the Act. Regulations Governing Capital Adequacy. The federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks. If the capital falls below the minimum levels established by these guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or nonbank businesses or to open facilities. The various regulatory capital requirements that 1st Source is subject to are disclosed on page 38 in Footnote "O" of the annual shareholders report for year ended December 31, 1999, and is incorporated herein by reference. Management of 1st Source believes that the risk-weighting of assets and the risk-based capital guidelines do not have a material adverse impact on 1st Source's operations or on the operations of the Bank. 7 Community Reinvestment Act. The Community Reinvestment Act of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Regulations Governing Extensions of Credit. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or its subsidiaries, or investments in their securities and on the use of their securities as collateral for loans to any borrowers. These regulations and restrictions may limit the ability of 1st Source to obtain funds from the Bank for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses. Further, under the BHCA and certain regulations of the Federal Reserve, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. The Bank is also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest-rates and collateral, and following credit underwriting procedures that are not less stringent than, as those prevailing at the time for comparable transactions with persons not covered above and who are not employees, and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. The Bank is also subject to certain lending limits and restrictions on overdrafts to such persons. Reserve Requirements. The Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. Reserves of 3% must be maintained against total transaction accounts of $46.5 million or less (subject to adjustment by the Federal Reserve) and 10% must be maintained against that portion of total transaction accounts in excess of such amount. Dividends. The ability of the Bank to pay dividends and management fees is limited by various state and federal laws, by the regulations promulgated by its primary regulators and by the principles of prudent bank management. Monetary Policy and Economic Control. The commercial banking business in which 1st Source engages is affected not only by general economic conditions, but also by the monetary policies of the Federal Reserve. Changes in the discount rate on member bank borrowing, availability of borrowing at the "discount window," open market operations, the imposition of changes in reserve requirements against member banks deposits and assets of foreign branches, and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the Federal Reserve. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and such use may affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to do so in the future. The monetary policies of the Federal Reserve are influenced by various factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. Future monetary policies and the effect of such policies on the future business and earnings of 1st Source and the Bank cannot be predicted. Pending Legislation. Because of concerns relating to competitiveness and the safety and soundness of the banking industry, Congress often considers a number of wide-ranging proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. It cannot be predicted whether or in what form any proposals will be adopted or the extent to which the business of 1st Source may be affected thereby. FORWARD LOOKING STATEMENTS The information regarding "forward-looking statements" on page 7 of the annual shareholders report for the year ended December 31, 1999, is incorporated herein by reference. 8 ITEM 1. BUSINESS (Continued)
SELECTED STATISTICAL INFORMATION Distribution of Assets, Liabilities and Shareholders' Equity Interest Rates and Interest Differential (Dollars in Thousands) Year ended December 31, 1999 1998 1997 ---------------------------------- -------------------------------- ------------------------------ Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ---------------------------------- -------------------------------- ------------------------------- ASSETS: Investment securities: Taxable $ 348,944 $ 20,049 5.75% $ 294,632 $ 17,419 5.91% $ 272,400 $ 16,638 6.11% Tax-exempt (1) 161,712 11,336 7.01% 150,678 11,327 7.52% 151,686 11,723 7.73% Net loans (2 & 3) 1,949,172 171,770 8.81% 1,853,537 168,664 9.10% 1,610,889 148,061 9.19% Other investments 18,354 911 4.96% 45,708 2,348 5.14% 11,662 592 5.09% --------- ------- ----- --------- ------- ----- --------- ------- ----- Total Earning Assets 2,478,182 204,066 8.23% 2,344,555 199,758 8.52% 2,046,637 177,014 8.65% Cash and due from banks 113,099 86,452 73,246 Reserve for loan losses (39,105) (38,050) (31,966) Other assets 187,868 157,968 110,383 ---------- ---------- ---------- Total $2,740,044 $2,550,925 $2,198,300 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,843,692 $ 84,839 4.60% $1,748,759 $ 86,264 4.93% $1,488,287 $ 73,150 4.92% Short-term borrowings 283,035 14,995 5.30% 243,431 15,034 6.18% 227,757 13,014 5.71% Long-term debt 12,492 892 7.14% 13,036 929 7.13% 16,527 1,160 7.02% --------- ------- ----- --------- ------- ----- --------- ------- ----- Total Interest Bearing Liabilities 2,139,219 100,726 4.71% 2,005,226 102,227 5.10% 1,732,571 87,324 5.04% Noninterest bearing deposits 283,479 250,755 210,686 Other liabilities 90,152 89,343 72,500 Shareholders' equity 227,194 205,601 182,543 ---------- ---------- ---------- Total $2,740,044 $2,550,925 $2,198,300 ========== ========== ========== Net Interest Income $103,340 $97,531 $89,690 ======== ======= ======= Net Yield on Earning Assets on a Taxable Equivalent Basis 4.17% 4.16% 4.38% ===== ===== =====
(1) Interest income including the effects of taxable equivalent adjustments, using a 40.525% rate. Tax equivalent adjustments were $3,441 in 1999, $3,408 in 1998 and $3,536 in 1997. (2) Loan income includes fees on loans of $5,745 in 1999, $4,889 in 1998 and $4,097 in 1997. Loan income also includes the effects of taxable equivalent adjustments, using a 40.525% rate. Tax equivalent adjustments were $196 in 1999, $202 in 1998 and $162 in 1997. (3) For purposes of this computation, nonaccruing loans are included in the daily average loan amounts outstanding. 9 ITEM 1. BUSINESS (Continued) The following table sets forth for the periods indicated a summary of the changes in interest earned and interest paid, resulting from changes in volume and changes in rates:
Increase (Decrease) Due to (1) Volume Rate Net -------- -------- -------- (In Thousands) 1999 compared to 1998 Interest earned on: Loans ................................... $ 8,041 $ (4,935) $ 3,106 Investment securities: Taxable ............................... 3,086 (456) 2,630 Tax-exempt ............................ 126 (116) 10 Interest-bearing deposits with other banks .......................... -- (18) (18) Federal funds sold and other money market investments ............. (1,416) (4) (1,420) -------- -------- -------- Total Earning Assets ............. $ 9,837 $ (5,529) $ 4,308 Interest paid on: Savings deposits ........................ 4,829 2,073 6,902 Other time deposits ..................... (3,580) (4,747) (8,327) Short-term borrowings ................... (308) 269 (39) Long-term debt .......................... (38) 1 (37) -------- -------- -------- Total Interest-Bearing Liabilities 903 (2,404) (1,501) -------- -------- -------- Net Interest Income ....................... $ 8,934 $ (3,125) $ 5,809 ======== ======== ======== 1998 compared to 1997 Interest earned on: Loans ................................... $ 22,038 $ (1,435) $ 20,603 Investment securities: Taxable ............................... 1,297 (516) 781 Tax-exempt ............................ (80) (317) (397) Interest-bearing deposits with other banks ........................... (1) 27 26 Federal funds sold and other money market investments .............. 1,764 (33) 1,731 -------- -------- -------- Total Earning Assets ............. 25,018 (2,274) 22,744 Interest paid on: Savings deposits ........................ 2,084 1,113 3,197 Other time deposits ..................... 10,463 (546) 9,917 Short-term borrowings ................... 909 1,111 2,020 Long-term debt .......................... (249) 18 (231) -------- -------- -------- Total Interest-Bearing Liabilities 13,207 1,696 14,903 -------- -------- -------- Net Interest Income ....................... $ 11,811 $ (3,970) $ 7,841 ======== ======== ========
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. 10 ITEM 1. BUSINESS (Continued) INVESTMENT PORTFOLIO The carrying amounts of investment securities at the dates indicated are summarized as follows:
December 31 -------------------------------------- 1999 1998 1997 -------- -------- -------- (In Thousands) U.S. Treasury and government agencies and corporations $282,313 $284,327 $228,884 States and political subdivisions 161,125 154,473 148,228 Other 103,792 100,899 37,796 -------- -------- -------- Total $547,230 $539,699 $414,908
The following table shows the maturities of investment securities at December 31, 1999, at the carrying amounts and the weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 40.525% tax rate) of such securities.
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 -------- ----- -------- ----- ------- ----- ------- ----- (Dollars in Thousands) U.S. Treasury and government agencies and corporations $ 89,949 5.33% $162,112 5.62% $12,474 6.08% $17,778 6.39% States and political subdivisions 12,177 6.30% 110,530 6.56% 30,303 7.77% 8,115 6.63% Other 30,445 6.29% 22,277 5.86% 223 5.41% 50,847 6.37% ---------- ----- ---------- ----- ------- ----- ------- ----- Total $132,571 5.64% $294,919 5.99% $43,000 7.28% $76,740 6.40%
Weighted average yields on tax-exempt obligations have been computed by adjusting tax-exempt income to a fully taxable equivalent basis, excluding the effect of the tax preference interest expense adjustments. 11 ITEM 1. BUSINESS (Continued) LOAN PORTFOLIO The following table shows 1st Source's loan distribution at the end of each of the last five years for December 31:
1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Loans: Commercial and agricultural $ 440,909 $ 399,013 $ 364,391 $ 335,192 $ 314,421 Commercial loans secured by transportation and construction equipment 896,848 732,488 752,677 561,042 457,930 Loans secured by real estate 591,401 630,915 568,136 468,109 408,028 Consumer loans 134,031 119,280 111,577 91,220 79,036 ---------- ---------- ---------- ---------- ---------- Total Loans $2,063,189 $1,881,696 $1,796,781 $1,455,563 $1,259,415 ========== ========== ========== ========== ==========
12 ITEM 1. BUSINESS (Continued) LOAN PORTFOLIO (Continued) The following table shows the rate sensitivity of loans (excluding residential mortgages for 1-4 family residences, consumer loans and lease financing) outstanding as of December 31, 1999. The amounts due after one year are also classified according to the sensitivity to changes in interest rates.
Rate Sensitivity ---------------------------------------------------------------- Within After One But After One Year Within Five Years Five Years Total -------- ----------------- ---------- --------- (In Thousands) Commercial loans secured by transportation and construction equipment $454,355 $398,127 $25,943 $ 878,425 Commercial and agricultural 306,824 69,540 11,916 388,280 Loans secured by real estate 219,540 67,533 9,722 296,795 -------- -------- ------- ---------- Total $980,719 $535,200 $47,581 $1,563,500 ======== ======== ======= ========== Rate Sensitivity ---------------- Fixed Variable Rate Rate -------- ------- Due after one year but within five years $517,510 $17,690 Due after five years 44,892 2,689 -------- ------- Total $562,402 $20,379 ======== =======
The following table summarizes the nonaccrual, past due and restructured loans:
December 31 --------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Dollars in Thousands) Nonaccrual Loans $11,967 $9,266 $10,030 $6,678 $4,893 Accruing loans past due 90 days or more 254 275 730 557 274 Restructured loans -- -- -- -- -- ------- ------ ------- ------ ------ Total Nonperforming Loans $12,221 $9,541 $10,760 $7,235 $5,167 ======= ====== ======= ====== ======
13 ITEM 1. BUSINESS (Continued) LOAN PORTFOLIO (Concluded) Information with respect to nonaccrual and restructured loans at December 31, 1999 and 1998 is as follows: December 31 1999 1998 -------- -------- (In Thousands) Nonaccrual loans $11,967 $9,266 Interest income which would have been recorded under original terms 1,237 1,129 Interest income recorded during the period 371 410 At December 31, 1999, $11,179,000 of the nonaccrual loans are collateralized. Potential Problem Loans At December 31, 1999, management was monitoring two large potential problem loans, both of which are secured by capital equipment. In February 2000, these loans, with total outstanding balances of approximately $18 million, were placed into nonaccrual status. The collateral on these loans, if sold in liquidation, is estimated to cover 75% of outstandings. Loans are subject to constant review and are given management's attention whenever a problem situation appears to be developing. Loan Concentrations At December 31, 1999, 15.7% of total business loans were concentrated with borrowers in air transportation and aircraft dealers. Loans to truck and automobile leasing companies accounted for 14.2% of all business loans at December 31, 1999. 14 ITEM 1. BUSINESS (Continued) SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes the Company's loan loss experience for each of the last five years:
December 31 -------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- (In Thousands) Amount of loans outstanding at end of period ............... $ 2,063,189 $ 1,881,696 $ 1,796,781 $ 1,455,563 $ 1,259,415 =========== =========== =========== =========== =========== Average amount of net loans outstanding during period ...... $ 1,949,172 $ 1,853,537 $ 1,610,889 $ 1,348,489 $ 1,172,438 =========== =========== =========== =========== =========== Balance of reserve for loan losses at beginning of period .. $ 38,629 $ 35,424 $ 29,516 $ 27,470 $ 23,868 Charge-offs: Commercial and agricultural .... 879 1,295 293 2,385 985 Commercial loans secured by transportation and construction equipment ..... 519 1,671 317 347 36 Loans secured by real estate ... 148 323 157 230 597 Consumer loans ................. 1,481 1,510 643 324 372 ----------- ----------- ----------- ----------- ----------- Total charge-offs .......... 3,027 4,799 1,410 3,286 1,990 ----------- ----------- ----------- ----------- ----------- Recoveries: Commercial and agricultural .... 84 255 101 383 287 Commercial loans secured by transportation and construction equipment ..... 87 419 917 593 2,224 Loans secured by real estate ... 50 47 87 359 122 Consumer loans ................. 418 427 161 172 202 ----------- ----------- ----------- ----------- ----------- Total recoveries ........... 639 1,148 1,266 1,507 2,835 ----------- ----------- ----------- ----------- ----------- Net charge-offs (recoveries) ........ 2,388 3,651 144 1,779 (845) Additions charged to operating expense .............. 7,442 9,156 6,052 4,649 2,757 Recaptured reserve due to loan securitizations ........ (3,473) (2,300) -- (824) -- ----------- ----------- ----------- ----------- ----------- Balance at end of period ............ $ 40,210 $ 38,629 $ 35,424 $ 29,516 $ 27,470 =========== =========== =========== =========== =========== Ratio of net charge-offs (recoveries) to average net loans outstanding 0.12% 0.20% 0.01% 0.13% (0.07%)
15 1st Source's reserve for loan losses is provided for by direct charges to operations. Losses on loans are charged against the reserve and likewise, recoveries during the period for prior losses are credited to the reserve. The loss reserve is maintained at a level considered by management to be adequate to absorb anticipated losses from loans presently outstanding. The provision made to this reserve is determined by management based on the risk factors and general economic conditions affecting the loan portfolio, including changes in the portfolio mix and past loan loss experience. Management of 1st Source is constantly reviewing the status of the loan portfolio to identify borrowers that might develop financial problems, in order to aid borrowers in the handling of their accounts and to prevent sizable unexpected losses. In 1999, after management's assessment of loan quality, 1st Source made a charge of $7.44 million to operations as a provision for loan losses. At December 31, 1999, the reserve for loan losses was $40.21 million, or 1.95% of loans outstanding, net of unearned discount. 16 ITEM 1. BUSINESS (Continued) SUMMARY OF LOAN LOSS EXPERIENCE (Concluded) The reserve for loan losses has been allocated according to the amount deemed necessary to provide for the possibility of losses being incurred within the categories of loans set forth in the table below. The amount of such components of the reserve at December 31, and the ratio of such loan categories to total outstanding loan balances, are as follows:
(Dollars in Thousands) 1999 1998 1997 1996 1995 -------------------- ----------------- ----------------- ----------------- ----------------- Percent Percent Percent Percent Percent Of Loans Of Loans Of Loans Of Loans Of Loans In Each In Each In Each In Each In Each Category Category Category Category Category Reserve to Total Reserve to Total Reserve to Total Reserve to Total Reserve to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- Commercial and agricultural $ 7,698 21.4% $ 7,566 21.2% $ 6,325 20.3% $ 8,011 19.5% $ 8,250 25.0% Commercial loans secured by transportation and construction equipment 25,473 43.5% 21,822 38.9% 18,188 41.9% 12,867 38.0% 10,258 36.4% Loans secured by real estate 4,659 28.6% 6,460 33.5% 7,177 31.6% 5,535 28.5% 6,185 32.4% Consumer loans 2,380 6.5% 2,781 6.4% 3,734 6.2% 3,103 14.0% 2,777 6.2% ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total $40,210 100.0% $38,629 100.0% $35,424 100.0% $29,516 100.0% $27,470 100.0% ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Allowance for potential losses not specifically identified is allocated on a pro rata basis to all loan categories. 17 ITEM 1. BUSINESS (Continued) DEPOSITS The average daily amounts of deposits and rates paid on such deposits are summarized as follows:
Year Ended December 31 ------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------ ------------------------ ----------------------- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- Noninterest bearing demand deposits $ 283,479 -- % $ 250,755 -- % $ 210,685 -- % Interest bearing demand deposits 218,631 4.19% 123,571 3.27% 75,765 2.30% Savings deposits 440,047 2.57% 373,495 2.55% 341,777 2.52% Other time deposits 1,185,014 5.43% 1,251,693 5.81% 1,070,746 5.86% ---------- ---------- ---------- Total $2,127,171 $1,999,514 $1,698,973 ========== ========== ==========
The amount of time certificates of deposit of $100,000 or more and other time deposits of $100,000 or more outstanding at December 31, 1999, by time remaining until maturity is as follows (in thousands): Under 3 months $206,277 4 - 6 months 37,495 7 - 12 months 62,078 Over 12 months 61,673 ---------- Total $367,523 ======== 18 ITEM 1. BUSINESS (Continued) RETURN ON EQUITY AND ASSETS The ratio of net income to average shareholders' equity and average total assets, and certain other ratios, are presented below: Year Ended December 31 1999 1998 1997 ------ ------ ------ Percentage of net income to: Average shareholders' equity 15.74% 15.30% 14.51% Average total assets 1.31% 1.23% 1.21% Percentage of dividends declared per common share to diluted net income per common share 16.83% 17.16% 18.38% Percentage of average shareholders' equity to average total assets 8.29% 8.06% 8.30% 19 ITEM 1. BUSINESS (Concluded) SHORT-TERM BORROWINGS The following table shows the distribution of 1st Source's short-term borrowings and the weighted average interest rates thereon at the end of each of the last three years. Also provided are the maximum amount of borrowings and the average amount of borrowings in thousands, as well as weighted average interest rates for the last three years.
Federal Funds Purchased and Security Other Repurchase Commercial Short-Term Total 1999 Agreements Paper Borrowings Borrowings - -------------------------------- -------------- ---------- ------------ ----------- Balance at December 31, 1999 $263,253 $8,635 $137,854 $409,742 Maximum amount outstanding at any month-end 263,253 10,325 142,143 415,721 Average amount outstanding 191,265 7,846 83,924 283,035 Weighted average interest rate during the year 4.51% 4.95% 7.13% 5.30% Weighted average interest rate for outstanding amounts at December 31, 1999 5.20% 5.35% 5.87% 5.43% 1998 - -------------------------------- Balance at December 31, 1998 $159,478 $5,856 $76,825 $242,159 Maximum amount outstanding at any month-end 181,364 6,556 141,030 328,950 Average amount outstanding 149,794 4,646 88,991 243,431 Weighted average interest rate during the year 4.84% 5.29% 8.48% 6.18% Weighted average interest rate for outstanding amounts at December 31, 1998 4.34% 4.63% 5.33% 4.66% 1997 - -------------------------------- Balance at December 31, 1997 $117,987 $3,892 $113,127 $235,006 Maximum amount outstanding at any month-end 217,039 6,641 113,127 336,807 Average amount outstanding 136,208 5,321 86,228 227,757 Weighted average interest rate during the year 5.12% 5.46% 6.66% 5.71% Weighted average interest rate for outstanding amounts at December 31, 1997 5.00% 5.39% 6.08% 5.53%
Federal funds purchased and securities sold under agreements to repurchase generally mature within 1 to 30 days of the transaction date. Commercial paper and other short-term borrowings generally mature within 30 to 180 days. 20 ITEM 2. PROPERTIES 1st Source's headquarters building is located in downtown South Bend. In 1982, the land was leased from the City of South Bend on a 49-year lease, with a 50-year renewal option. The building is part of a larger complex, including a 300-room hotel and a 500-car parking garage. 1st Source sold the building and entered into a leaseback agreement with the purchaser for a term of 30 years. The bank building is a structure of approximately 160,000 square feet, with 1st Source and its subsidiaries occupying approximately 70% of the available office space, and approximately 30% presently subleased to unrelated tenants. 1st Source also owns property and/or buildings on which 29 of the bank subsidiary's 50 banking offices are located, including the facilities in Elkhart, LaPorte, Marshall, Porter, St. Joseph and Starke Counties in the state of Indiana, as well as a parking facility, two buildings housing drive-in banking plazas, a records retention facility, and a computer operations center. In 1995, 1st Source reacquired its former headquarters building through foreclosure. It is being refurbished for additional tenants and 1st Source use. The remaining properties utilized by the subsidiary are leased from unrelated parties. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information regarding common stock prices and dividends on page 18 of the annual shareholders report for the year ended December 31, 1999, is incorporated herein by reference. There were 1,146 shareholders of 1st Source Common Stock as of December 31, 1999. ITEM 6. SELECTED FINANCIAL DATA The information under the caption "Selected Consolidated Financial Data" on page 8 of the annual shareholders report for the year ended December 31, 1999, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 7 through 19 of the annual shareholders report for the year ended December 31, 1999, is incorporated herein by reference. 1st Source cautions that any forward looking statements contained in this report, in a report incorporated by reference into this report or made by management of 1st Source involve risks and uncertainties and are subject to change based on various factors. Actual results could differ materially from those expressed or implied. 21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the caption "Quantitative and Qualitative Disclosures about Market Risk" on pages 11 and 12 of the annual shareholders report for the year ended December 31, 1999, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent accountants and the consolidated financial statements of 1st Source and its subsidiaries are included on pages 20 through 41 in the annual shareholders report for the year ended December 31, 1999, and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the caption "Directors and Executive Officers" on pages 3 through 6 and under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 15 of the proxy statement dated March 15, 2000, is incorporated herein by reference with respect to Directors. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Renumeration of Executive Officers" on pages 7 through 14 of the proxy statement dated March 15, 2000, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Voting Securities and Principal Holders Thereof" on page 2 and under the caption "Directors and Executive Officers" on pages 3 through 6 of the proxy statement dated March 15, 2000, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information on page 6 of the proxy statement dated March 15, 2000, is incorporated herein by reference. 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) and (2) -- The response to this portion of Item 14 is submitted as a separate section of this report. (3) -- The response to this portion of Item 14 is submitted as a separate section of this report. (b) Reports on Form 8-K -- None filed during the fourth quarter of 1999. (c) Exhibits -- The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules -- None. 23 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 signed on its behalf by the undersigned, thereunto duly authorized. 1st SOURCE CORPORATION Registrant By: /s/ CHRISTOPHER J. MURPHY III -------------------------------- Christopher J. Murphy III Chairman of the Board, President and Chief Executive Officer Date: February 17, 2000 ------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ CHRISTOPHER J. MURPHY III - ------------------------------------ Christopher J. Murphy III, Chairman of the Board, President and Chief Executive Officer Date: February 17, 2000 --------------------- /s/ WELLINGTON D. JONES III - ------------------------------------ Wellington D. Jones III, Executive Vice President and a Director Date: February 17, 2000 --------------------- /s/ VINCENT A. TAMBURO - ------------------------------------ Vincent A. Tamburo, Secretary and General Counsel Date: March 7, 2000 --------------------- /s/ LARRY E. LENTYCH - ------------------------------------ Larry E. Lentych, Treasurer and Chief Financial Officer Date: February 17, 2000 --------------------- /s/ E. WILLIAM BEAUCHAMP, C.S.C. - ------------------------------------ Reverend E. William Beauchamp, Director Date: February 17, 2000 --------------------- 24 /s/ PAUL R. BOWLES - ------------------------------------ Paul R. Bowles, Director Date: February 17, 2000 --------------------- /s/ PHILIP J. FACCENDA - ------------------------------------ Philip J. Faccenda, Director Date: February 18, 2000 --------------------- /s/ DANIEL B. FITZPATRICK - ------------------------------------ Daniel B. Fitzpatrick, Director Date: February 18, 2000 --------------------- /s/ LAWRENCE E. HILER - ------------------------------------ Lawrence E. Hiler, Director Date: February 17, 2000 --------------------- /s/ WILLIAM P. JOHNSON - ------------------------------------ William P. Johnson, Director Date: February 17, 2000 --------------------- /s/ REX MARTIN - ------------------------------------ Rex Martin, Director Date: February 17, 2000 --------------------- /s/ DANE A. MILLER - ------------------------------------ Dane A. Miller, Director Date: February 17, 2000 --------------------- /s/ RICHARD J. PFEIL - ------------------------------------ Richard J. Pfeil, Director Date: February 17, 2000 --------------------- /s/ TIMOTHY K. OZARK - ------------------------------------ Timothy K. Ozark, Director Date: February 17, 2000 --------------------- 25 ANNUAL REPORT ON FORM 10-K ITEM 14(a) (1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1999 1st SOURCE CORPORATION SOUTH BEND, INDIANA F-1 FORM 10-K -- ITEM 14(a) (1) and (2) 1ST SOURCE CORPORATION AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following report of independent accountants and consolidated financial statements of 1st Source Corporation and subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 31, 1999, are incorporated by reference in Item 8: Report of independent accountants Consolidated statements of financial condition -- December 31, 1999 and 1998 Consolidated statements of income -- Years ended December 31, 1999, 1998 and 1997 Consolidated statements of shareholders' equity -- Years ended December 31, 1999, 1998 and 1997 Consolidated statements of cash flows -- Years ended December 31, 1999, 1998 and 1997 Notes to consolidated financial statements -- December 31, 1999, 1998 and 1997 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. F-2 ANNUAL REPORT ON FORM 10-K ITEM 14(a) (3) and 14(c) LIST OF EXHIBITS YEAR ENDED DECEMBER 31, 1999 1st SOURCE CORPORATION SOUTH BEND, INDIANA E-1 FORM 10-K -- Item 14(a) (3) and 14(c) 1ST SOURCE CORPORATION AND SUBSIDIARIES LIST OF EXHIBITS * 3(a) -- Articles of Incorporation of Registrant, as amended April 30, 1996, and filed as exhibit to Form 10-K, dated December 31, 1996, and incorporated herein by reference. 3(b) -- By-Laws of Registrant, as amended April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference. 4(a) -- Form of Common Stock Certificates of Registrant filed as exhibit to Registration Statement 2-40481 and incorporated herein by reference. Note: No long-term debt of the Registrant exceeds 10% of the consolidated total assets of the Registrant and its subsidiaries. In accordance with paragraph (4)(iii) of Item 601(b) of Regulation S-K, the Registrant will furnish the Commission upon request copies of long-term debt instruments and related agreements. 4(b)(1) -- Form of 9% Cumulative Trust Preferred Securities Indenture, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference. 4(b)(2) -- Form of 9% Cumulative Trust Preferred Securities Trust Agreement, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference. 4(b)(3) -- Form of 9% Cumulative Trust Preferred Securities Guarantee Agreement, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference. 4(c)(1) -- Form of Floating Rate Cumulative Trust Preferred Securities Indenture, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference. 4(c)(2) -- Form of Floating Rate Cumulative Trust Preferred Securities Trust Agreement, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference. 4(c)(3) -- Form of Floating Rate Cumulative Trust Preferred Securities Guarantee Agreement, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference. 10(a)(1) -- Employment Agreement of Christopher J. Murphy III, dated April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference. E-2 10(a)(2) -- Employment Agreement of Wellington D. Jones III, dated April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference. 10(a)(3) -- Employment Agreement of Allen R. Qualey, dated April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference. 10(a)(4) -- Employment Agreement of Larry E. Lentych, dated April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference. 10(a)(5) -- Employment Agreement of Richard Q. Stifel, dated April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference. 10(b)(1) -- Form of Company's Employees' Money Purchase Pension Plan and Trust Agreement dated January 1, 1989, and amendment to the Company's Employees' Money Purchase Pension Plan and Trust dated April 1, 1994, filed as exhibit to Form 10-K dated December 31, 1994, and incorporated herein by reference. 10(b)(2) -- An amendment to Company's Employees' Money Purchase Pension Plan and Trust Agreement dated July 20, 1999, and filed as exhibit to Form 10-K dated December 31, 1999, and attached hereto. 10(c)(1) -- Form of Company's Employees' Profit Sharing Plan and Trust Agreement dated January 1, 1989, amendment to the Company's Profit Sharing Plan and Trust Agreement dated April 1, 1994, filed as exhibit to Form 10-K dated December 31, 1994, and incorporated herein by reference. 10(c)(2) -- An amendment to 1st Source Corporation Employees' Profit Sharing Plan and Trust Agreement dated September 30, 1996, and filed as exhibit to Form 10-K, dated December 31, 1996, and incorporated herein by reference. 10(c)(3) -- An amendment to 1st Source Corporation Employees' Profit Sharing Plan and Trust Agreement dated July 20, 1999, and filed as exhibit to Form 10-K dated December 31, 1999, and attached hereto. 10(d) -- 1st Source Corporation Employee Stock Purchase Plan dated April 17, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference. 10(e) -- 1st Source Corporation 1982 Executive Incentive Plan, amended April 19, 1988, and filed as exhibit to Form 10-K, dated December 31, 1988, and incorporated herein by reference. 10(f) -- 1st Source Corporation 1982 Restricted Stock Award Plan, as amended February 19, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference. E-3 10(h) -- 1st Source Corporation Non-Qualified Stock Option Agreement with Christopher J. Murphy III, dated January 1, 1992, as amended December 11, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference. 10(i) -- 1st Source Corporation 1992 Stock Option Plan, dated April 23, 1992, as amended December 11, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference. 10(j) -- 1st Source Corporation 1998 Performance Compensation Plan, dated February 19, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference. 10(k) -- Consulting Agreement of Ernestine M. Raclin, dated April 14, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference. 13 -- Portions of Annual Report to Security Holders for the year ended December 31, 1999, attached hereto. 21 -- Subsidiaries of Registrant, attached hereto. 23 -- Consent of Independent Accountants, attached hereto. 27 -- Financial Data Schedule, attached hereto. * The exhibits included under exhibit 10 constitute all management contracts, compensatory plans and arrangements required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. E-4 EX-10.B(2) 2 AMENDMENT TO MONEY PURCHASE PENSION PLAN EXHIBIT 10(b)(2) AMENDMENT TO THE 1ST SOURCE CORPORATION EMPLOYEES' MONEY PURCHASE PENSION PLAN AND TRUST AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1989 WHEREAS, 1ST SOURCE CORPORATION, (hereinafter referred to as the "Sponsoring Employer") previously adopted the 1st Source Corporation Employees' Money Purchase Pension Plan and Trust (hereinafter referred to as the "Plan"); and WHEREAS, the Plan allows for its amendment under Section 12.03 of the Plan; and WHEREAS, the Sponsoring Employer desires to amend the Plan as indicated herein. NOW, THEREFORE, the Employer hereby amends the Plan effective as of the dates indicated as follows: 1. Effective January 1, 1998, all references in the Plan (including Section 4.03F and 6.03A) which mention a $3,500 dollar amount in regard to making a distribution of Participants' Accrued Benefits without the consent of the Participant or the Participant's spouse shall be changed to $5,000 (or such other dollar amount as may be provided from time to time under Code 411 (a)(11)(A)). 2. Section 4.02B(1) is amended by restating such paragraph as follows: 4.02B(1) Commencement of Benefits: Except as provided below, and notwithstanding anything contained herein to the contrary, any benefits to which a Participant is entitled shall be distributed or commence to be distributed, no later than the first day of April following the calendar year in which the later of the following two events occur: (a) Such individual attains age 70-1/2, or (b) If later, date of actual retirement (termination of employment) by the Participant. Provided, further, if a Participant who is still employed by the Employer has begun to receive his or her benefits, such Participant if not currently or previously a "five percent (5%) owner" (as defined in Section 416(I) of the Code) while receiving distributions (and subject to reasonable procedures adopted by the Plan Administrator from time to time) may elect to discontinue distribution until actual retirement (termination of employment). Provided, however, any five percent (5%) owner (as defined in Section 416(I) of the Code) shall be required to have his or her benefits distributed or commenced to be distributed no later than the first day of April following the calendar year in which such individual attains age 70-1/2 without regard to the actual date of retirement and without regard to anything in this Plan to the contrary. - 1 - The distribution rules contained in this Section 4.02B(1) shall not apply to a Participant who has executed a designation prior to January 1, 1984, in accordance with Section 242(b) of the Tax Equity and Fiscal Responsibility Act of 1982. All distributions hereunder shall be in accordance with Code section 401(a)(9)(C), as amended from time to time, and valid regulations thereunder, which are incorporated hereby by this reference. 3. Effective December 12, 1994, Section 13.07 is added as follows: 13.07 MILITARY SERVICE CREDIT. a. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Internal Revenue Code. b. With respect to Participants who have loans outstanding under Article VII hereof who join the military service, loan repayments for such Participants may be suspended by the Plan Administrator under this Plan to the extent permitted under Section 414(u) of the Internal Revenue Code. 4. Except as hereby amended, the Plan as currently in existence is hereby reaffirmed in its entirety. However, these amendments shall be effective only to the extent that each one is in compliance with the requirements of the Code and ERISA. To the extent that any of the foregoing amendments are determined to cause the Plan not to qualify under applicable Code or ERISA provisions, then any such amendment causing such disqualifications shall be considered void to the extent necessary to have this Plan continue to be qualified under applicable Code and ERISA requirements. 1ST SOURCE CORPORATION - "Sponsoring Employer" By: /s/ Larry E. Lentych ------------------------------------- Title: C.F.O. ------------------------------------- Date: 7/20/99 ------------------------------------- - 2 - EX-10.C(3) 3 AMENDMENT TO PROFIT SHARING PLAN AND TRUST EXHIBIT 10(c)(3) AMENDMENT TO THE 1ST SOURCE CORPORATION EMPLOYEES' PROFIT SHARING PLAN AND TRUST AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1989 WHEREAS, 1ST SOURCE CORPORATION, (hereinafter referred to as the "Sponsoring Employer") previously adopted the 1st Source Corporation Employees' Profit Sharing Plan and Trust (hereinafter referred to as the "Plan"); and WHEREAS, the Plan allows for its amendment under Section 12.03 of the Plan; and WHEREAS, the Sponsoring Employer desires to amend the Plan as indicated herein. NOW, THEREFORE, the Sponsoring Employer hereby amends the Plan effective as of the dates indicated as follows: 1. Effective January 1, 1998, all references in the Plan (including Section 6.03A) which mention a $3,500 dollar amount in regard to making a distribution of Participants' Accrued Benefits without the consent of the Participant or the Participant's spouse shall be changed to $5,000 (or such other dollar amount as may be provided from time to time under Code 411 (a)(11)(A)). 2. Effective January 1, 1998, Section 4.02B(1) is amended by restating such paragraph as follows: 4.02B(1) Commencement of Benefits: Except as provided below, and notwithstanding anything contained herein to the contrary, any benefits to which a Participant is entitled shall be distributed or commence to be distributed, no later than the first day of April following the calendar year in which the later of the following two events occur: (a) Such individual attains age 70-1/2, or (b) If later, date of actual retirement (termination of employment) by the Participant. Provided, further, if a Participant who is still employed by the Employer has begun to receive his or her benefits, such Participant if not currently or previously a "five percent (5%) owner" (as defined in Section 416(I) of the Code) while receiving distributions (and subject to reasonable procedures adopted by the Plan Administrator from time to time) may elect to discontinue distribution until actual retirement (termination of employment). Provided, however, any five percent (5%) owner (as defined in Section 416(I) of the Code) shall be required to have his or her benefits distributed or commenced to be distributed no later than the first day of April following the calendar year in which such individual attains age 70-1/2 without regard to the actual date of retirement and without regard to anything in this Plan to the contrary. - 1 - The distribution rules contained in this Section 4.02B(1) shall not apply to a Participant who has executed a designation prior to January 1, 1984, in accordance with Section 242(b) of the Tax Equity and Fiscal Responsibility Act of 1982. All distributions hereunder shall be in accordance with Code section 401(a)(9)(C), as amended from time to time, and valid regulations thereunder, which are incorporated hereby by this reference. 3. Effective December 12, 1994, Section 13.07 is added as follows: 13.07 MILITARY SERVICE CREDIT. a. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Internal Revenue Code. b. With respect to Participants who have loans outstanding under Article VII hereof who join the military service, loan repayments for such Participants may be suspended by the Plan Administrator under this Plan to the extent permitted under Section 414(u) of the Internal Revenue Code. 4. Except as hereby amended, the Plan as currently in existence is hereby reaffirmed in its entirety. However, these amendments shall be effective only to the extent that each one is in compliance with the requirements of the Code and ERISA. To the extent that any of the foregoing amendments are determined to cause the Plan not to qualify under applicable Code or ERISA provisions, then any such amendment causing such disqualifications shall be considered void to the extent necessary to have this Plan continue to be qualified under applicable Code and ERISA requirements. 1ST SOURCE CORPORATION - "Sponsoring Employer" By: /s/ Larry E. Lentych ------------------------------------- Title: C.F.O. ------------------------------------- Date: 7/20/99 ------------------------------------- - 2 - EX-13 4 PORTIONS OF ANNUAL REPORT TO SECURITY HOLDERS 1 EXHIBIT 13 1999 ANNUAL REPORT CONTENTS Corporate Description 1 1999 in Brief 1 Financial Highlights 2 Letter to Shareholders 3 Financial Report 7 Banking Center Locations 42 Officers and Directors 43 Shareholders 'Information 44 [1ST SOURCE CORPORATION LOGO] The body of this annual report is printed on recycled paper. 2 CORPORATE DESCRIPTION 1st Source Corporation is the largest locally-owned financial institution headquartered in the Northern Indiana-Southwestern Michigan area. While delivering a comprehensive range of consumer and commercial banking services, 1st Source has distinguished itself with innovative products and highly personalized services. 1st Source also competes for business nationally by offering specialized financing services for used private aircraft, automobiles for leasing and rental agencies, heavy duty trucks, and construction equipment. The corporation's principal subsidiary, 1st Source Bank, has 50 banking centers in 12 counties in Indiana and Michigan and 15 locations nationwide supporting its Specialty Finance Group. 1st Source's wholly-owned mortgage banking subsidiary, Trustcorp Mortgage Company, has eight offices in Indiana, Ohio and Kentucky. With a history dating back to 1863, 1st Source is proud of its tradition of providing superior service to customers while playing a leadership role in the continued development of the communities in which it serves. 1999 IN BRIEF 1999 net income of $35.8 million was the highest in 1st Source history and 13.7% higher than the $31.5 million earned in 1998. Diluted net income per common share for 1999 was $1.86, up 14.8% from the $1.62 for 1998. Return on average total assets was 1.31% compared to 1.23% a year ago. Return on average common equity was 15.74% for 1999 compared to 15.30 % for 1998. The average common equity-to-assets ratio for 1999 was 8.29% compared to 8.06% last year. At year-end 1999, total assets were $2.87 billion, up 5.1% from a year earlier. Loans were up 9.6%, deposits were down 2.3% and shareholders' equity increased from $216.8 million at the end of 1998 to $238.8 million at the end of 1999. The reserve for loan losses at year-end 1999 was 1.95% of total loans, while nonperforming assets amounted to 0.74% of total loans. NET INCOME (In Millions) [GRAPH]
95 96 97 98 99 (21.0) (23.2) (26.5) (31.5) (35.8)
DILUTED NET INCOME PRE COMMON SHARE [GRAPH]
95 96 97 98 99 (1.08) (1.20) (1.36) (1.62) (1.86)
RETURN ON AVERAGE COMMON EQUITY (As a Percent) [GRAPH]
95 96 97 98 99 (14.75) (14.38) (14.51) (15.30) (15.74)
RETURN ON AVERAGE TOTAL ASSETS (As a Percent) [GRAPH]
95 96 97 98 99 (1.25) (1.22) (1.21) (1.23) (1.31)
(page 1) 3 FINANCIAL HIGHLIGHTS EARNINGS AND DIVIDENDS (Dollars in thousands, except per share amounts)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Operating income .............. $ 263,689 $ 248,404 $ 208,972 $ 174,299 $ 154,607 Operating expense ............. 207,191 196,883 166,353 138,700 122,564 Net income .................... 35,768 31,457 26,489 23,203 21,042 Cash dividends ................ 5,922 5,296 4,723 4,123 3,594 Per Common Share * Diluted net income ......... $ 1.86 $ 1.62 $ 1.36 $ 1.20 $ 1.08 Cash dividends ............. .313 .278 .250 .218 .189 Book value ................. 12.64 11.48 10.24 9.11 8.10 Return on average common equity 15.74% 15.30% 14.51% 14.38% 14.75% Return on average total assets 1.31% 1.23% 1.21% 1.22% 1.25% Statement of Condition Average Balances: Assets ..................... $2,740,044 $2,550,925 $2,198,300 $1,895,214 $1,686,560 Earning assets ............. 2,478,182 2,344,555 2,046,637 1,767,055 1,569,703 Loans ...................... 1,949,172 1,853,537 1,610,889 1,348,089 1,172,438 Reserve for loan losses .... 39,105 38,050 31,966 28,482 26,081 Investment securities ...... 510,656 445,310 424,086 400,209 373,976 Deposits ................... 2,127,171 1,999,514 1,698,973 1,524,149 1,354,453 Shareholders' equity ....... 227,194 205,601 182,543 161,324 142,667
*The computation of per common share data gives retroactive recognition to a 10% stock dividend declared January 14,1999; a 10% stock dividend declared January 20,1998; a five-for-four stock split declared January 21, 1997; and a 5% stock dividend declared January 22,1996. [1ST SOURCE CORPORATION LOGO] (Page 2) 4 TO OUR SHAREHOLDERS: Shortly after midnight on January 1, 2000, I was standing at a 1st Source ATM in our South Bend downtown banking facility ready to test the machine in front of the local television and print news media. Cameras were rolling as I inserted my card with confidence (my colleagues had called earlier to be sure I remembered my PIN number!). The transaction went flawlessly and $20 slid neatly into my hands. 1st Source was indeed Y2K compliant, and, as we had told our customers for many months, their money was safe, secure, and protected. Y2K had come and gone without a hitch. As one commentator said, "Y2K was a nonevent." Yes, it was, but only because all of 1st Source 's operations and systems personnel worked very hard to make it so, along with the rest of the banking industry and the utility companies. GROWTH Our Y2K efforts typified our 1999 performance as well. In a word, "Excellent!" The Company had its fourteenth consecutive year of record earnings, because many good people -- my colleagues throughout 1st Source -- were personally and professionally focused on serving our customers one at a time. The $35.8 million earned for 1999 was up 13.7% from the $31.5 million earned in 1998. These earnings were driven by increases in all our major loan categories: commercial and agricultural lending, consumer and mortgage lending, and our specialty finance businesses consisting of lending services for aircraft, auto, truck, and construction machinery. [PHOTO] Christopher J. Murphy III Chairman, President and Chief Executive Officer (page 3) 5 Earnings were also driven by increased fees in asset management, mortgage banking, securitization, insurance, and deposits. We were blessed with the continuation of a strong national economy and growing local communities. This has enabled us to forge ahead with our five-year "Vision 2000 "plan, now in its fourth year. In pursuit of that plan, our efforts have focused on aggressively growing our businesses. In Asset Management, we added two new offices -- in Warsaw and Elkhart -- to serve trust and asset management customers with on-site full service. Our strategy has been to provide strong asset management, highly personal and responsive service, and local access to investment managers. By doing so, we achieved the largest asset management growth in our history, as more than $200 million of new customers' assets were transferred to us. Furthermore, the quality of our investment performance improved substantially. In fact, our investment management staff received national recognition for the management of our income equity fund in 1999. Our national specialty finance businesses continued to grow. We expanded the sales force devoted to financing rental car companies and construction equipment by adding people in Fort Lauderdale, Nashville, Dallas, Phoenix, and South Bend. We installed a new lease accounting and financial system to improve our productivity and control in the management of our growing lease portfolios. We also continued to create loans and fund them in the national capital markets through a securitization program. This program allows our specialty finance businesses to grow without having to rely solely on deposits. Five years ago, we decided that 1st Source needed to grow its consumer loan and deposit businesses across a wider geographic area. At that time, we had 33 banking centers -- all in Indiana. To grow our deposit base and to serve customers throughout the South Bend-Elkhart television market, we launched a project we called "Quantum Leap." Last year, we added two new branches (Niles, Michigan and Warsaw, Indiana), which brought our total to 50 banking centers spread over twelve counties in two states. As part of our long term strategy, 1st Source had entered the on-line banking market. In 1999, we intensified our Internet presence by expanding our on-line Certificate of Deposit (CD) program and by offering an improved checking account and bill paying services. To ensure better customer ease of use in on-line banking, we selected a new vendor to provide the system and software support to this important growth and service opportunity. We will continue to expand and improve our Internet offerings, making them increasingly attractive to both new and existing customers. People recognized and rewarded our efforts in 1999 by choosing to make "the Smart Switch" to 1st Source and by becoming our customers. Similarly, the State of Indiana recognized 1st Source by awarding us the State of Indiana Quality Award for outstanding efforts to improve customer service. The Federal Home Loan Bank also honored 1st Source this past year for our support of affordable housing and neighborhood rejuvenation, including our efforts to provide funding for the expansion of a residential center for the homeless. They presented us with their 1999 President's Community Support Award. At the close of the year, the Small Business Administration designated us as a Preferred Lender due to the number and quality of the small business loans originated by 1st Source Bank. This designation allows us to directly underwrite small business loans with the SBA. Our training efforts in 1999 were focused primarily on building relationship management capabilities which allow us to develop true relationships with customers by using dialogue, information gathering, (Page 4) 6 listening, analysis, advising, caring and action. It's a very proactive, team oriented approach to banking. Our Business Banking Group introduced a Certified Relationship Manager training course with classroom exercises, extensive homework and formal testing. By the close of the year, fifteen business bankers had become Certified Relationship Managers. They had completed the requisite number and quality of customer profiles, embraced the planning process and demonstrated a capability to serve the customer proactively. Similarly, profiling and planning occurred throughout the branches as customer service representatives learned and began to apply the process. Templates have been developed defining service in demonstrable ways for our colleagues and are being written into the customer calling and management process. The entire organization is ready to embrace and master Relationship Management. It is the cornerstone of our Vision 2000 Plan and we believe it is essential to our long-term success. [PHOTO] 1st Source Bank Policy Committee Seated, from left to right: Richard Q. Stifel, Allen R. Qualey, Larry A. Gardner and Dan L. Craft. Standing, from left to right: Wellington D. Jones III, Steven J. Wessell, James S. Jackson, Christopher J. Murphy, III, Maggie M. Kernan, Larry E. Lentych and Vincent A. Tamburo. (Page 5) 7 Rather than go into a detailed explanation of the numbers or a review of the financials, I invite you to read Management's Discussion and Analysis beginning on page 7. There, Larry Lentych, our Chief Financial Officer, Tom Flournoy, our Controller, and their colleagues in our finance and accounting area, have explained our performance in detail. COMMUNITY LEADERSHIP Superior leadership . . . strong commitment of time and energy . . . and a passion for helping people -- these are the qualities that distinguish the first winners of the Ernestine M. Raclin Community Leadership Award presented by 1st Source Bank. Five 1st Source employees and four employees of locally owned businesses were awarded the Bank's highest honor for outstanding volunteer contributions to our community. Each winner received a $1,000 award, a $1,000 donation to the charity of their choice, and a Globe of Leadership signifying their accomplishments. Our winners gave of their time and talents in a variety of creative undertakings. One such program was "Where Have My Eyebrows Gone" which provides support for cancer patients. Other winners helped rehabilitate homes for the elderly and disabled, restored hope to inner-city neighborhoods, aided the mentally and physically challenged, and even established a county emergency medical response team. Their accomplishments are truly remarkable, when you consider that volunteerism must be mixed well with family and profession. As we close the year, I want to thank two directors retiring from our Boards who have given us many years of advice and service. Anne Hillman, a quiet leader in our community who has been involved in everything from the Historical Society to Junior League and the South Bend Symphony. She and her family have built an important business in our community and are now passing it unto the third generation. As a family business person, a community activist, woman and mother, she has brought wise counsel and perspective to the 1st Source Bank Board. She joined the Board in 1972, and we thank her for her many years of dedicated service. Philip Faccenda has served on the Bank Board, the Holding Company Board and the Executive Committee since 1972. He has been involved in our strategic direction and corporate structure for all the years he has served on the Board. He has a quiet and strong presence and has assisted us in many roles. We will always be indebted to him for the role he has played in the success of 1st Source. In closing, let me thank and acknowledge all the men and women at 1st Source who make this such a special place. All of them gave up their vacations in December and January to assure our customers of the Bank's readiness for the Y2K millennium change. They did so willingly knowing that our customers needed them. This is the kind of dedication that builds successful companies. To all of them, "thank you." Lastly, our collective thanks go to our shareholders for their support of our efforts. /s/ Christopher J. Murphy Christopher J. Murphy III Chairman, President and Chief Executive Officer (page 6) 8 Management's Discussion and Analysis of Financial Condition and Results of Operations ABOUT OUR BUSINESS 1st Source Corporation (1st Source) is an Indiana-based, bank holding company with $2.87 billion in total assets, $2.13 billion in total deposits, $2.06 billion in total loans, and $238.8 million in total shareholders' equity. 1st Source's principal subsidiary is 1st Source Bank with its main office in South Bend, Indiana. The assets of the bank account for 97% of the total consolidated assets of 1st Source. The bank offers a broad range of commercial banking, personal banking and trust services. As part of its commercial banking services, 1st Source also provides highly specialized financing services for automobile fleets in the rental and leasing industries; privately owned aircraft used by businesses and individuals; and heavy duty trucks and construction equipment. This section of the Annual Report provides a narrative discussion and analysis of 1st Source's financial condition and results of operations for the last three years. All tables, graphs, financial statements and notes to the consolidated financial statements should be considered an integral part of this analysis. 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 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 cautions 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 its markets served; increasing consolidation within the banking industry; customers and vendors' critical systems or services failing to comply with ongoing Year 2000 programming issues; unforeseen changes in interest rates; 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. AVERAGE ASSETS (In Millions) [GRAPH]
95 96 97 98 99 (1,687) (1,895) (2,198) (2,551) (2,740)
AVERAGE DEPOSITS (In Millions) [GRAPH]
95 96 97 98 99 (1,354) (1,524) (1,699) (2,000) (2,127)
AVERAGE LOANS (In Millions) [GRAPH]
95 96 97 98 99 (1,172) (1,348) (1,611) (1,854) (1,949)
AVERAGE SHAREHOLDERS' EQUITY (In Millions) [GRAPH]
95 96 97 98 99 (127) (143) (161) (183) (206)
(page 7) 9 SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except per share amounts)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Interest income ............................ $ 200,429 $ 196,148 $ 173,316 $ 148,820 $ 135,115 Interest expense ........................... 100,726 102,227 87,324 73,429 64,946 Net interest income ........................ 99,703 93,921 85,992 75,391 70,169 Provision for loan losses .................. 7,442 9,156 6,052 4,649 2,757 Net interest income after provision for loan losses ............... 92,261 84,765 79,940 70,742 67,412 Noninterest income ......................... 63,260 52,256 35,656 25,479 19,492 Noninterest expense ........................ 99,023 85,500 72,977 60,622 54,861 Income before income taxes ................. 56,498 51,521 42,619 35,599 32,043 Income taxes ............................... 18,471 17,843 14,392 12,396 11,001 Distribution on preferred securities of subsidiary trusts, net of income tax benefit 2,259 2,221 1,738 -- -- Net income ................................. $ 35,768 $ 31,457 $ 26,489 $ 23,203 $ 21,042 Assets ..................................... $2,872,945 $2,733,592 $2,418,154 $2,079,767 $1,799,257 Long-term debt ............................. 12,174 13,189 16,656 18,596 21,819 Shareholders' equity ....................... 238,820 216,793 194,953 171,833 152,601 Basic net income per common share* ......... 1.89 1.66 1.40 1.23 1.11 Diluted net income per common share* ....... 1.86 1.62 1.36 1.20 1.08 Cash dividends per common share* ........... .313 .278 .250 .218 .189 Return on average common equity ............ 15.74% 15.30% 14.51% 14.38% 14.75% Return on average total assets ............. 1.31% 1.23% 1.21% 1.22% 1.25%
*The computation of per common share data gives retroactive recognition to a 10% stock dividend declared January 14, 1999; a 10% stock dividend declared January 20, 1998; a five-for-four stock split declared January 21, 1997; and a 5% stock dividend declared January 22, 1996. (page 8) 10 1st Source Corporation and Subsidiaries RESULTS OF OPERATIONS Net income in 1999 was $35.8 million, up from $31.5 million in 1998 and $26.5 million in 1997. Diluted net income per common share was $1.86 in 1999, $1.62 in 1998 and $1.36 in 1997 after giving retroactive recognition to stock splits and stock dividends. Return on average total assets was 1.31% in 1999, compared to 1.23% in 1998 and 1.21% in 1997. Return on average common equity was 15.74% in 1999 versus 15.30% in 1998 and 14.51% in 1997. Net income in 1999 was favorably affected by strong noninterest income growth. By leveraging internal resources, 1st Source has been successful in generating additional noninterest income as a way to mitigate the competitive pressures on the interest margin. Offsetting the increase in noninterest income were expense increases in salaries, leased equipment depreciation and other expense. Dividends declared on common stock in 1999 amounted to $.313 per share, compared to $.278 in 1998 and $.250 in 1997. The level of earnings reinvested and dividend payouts are based on management's assessment of future growth opportunities and the level of capital necessary to support them. The quarterly results of operations for the years ended December 31, 1999 and 1998 are summarized below. QUARTERLY RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts)
Three Months Ended March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 1999 Interest income .................... $ 47,898 $ 49,872 $ 50,598 $ 52,061 Net interest income ................ 23,579 24,783 25,626 25,715 Provision for loan losses .......... 1,293 1,443 2,232 2,474 Investment securities and other investment gains (losses) .... (77) (400) -- 630 Income before income taxes and subsidiary trust distributions 13,927 12,754 14,057 15,760 Net income ......................... 8,528 7,874 8,613 10,753 Diluted net income per common share .44 .41 .45 .56 1998 Interest income .................... $ 47,892 $ 49,318 $ 49,355 $ 49,583 Net interest income ................ 23,244 23,611 23,512 23,554 Provision for loan losses .......... 2,401 2,689 2,042 2,024 Investment securities and other investment gains (losses) ...... (122) (584) -- 94 Income before income taxes and subsidiary trust distributions . 11,651 12,211 13,931 13,728 Net income ......................... 7,160 7,342 8,336 8,619 Diluted net income per common share .36 .38 .43 .45
(Page 9) 11 BALANCE SHEET COMPOSITION AND MANAGEMENT Changes in interest income and interest expense are affected by the allocation of funds throughout the Statement of Financial Condition. The following sections discuss the sources from which 1st Source obtains funds and the manner in which management has chosen to invest these funds. SOURCES OF FUNDS CORE DEPOSITS -- 1st Source's major source of investable funds is provided by stable core deposits consisting of all interest bearing and non-interest bearing deposits, excluding brokered certificates of deposit and certain certificates of deposit of $100,000 and over. In 1999, average core deposits equaled 65.47% of average total assets, compared to 62.49% in 1998 and 63.36% in 1997. The effective cost rate of core deposits in 1999 was 3.74%, compared to 3.94% in 1998 and 3.97% in 1997. Average demand deposits (non-interest bearing core deposits) increased 13.05% in 1999, compared to an increase of 19.02% in 1998. They represented 15.80% of total core deposits in 1999 compared to 15.73% in 1998 and 15.13% in 1997. PURCHASED FUNDS -- 1st Source's purchased funds are used to supplement core deposits and include certain certificates of deposit of $100,000 and over, brokered certificates of deposit, federal funds, securities sold under agreements to repurchase, commercial paper and other short-term borrowings. Purchased funds are raised from customers seeking short-term investments and are used to balance the bank's interest rate sensitivity. During 1999, 1st Source's reliance on purchased funds decreased to 22.49% of average total assets from 25.43% in 1998. LOAN SECURITIZATIONS -- 1st Source sells many of the aircraft and auto loans it originates through the issuance of securities backed by those loans in securitization transactions. In a securitization, 1st Source sells and transfers pools of loans to a qualified special-purpose entity. The special-purpose entity simultaneously sells and transfers its total interest in the loans to a trust, which issues beneficial interests in the loans in the form of securities which are sold through private placement transactions. The special-purpose entity generally retains the right to receive any excess cash flows of the trust. 1st Source sold $276 million of loans in 1999 and $346 million of loans in 1998 in conjunction with aircraft and auto loan securitization transactions, and revolving agreements related to all current and previous years' securitizations. SHAREHOLDERS' EQUITY -- Management continues to emphasize profitable asset growth and retention of equity in the business. Average shareholders' equity equates to 8.29% of average total assets in 1999 compared to 8.06% in 1998. Shareholders' equity was 8.31% of total assets at year-end 1999, compared to 7.93% at year-end 1998. INVESTMENT OF FUNDS INVESTMENT SECURITIES -- Investment securities at year-end 1999 increased 1.40% from 1998, following a 30.08% increase from year-end 1997 to year-end 1998. The increase in 1998 was attributed to deposit growth. LOANS -- Average loans, net of unearned discount, increased 5.16% in 1999, following a 15.06% increase in 1998. Loans, net of unearned discount, at December 31, 1999, were $2.06 billion and were 71.81% of total assets, compared to $1.88 billion or 68.84% of total assets at December 31, 1998. Commercial and agricultural lending outstandings, excluding those secured by real estate, increased 10.50% during 1999. 1st Source continues to experience success in its market as customers seek professional personal service with local decision-making authority. Commercial loans secured by transportation and construction equipment at year-end 1999 increased 22.44% from year-end 1998. The increase in 1999 was the result of further expansion of our customer base and increased penetration in all of our niche (Page 10) 12 MATURITIES OF INVESTMENT SECURITIES AT DECEMBER 31, 1999 (Dollars in thousands)
U.S. Treasury States and Political and Agencies Subdivisions Other Securities Total --------------- --------------- ---------------- ---------------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- 0 - 1 Year $89,949 5.33% $12,177 6.30% $30,445 6.29% $132,571 5.64% 1 - 5 Years 162,112 5.62 110,530 6.56 22,277 5.86 294,919 5.99 5 - 10 Years 12,474 6.08 30,303 7.77 223 5.41 43,000 7.28 Over 10 Years 17,778 6.39 8,115 6.63 50,847 6.37 76,740 6.40 Total $282,313 5.60% $161,125 6.77% $103,792 6.23% $547,230 6.06%
Weighted average yields on tax-exempt obligations have been computed by adjusting tax-exempt income to a fully taxable equivalent basis, excluding the effect of the tax preference interest expense adjustment. markets: construction equipment, auto fleet rental and leasing franchises, aircraft and heavy duty truck financings. Also, fewer loans were sold in 1999 through loan securitizations. In 1999, loans originated net of loans sold were $781 million compared to $633 million in 1998, equating to an increase of 23.43%. Real estate loans decreased 6.26% during 1999. This decrease was due to residential mortgage loans held for sale decreasing 55.86%, offset by an increase of 16.69% in commercial real estate lending and an increase of 13.12% in portfolio residential mortgage loans. The decrease in residential mortgage loans held for sale is attributed to less refinancing activity occurring in 1999 due to a higher interest rate environment. Consumer loans grew 12.37% in 1999. This growth is attributed to increased consumer lending at the new retail banking centers as well as slower payoffs of consumer loans during 1999 due to rising interest rates. LIQUIDITY RISK MANAGEMENT -- The Asset/Liability management process incorporates overall bank liquidity and interest rate sensitivity. The purpose of liquidity management is to match the sources and uses of funds to anticipated customer deposits, withdrawals and borrowing requirements, as well as to provide for the cash flow needs of 1st Source. The primary source of liquidity is the investment portfolio. At December 31, 1999, securities maturing in one year amounted to $132.6 million which represented 24.23% of the investment portfolio as compared to 27.34% at year-end 1998. Other alternative sources of funds are loan repayments and loan securitizations. The liquidity of 1st Source is further enhanced by a significant concentration of core deposits and $100,000-and-over certificates of deposit. Both provide a relatively stable funding base. INTEREST RATE RISK MANAGEMENT -- The Asset/Liability Management Committee of 1st Source monitors and manages the relationship of earning assets to interest bearing liabilities and the responsiveness of asset yields, interest expense and interest margins to changes in market interest rates. In the normal course of business, 1st Source faces ongoing interest rate risks and uncertainties. 1st Source occasionally utilizes interest rate swaps to partially manage the primary market exposures associated with the interest rate risk related to underlying assets, liabilities, and anticipated transactions. Under the current interest rate swaps, 1st Source entered into agreements with another party to exchange, at specific intervals, the difference between fixed-rate and floating-rate interest amounts as calculated by reference to a notional amount as (page 11) 13 a means to convert floating rate loans to a fixed rate. The notional amounts total $49.6 million at December 31, 1999. The current positions are not leveraged and are not held for trading. A hypothetical change in earnings was modeled by calculating an immediate 100 basis point (1.00%) change in interest rates across all maturities. This analysis presents the hypothetical change in earnings of those rate sensitive financial instruments and interest rate swaps held by 1st Source (excluding Trustcorp Mortgage) at December 31, 1999. The aggregate hypothetical decrease in pre-tax earnings is estimated to be $1.39 million on an annualized basis on all rate sensitive financial instruments and the interest rate swaps based on a hypothetical increase of a 100 basis point change in interest rates. The aggregate hypothetical increase in pre-tax earnings is estimated to be $8.14 million on an annualized basis on all rate sensitive financial instruments and the interest rate swaps based on a hypothetical decrease of a 100 basis point change in interest rates. Actual results may differ materially from those projected. The use of this methodology to quantify the market risk of the balance sheet should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions. Due to the nature of the mortgage banking business, 1st Source manages the earning assets and interest-bearing liabilities of Trustcorp Mortgage Company on a separate basis. The predominant assets on Trustcorp's balance sheet are mortgage loans held for sale, which are funded by short-term borrowings (normally less than 30 days) from non-affiliated banks. These borrowings are managed on a daily basis. Trustcorp's other borrowings for working capital and purchases of servicing assets are funded by 1st Source Corporation and non-affiliated banks. Trustcorp manages the interest rate risk related to loan commitments by entering into contracts for future delivery of loans. (See Note M of Notes to Consolidated Financial Statements.) COMPOSITION OF AVERAGE ASSETS (In millions) [GRAPH]
95 96 97 98 99 Loans (net of unearned discount and loss reserve) 1,146.3 1,323.6 1,578.9 1,815.5 1,910.1 Investments 396.2 411.9 434.1 489.3 527.3 Other earning assets 1.4 12.3 25.0 47.4 64.8 Other assets 142.7 147.4 160.3 198.7 237.8 Total 1,686.6 1,895.2 2,198.3 2,550.9 2,740.0
COMPOSITION OF AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY (In millions) [GRAPH]
95 96 97 98 99 Noninterest bearing deposits 173.2 186.8 210.7 250.8 283.5 Interest bearing core deposits 1,034.3 1,108.0 1,182.2 1,343.3 1,510.5 Purchased funds & long-term debt 305.7 405.2 585.3 706.6 673.4 Other liabilities 30.7 33.9 37.6 44.6 45.4 Shareholders' equity 142.7 161.3 182.5 205.6 227.2 Total 1,686.6 1,895.2 2,198.3 2,550.9 2,740.0
(page 12) 14 EARNING RESULTS Net interest income, the difference between income from earning assets and the interest cost of funding those assets, is 1st Source's primary source of earnings. Net interest income, on a fully taxable equivalent basis, increased 5.96% in 1999, following an 8.74% increase in 1998. Net interest margin, the ratio of net interest income to average earning assets, is affected by movements in interest rates and changes in the mix of earning assets and the liabilities that fund those assets. Net interest margin on a fully taxable equivalent basis was 4.17% in 1999 compared to 4.16% in 1998 and 4.38% in 1997. The interest margin leveled out in 1999 after decreasing the previous year due to competitive pricing pressures. The yield on earning assets in 1999 was 8.23%, compared to 8.52% in 1998 and 8.65% in 1997. Average earning assets in 1999 increased 5.70%, following a 14.56% increase in 1998. The effective rate on interest bearing liabilities was 4.71% in 1999, compared to 5.10% for 1998 and 5.04% for 1997. Compared to 1998, interest rates were predominantly down as reflected in the lower yield on earning assets and the effective rate on interest bearing liabilities. As evidenced by only a slightly higher interest margin in 1999, the above rates changed in correlation to each other. NONINTEREST INCOME -- Supplementing the growth in net interest income was an increase in noninterest income of 21.06% over 1998. The factors influencing the growth were increased aircraft and auto loan securitization and servicing income and revenues generated from operating leases. Noninterest income in 1998 increased 46.56% over 1997 primarily for the same reasons as in the current year. In addition, the increase in 1998 reflected greater fees related to mortgage origination, which tapered off in 1999. Trust fees in 1999 were $8.95 million, compared to $8.26 million in 1998 and $7.31 million in 1997. Trust fees increased 8.44% in 1999, following an 12.92% increase in 1998. Service charges on deposit accounts increased by 18.00% resulting in $6.90 million of income for 1999. The $5.84 million recorded in 1998 was an increase of 8.64% from the $5.38 million of service charges on deposit accounts generated in 1997. Loan servicing and sale income generated from 1st Source's aircraft and auto loan securitization and mortgage banking activities increased 22.95% to $19.49 million in 1999. The $15.85 million recorded in 1998 represented a 64.51% increase over 1997. 1st Source recognized loan securitization gains of $6.70 million during 1999, compared to $1.98 million during 1998. Other aircraft and auto loan securitization income, including servicing income, in 1999 was $5.37 million, compared to $7.32 million in 1998. The outstanding servicing portfolio of aircraft and auto loans grew to $344 million at year-end 1999, compared to $321 million at the end of 1998. Gains of $5.07 million were recognized on the origination and sale of mortgage loans and servicing in 1999, compared to gains of $4.86 million in 1998. In addition, net servicing fees on mortgages increased to $2.34 million for 1999, from $1.69 million for 1998. As of year-end 1999, Trustcorp Mortgage Company's mortgage servicing portfolio aggregates $2.21 billion, as compared to $1.87 billion one year ago. Equipment rental income generated from operating leases increased to $17.41 million in 1999, a 38.62% increase over 1998. The $12.56 million recorded in 1998 was an 80.68% increase over 1997. Revenues from operating leases for construction equipment, automobiles and other equipment, and the related depreciation on the equipment, have increased significantly in the past few years as 1st Source has focused on increasing this line of business. Other income was flat during 1999, experiencing an increase of only 0.02%, following an increase of 51.42% in 1998. The growth in 1998 was generated primarily by an increase in mortgage loan fees as homeowners took advantage of lower interest rates to refinance their mortgages. In addition, increases were realized in insurance commissions, standby letter of credit fees and appreciation in the cash surrender value of bank-owned life insurance (BOLI). The 1999 net gains and 1998 net losses recorded for investment securities and other are the result of disposals and adjustments on venture capital investments. (page 13) 15
SELECTED STATISTICAL INFORMATION Distribution of Assets, Liabilities and Shareholders' Equity Interest Rates and Interest Differential (Dollars in Thousands) Year ended December 31, 1999 1998 1997 ---------------------------------- -------------------------------- ------------------------------ Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ---------------------------------- -------------------------------- ------------------------------- ASSETS: Investment securities: Taxable $ 348,944 $ 20,049 5.75% $ 294,632 $ 17,419 5.91% $ 272,400 $ 16,638 6.11% Tax-exempt (1) 161,712 11,336 7.01% 150,678 11,327 7.52% 151,686 11,723 7.73% Net loans (2 & 3) 1,949,172 171,770 8.81% 1,853,537 168,664 9.10% 1,610,889 148,061 9.19% Other investments 18,354 911 4.96% 45,708 2,348 5.14% 11,662 592 5.09% --------- ------- ----- --------- ------- ----- --------- ------- ----- Total Earning Assets 2,478,182 204,066 8.23% 2,344,555 199,758 8.52% 2,046,637 177,014 8.65% Cash and due from banks 113,099 86,452 73,246 Reserve for loan losses (39,105) (38,050) (31,966) Other assets 187,868 157,968 110,383 ---------- ---------- ---------- Total $2,740,044 $2,550,925 $2,198,300 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,843,692 $ 84,839 4.60% $1,748,759 $ 86,264 4.93% $1,488,287 $ 73,150 4.92% Short-term borrowings 283,035 14,995 5.30% 243,431 15,034 6.18% 227,757 13,014 5.71% Long-term debt 12,492 892 7.14% 13,036 929 7.13% 16,527 1,160 7.02% --------- ------- ----- --------- ------- ----- --------- ------- ----- Total Interest Bearing Liabilities 2,139,219 100,726 4.71% 2,005,226 102,227 5.10% 1,732,571 87,324 5.04% Noninterest bearing deposits 283,479 250,755 210,686 Other liabilities 90,152 89,343 72,500 Shareholders' equity 227,194 205,601 182,543 ---------- ---------- ---------- Total $2,740,044 $2,550,925 $2,198,300 ========== ========== ========== Net Interest Income $103,340 $97,531 $89,690 ======== ======= ======= Net Yield on Earning Assets on a Taxable Equivalent Basis 4.17% 4.16% 4.38% ===== ===== =====
(1) Interest income including the effects of taxable equivalent adjustments, using a 40.525% rate. Tax equivalent adjustments were $3,441 in 1999, $3,408 in 1998 and $3,536 in 1997. (2) Loan income includes fees on loans of $5,745 in 1999, $4,889 in 1998 and $4,097 in 1997. Loan income also includes the effects of taxable equivalent adjustments, using a 40.525% rate. Tax equivalent adjustments were $196 in 1999, $202 in 1998 and $162 in 1997. (3) For purposes of this computation, nonaccruing loans are included in the daily average loan amounts outstanding. (pages 14 & 15) 16 EARNING RESULTS (continued) NONINTEREST EXPENSE -- 1st Source experienced increases in noninterest expense of 15.82% and 17.16% for 1999 and 1998, respectively. Costs to attract and retain quality people and the depreciation on our growing operating lease portfolio were the leading contributors to expense growth for both years. In addition, 1999 experienced an increase in non-credit losses, whereas 1998 had a significant increase in professional consulting expenses. Cost control across all business units and better utilization of resources continues to be a major focus at 1st Source. Salaries and employee benefits comprised approximately 53% of total noninterest expense in 1999 compared to 55% in 1998. Salaries and employee benefits increased 11.02% in 1999, following a 13.20% increase in 1998. Salaries and wages increased 10.70% in 1999 and 15.61% in 1998. The number of full-time equivalent employees stood at 1,083 at the end of 1999, compared to 1,036 and 966 at the end of 1998 and 1997, respectively. Employee benefits increased 12.15% in 1999, following a 5.34% increase in 1998. The higher percentage of increase in employee benefits for 1999 was primarily the result of increased payroll tax, pension, and group insurance expense. Group insurance expense increased 17.84% in 1999, following a 20.13% increase in 1998. Occupancy expense in 1999 increased 6.79% from 1998, following a 9.26% increase in 1998. The higher percentage of increase in occupancy expense in 1998 was primarily due to the full year impact of the previous year's branch expansion. Furniture and equipment expense, including depreciation, increased in 1999 by 12.56%, following a 7.14% increase in 1998. The increase in 1999 is attributed primarily to the upgrade in computer systems and hardware. Depreciation on operating leases increased 45.15% in 1999, following a 79.86% increase in 1998 due to the increased volume of operating leases. Supplies and communications expense increased 11.83% in 1999, following a 7.54% increase in 1998. The greater increase in 1999 is primarily the result of Year 2000 (Y2K) expenses. Business development and marketing expense increased 21.97% in 1999, following an increase of 2.98% in 1998. Charitable contributions increased in 1999 compared to 1998. An increase of 19.26% occurred in other expenses during 1999, compared to a 24.11% increase in 1998. Professional consulting expenses increased in both 1999 and 1998 as the result of Y2K readiness preparations. The 1998 professional consulting expenses were also impacted by increased loan securitization activity. Finally, check forgery losses also increased in 1999. YEAR 2000 -- In 1997, a comprehensive project plan to address the Y2K computer system issue as it relates to 1st Source's operations was developed, approved by the Board of Directors and implemented. As part of the project, 1st Source identified and prioritized those systems deemed to be mission critical or those that have a significant impact on normal operations. Formal communications with third party data-processing vendors and service providers were also initiated in 1997 to assess the Y2K readiness of their products and services. Additionally, 1st Source implemented and completed a plan to manage the potential risk posed by the impact of the Y2K issue on its major borrowing customers. Based upon current information related to 1st Source's own systems and the progress of its major vendors, service providers, and major borrowing customers, management has determined that the Y2K issue has not posed significant operational or credit problems (page 16) 17 EARNING RESULTS (concluded) for 1st Source. This determination is based on the assertion of those vendors, service providers and major borrowing customers that they were and continue to be Y2K compliant. However, 1st Source can give no guarantee that the systems of these parties will continue to operate without error. 1st Source's total cost for the Y2K project was approximately $2.6 million. Funds were provided from our normal operating budget and costs were expensed as they were incurred. Any additional cost is not anticipated to be material to its financial position or results of operations in any given year. 1st Source cautions that this Y2K disclosure includes certain "forward-looking statements." The reader should refer to the "forward-looking statements" disclosure on page 7 for further discussion. INCOME TAXES -- Federal income taxes were $15.26 million and $13.50 million, prior to the tax benefit of $1,216,000 and $1,196,000 relating to the distribution on preferred securities of subsidiary trusts for 1999 and 1998, respectively. After this benefit, 1999 federal income taxes were $14.04 million, or 28.19% of income after state taxes, compared to $12.30 million or 28.11% in 1998 and $9.86 million or 27.12% in 1997. A settlement with the Internal Revenue Service was reached during 1997 over a dispute arising from the 1983 purchase of the First National Bank of Mishawaka relating to deduction of core deposit intangibles. Interest of $955,000 related to the settlement was paid to the IRS in 1998. State income taxes were $3.21 million and $4.34 million in 1999 and 1998, respectively, prior to the tax benefit of $200,000 and $318,000 relating to the distribution on preferred securities of subsidiary trusts for 1999 and 1998, respectively. After this benefit, 1999 state income taxes were $3.01 million, compared to $4.02 million in 1998 and $3.35 million in 1997. State income tax declined in 1999 due primarily to a change in Indiana tax law effective to January 1, 1999, allowing resident banks to apportion their income to the state of its source. CREDIT EXPERIENCE PROVISION FOR LOAN LOSSES -- The ability of a bank to identify and assess the risk factors affecting its loan portfolio is crucial for profitability. Management follows a credit policy that balances the risk and return on loans and monitors potential credit problems to ensure that they are adequately managed and reserved. The provision made to the reserve for loan losses is determined by management based on the risk factors and general economic conditions affecting the loan portfolio, including changes to the portfolio mix and past loan loss experience. The provision for loan losses for 1999 was $7.44 million, compared to $9.16 million in 1998 and $6.05 million in 1997. The decrease in the provision for loan losses in 1999 compared to 1998 reflects the lower net charge-offs in 1999. Net charge-offs of $2.39 million, $3.65 million, and $144,000 were recorded in 1999, 1998 and 1997, respectively. The reserve for loan losses at December 31, 1999 totaled $40.21 million and was 1.95% of loans, compared to $38.63 million or 2.05% of loans at December 31, 1998, and $35.42 million or 1.97% of loans at December 31, 1997. The reduction in the reserve for loan losses to net loan percentage from 1998 to 1999 is primarily attributable to securitization loan sales. It is management's opinion that the reserve for loan losses is adequate to absorb anticipated losses in the loan portfolio as of December 31, 1999. NONPERFORMING ASSETS -- 1st Source's policy is to discontinue the accrual of interest on loans on which principal or interest is past due and remains unpaid for 90 days or more, unless the loan is well collateralized and in the process of collection. (page 17) 18 CREDIT EXPERIENCE (concluded) Nonperforming assets amounted to $15.36 million at December 31, 1999, compared to $10.57 million at December 31, 1998, and $11.44 million at December 31, 1997. Impaired loans totaled $31.57 million, $13.30 million and $9.39 million at December 31, 1999, 1998 and 1997, respectively. The overall increase in nonperforming assets for 1999 is the result of increases in nonaccrual loans and other assets. The increase in nonaccrual loans is primarily attributed to one commercial loan secured by real estate. The increase in other assets is due primarily to the return of vehicles and one aircraft at the termination of their leases. NONPERFORMING ASSETS AT DECEMBER 31 (Dollars in thousands)
1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Loans past due over 90 days $ 254 $ 275 $ 730 $ 557 $ 274 Nonaccrual loans 11,967 9,266 10,030 6,678 4,893 TOTAL NONPERFORMING LOANS 12,221 9,541 10,760 7,235 5,167 Other real estate 1,167 424 335 445 1,359 Other assets 1,967 606 341 93 58 TOTAL NONPERFORMING ASSETS $15,355 $10,571 $11,436 $7,773 $6,584 Nonperforming assets to loans, net of unearned discount .74% .56% .64% .54% .52%
CAPITAL RESOURCES 1st Source manages its capital resources to serve its customers, protect its depositors, support growth and provide a fair return to shareholders. As of December 31, 1999, there were 1,146 holders of record of 1st Source common stock. 1st Source's leverage capital ratio increased from 9.51% at December 31, 1998, to 10.01% at December 31, 1999. 1st Source's common stock is traded on the Nasdaq Stock Market under the National Market symbol "SRCE." High and low stock prices and cash dividends paid for the last two years by quarter were:
Cash Cash 1999 SALES PRICE Dividends 1998 Sales Price Dividends Common Stock Prices High Low Paid High Low Paid - ------------------- ---- --- ---- ---- --- ---- Quarter Ended: March 31 $35 3/4 $29 3/4 $.073 $33 3/4 $25 1/4 $.066 June 30 33 1/4 29 1/2 .080 36 3/4 30 3/4 .066 September 30 32 7/8 23 7/8 .080 36 27 1/2 .073 December 31 29 7/8 24 7/8 .080 32 25 3/4 .073
At December 31, 1999, the total market capitalization of 1st Source was approximately $473 million. (page 18) 19 CAPITAL RESOURCES (concluded) EFFECTS OF INFLATION -- The results of operations can also be affected by inflation, although it is difficult to measure the precise impact on the various types of income and expense. Interest rates, in particular, are significantly affected by inflation, but neither the timing nor the magnitude of the changes coincide with changes in the consumer price index nor other measures of inflation. Additionally, increases in interest rates, such as those on consumer deposits, lag behind increases in overall rates. This, in turn, affects the composition of sources of funds by reducing core deposit growth and increasing the need for purchased funds. Another significant effect of inflation is on noninterest expenses, which tend to rise during periods of general inflation. LEVERAGE CAPITAL RATIO (As a Percent) [GRAPH]
95 96 97 98 99 (8.44) (8.48) (9.98) (9.51) (10.01)
COMMON STOCK PRICE RANGE (In Dollars) [GRAPH]
1998 1999 1st 2nd 3rd 4th 1st 2nd 3rd 4th ----------------------------------------- ----------------------------------------- High 33 3/4 36 3/4 36 32 35 3/4 33 1/4 32 7/8 29 7/8 Low 25 1/4 30 3/4 27 1/2 25 3/4 29 3/4 29 1/2 23 7/8 24 7/8 Quarter Ending 33 32 1/2 29 1/4 30 1/2 29 3/4 32 24 25
BOOK VALUE PER COMMON SHARE * [GRAPH]
95 96 97 98 99 (8.10) (9.11) (10.24) (11.48) (12.64)
* Book value is not necessarily indicative of the value of 1st Source common stock. CASH DIVIDENDS PER COMMON SHARE [GRAPH]
95 96 97 98 99 (.189) (.218) (.250) (.278) (.313)
(page 19) 20 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands)
December 31 ----------- 1999 1998 ---- ---- ASSETS Cash and due from banks ...................................... $ 101,911 $ 132,514 Federal funds sold and interest bearing deposits with other banks ......................... 1,399 41,951 Investment securities, available-for-sale (amortized cost of $475,390 and $440,147 at December 31, 1999 and 1998, respectively) ................. 470,040 443,691 Investment securities, held-to-maturity (fair value of $78,462 and $99,734 at December 31, 1999 and 1998, respectively) ................. 77,190 96,008 Loans, net of unearned discount: Commercial and agricultural loans ......................... 440,909 399,013 Commercial loans secured by transportation and construction equipment ................. 896,848 732,488 Loans secured by real estate .............................. 591,401 630,915 Consumer loans ............................................ 134,031 119,280 ----------- ----------- Total loans .................................................. 2,063,189 1,881,696 Less, reserve for loan losses ............................ (40,210) (38,629) ----------- ----------- Net Loans .................................................... 2,022,979 1,843,067 Equipment owned under operating leases, net of accumulated depreciation of $20,284 and $12,997 at December 31, 1999 and 1998, respectively ....... 65,956 54,170 Premises and equipment Land ...................................................... 4,509 4,130 Buildings and improvements ................................ 32,302 28,948 Furniture and equipment ................................... 23,748 21,996 Construction in progress .................................. 116 1,322 Total premises and equipment ................................. 60,675 56,396 Less, Accumulated depreciation ............................ 26,930 25,169 Net Premises and Equipment ................................... 33,745 31,227 Other Assets ................................................. 99,725 90,964 ----------- ----------- Total Assets ................................................. $ 2,872,945 $ 2,733,592 =========== =========== LIABILITIES Deposits: Noninterest bearing ....................................... $ 268,825 $ 294,810 Interest bearing .......................................... 1,858,627 1,882,297 ----------- ----------- Total Deposits ............................................... 2,127,452 2,177,107 Short-term borrowings Federal funds purchased and securities sold under agreements to repurchase ....................... 263,253 159,478 Other ..................................................... 146,489 82,681 Total Short-term Borrowings .................................. 409,742 242,159 Other Liabilities ............................................ 40,007 39,594 Long-term Debt ............................................... 12,174 13,189 ----------- ----------- Total Liabilities ............................................ 2,589,375 2,472,049 Commitments and contingencies (Notes L, M, and P) Guaranteed preferred beneficial interests in the Company's subordinated debentures ..................... 44,750 44,750 SHAREHOLDERS' EQUITY Common stock; no par value Authorized 40,000,000 shares; issued 19,531,519 shares in 1999 and 17,756,636 shares in 1998, less unearned shares 6,883 6,270 Capital surplus .............................................. 179,905 121,456 Retained earnings ............................................ 68,309 98,300 Cost of common stock in treasury (1999 - 492,704 shares and 1998 - 465,405 shares) ............ (14,382) (12,723) Net unrealized appreciation (depreciation) of securities available-for-sale ............................. (1,895) 3,490 ----------- ----------- Total Shareholders' Equity ................................... 238,820 216,793 ----------- ----------- Total Liabilities and Shareholders' Equity ................... $ 2,872,945 $ 2,733,592 =========== ===========
The accompanying notes are a part of the consolidated financial statements. (page 20 & 21) 21 CONSOLIDATED STATEMENTS OF INCOME 1st Source Corporation and Subsidiaries (Dollars in thousands, except per share data)
Year Ended December 31 ---------------------- 1999 1998 1997 ------ ------ ------ Interest income: Loans ...................................................... $ 171,575 $ 168,462 $ 147,899 Investment securities, taxable ............................. 20,049 17,419 16,638 Investment securities, tax-exempt .......................... 7,895 7,919 8,187 --------- --------- --------- Total Investment Securities .............................. 27,944 25,338 24,825 Other ...................................................... 910 2,348 592 --------- --------- --------- Total Interest Income ......................................... 200,429 196,148 173,316 Interest expense: Deposits ................................................... 84,839 86,264 73,150 Short-term borrowings ...................................... 14,995 15,034 13,014 Long-term debt ............................................. 892 929 1,160 --------- --------- --------- Total Interest Expense ........................................ 100,726 102,227 87,324 --------- --------- --------- Net Interest Income ........................................... 99,703 93,921 85,992 Provision for loan losses .................................. 7,442 9,156 6,052 --------- --------- --------- Net Interest Income After Provision for Loan Losses ........... 92,261 84,765 79,940 Noninterest income: Trust fees ................................................. 8,954 8,257 7,312 Service charges on deposit accounts ........................ 6,897 5,845 5,380 Loan servicing and sale income ............................. 19,490 15,852 9,636 Equipment rental income .................................... 17,407 12,557 6,950 Other income ............................................... 10,359 10,357 6,840 Investment securities and other investment gains (losses) .. 153 (612) (462) --------- --------- --------- Total Noninterest Income ...................................... 63,260 52,256 35,656 Noninterest expense: Salaries and employee benefits ............................. 52,472 47,265 41,755 Net occupancy expense ...................................... 5,303 4,966 4,545 Furniture and equipment expense ............................ 8,150 7,241 6,758 Depreciation - leased equipment ............................ 12,978 8,941 4,971 Supplies and communications ................................ 5,331 4,767 4,433 Business development and marketing expense ................. 4,346 3,564 3,461 Other expense .............................................. 10,443 8,756 7,054 --------- --------- --------- Total Noninterest Expense ..................................... 99,023 85,500 72,977 --------- --------- --------- Income Before Income Taxes and Subsidiary Trust Distributions ................................ 56,498 51,521 42,619 Income taxes .................................................. 18,471 17,843 14,392 Distribution on preferred securities of subsidiary trusts net of income tax benefit of $1,416 in 1999 and $1,514 in 1998 2,259 2,221 1,738 --------- --------- --------- Net Income .................................................... $ 35,768 $ 31,457 $ 26,489 ========= ========= ========= Basic Net Income Per Common Share ............................. $ 1.89 $ 1.66 $ 1.40 Diluted Net Income Per Common Share ........................... $ 1.86 $ 1.62 $ 1.36
The accompanying notes are a part of the consolidated financial statements. (page 22) 22 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except per share data)
Net Unrealized Cost of Appreciation Common (Depreciation) Common Capital Retained Stock of Securities Total Stock Surplus Earnings in Treasury Available-for-Sale --------- --------- --------- --------- ----------- ------------------ Balance at January 1, 1997 ................. $ 171,833 $ 5,700 $ 69,947 $ 102,399 $ (6,670) $ 457 Comprehensive income, net of tax: Net income .............................. 26,489 -- -- 26,489 -- -- Change in unrealized appreciation of available- for-sale securities (net of $977 income tax) ..................... 1,433 -- -- -- -- 1,433 --------- Total comprehensive income ................. 27,922 Cost of 179,025 shares of common stock acquired for treasury ................ (5,023) -- -- -- (5,023) -- Cash dividends ($.250 per share) ........... (4,723) -- -- (4,723) -- -- Five-for-four common stock split ($8 cash paid in lieu of fractional shares) (8) -- -- (8) -- -- Other ...................................... 4,952 -- -- 237 4,715 -- --------- --------- --------- --------- --------- --------- Balance at December 31, 1997 ............... 194,953 5,700 69,947 124,394 (6,978) 1,890 Comprehensive income, net of tax: Net income .............................. 31,457 -- -- 31,457 -- -- Change in unrealized appreciation of available- for-sale securities (net of $751 income tax) ..................... 1,600 -- -- -- -- 1,600 --------- Total comprehensive income ................. 33,057 Cost of 231,440 shares of common stock acquired for treasury ................ (7,116) -- -- -- (7,116) -- Cash dividends ($.278 per share) ........... (5,296) -- -- (5,296) -- -- 10% common stock dividend ($13 cash paid in lieu of fractional shares) (13) 570 51,509 (52,092) -- -- Other ...................................... 1,208 -- -- (163) 1,371 -- --------- --------- --------- --------- --------- --------- Balance at December 31, 1998 ............... 216,793 6,270 121,456 98,300 (12,723) 3,490 Comprehensive income, net of tax: Net income .............................. 35,768 -- -- 35,768 -- -- Change in unrealized appreciation of available- for-sale securities (net of $3,580 income tax) ................... (5,385) -- -- -- -- (5,385) --------- Total comprehensive income ................. 30,383 -- -- -- -- -- Cost of 210,966 shares of common stock acquired for treasury ................ (6,646) -- -- -- (6,646) -- Cash dividends ($.313 per share) ........... (5,922) -- -- (5,922) -- -- 10% common stock dividend ($17 cash paid in lieu of fractional shares) (17) 613 58,449 (59,079) -- -- Other ...................................... 4,229 -- -- (758) 4,987 -- --------- --------- --------- --------- --------- --------- Balance at December 31, 1999 ............... $ 238,820 $ 6,883 $ 179,905 $ 68,309 $ (14,382) $ (1,895) ========= ========= ========= ========= ========= =========
The accompanying notes are a part of the consolidated financial statements. (page 23) 23 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended December 31 ---------------------- 1999 1998 1997 --------- --------- --------- Operating Activities: Net income .................................................... $ 35,768 $ 31,457 $ 26,489 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .................................. 7,442 9,156 6,052 Depreciation of premises and equipment ..................... 17,099 12,638 8,372 Amortization of investment security premiums and accretion of discounts, net ................ 1,432 1,039 817 Amortization of mortgage servicing rights .................. 5,787 4,086 2,724 Deferred income taxes ...................................... (926) 8,133 4,839 Realized investment securities (gains) losses .............. (153) 612 462 Realized (gains) on securitized loans ...................... (6,702) (1,984) (800) Increase in interest receivable ............................ (1,705) (787) (1,836) Increase (decrease) in interest payable .................... (2,209) 2,023 3,660 Other ...................................................... 602 348 (3,303) --------- --------- --------- Net Cash Provided by Operating Activities ........................ 56,435 66,721 47,476 Investing Activities: Proceeds from sales and maturities of investment securities ... 253,736 249,012 159,564 Purchases of investment securities ............................ (271,441) (373,404) (144,491) Net (increase) decrease in short-term investments ............. 40,552 (30,274) (11,077) Loans sold or participated to others .......................... 335,205 377,608 154,609 Net increase in loans made to customers and principal collections on loans ......................... (522,499) (468,670) (495,632) Net increase in operating leases .............................. (11,411) (23,069) (16,585) Funding of bank-owned life insurance policies ................. -- -- (20,000) Purchases of premises and equipment ........................... (5,899) (3,795) (4,455) Increase in other assets ...................................... (8,584) (19,794) (4,132) Other ......................................................... (1,025) (9,288) (13,014) --------- --------- --------- Net Cash Used in Investing Activities ............................ (191,366) (301,674) (395,213) Financing Activities: Net increase (decrease) in demand deposits, NOW accounts and savings accounts .......................... (66,741) 311,160 46,384 Net increase (decrease) in certificates of deposit ............ 17,086 (25,844) 211,429 Net increase in short-term borrowings ......................... 167,583 7,153 10,143 Proceeds from issuance of long-term debt ...................... 2,211 747 1,559 Payments on long-term debt .................................... (3,226) (4,214) (3,499) Proceeds from issuance of cumulative trust preferred securities -- -- 44,750 Acquisition of treasury stock ................................. (6,646) (7,116) (5,023) Cash dividends ................................................ (5,922) (5,296) (4,723) Other ......................................................... (17) 13 (7) --------- --------- --------- Net Cash Provided by Financing Activities ........................ 104,328 276,603 301,013 Increase (Decrease) in Cash and Cash Equivalents ................. (30,603) 41,650 (46,724) Cash and cash equivalents, beginning of year ..................... 132,514 90,864 137,588 --------- --------- --------- Cash and Cash Equivalents, End of Year ........................... $ 101,911 $ 132,514 $ 90,864 ========= ========= =========
The accompanying notes are a part of the consolidated financial statements. (page 24) 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1st Source Corporation and Subsidiaries NOTE A -- ACCOUNTING POLICIES The principal line of business of 1st Source Corporation ("1st Source") and subsidiaries is banking and closely related activities. The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements. PRINCIPLES OF CONSOLIDATION -- The financial statements consolidate 1st Source and its subsidiaries (principally 1st Source Bank and Trustcorp Mortgage Company). All significant intercompany balances and transactions have been eliminated. For purposes of the parent company only financial information presented in Note Q, investments in subsidiaries are carried at 1st Source's equity in the underlying net assets. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT SECURITIES -- Securities that may be sold as part of 1st Source's asset/liability or liquidity management or in response to or in anticipation of changes in interest rates and resulting prepayment risk, or for other similar factors, are classified as available-for-sale and carried at fair market value. Unrealized holding gains and losses on securities available-for-sale are reported net of related deferred income taxes as a separate component of shareholders' equity, and the change in such items is a component of comprehensive income. Securities that 1st Source has the ability and positive intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. Trading securities are carried at fair market value with unrealized holding gains and losses included in earnings. There were no trading securities at December 31, 1999 or 1998. Realized gains and losses on the sales of all securities are reported in earnings and computed using the specific identification cost basis. LOANS -- Loans are reported at the principal amount outstanding, net of unearned income. Loans identified as held-for-sale are carried at the lower of cost or market determined on an aggregate basis. Included in real estate loans are loans held for sale totaling $83.1 million and $188.2 million at December 31, 1999 and 1998, respectively. SECURITIZED ASSETS -- The guidelines set forth in Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," are followed when accounting for securitizations. When 1st Source sells loans in securitizations, it retains servicing rights and interest-only strips. The interest-only strips are capitalized as retained interests in the securitized assets. Gain or loss on sale of the loans depends in part on the previous carrying amount of all retained interests, allocated in proportion to their fair value. 1st Source generally estimates fair value based on the present value of future cash flows expected under management's best estimates of certain key assumptions. Key assumptions used by 1st Source in 1999 in its securitization model are as follows: discount rate (15%), loan loss assumption for cash flow purposes (0.50%), interest earned on the reserve account (4.75%) and prepayment curve for cash flow purposes (based on asset type and ranges up to 12% CPR). In conjunction with its securitization activities, 1st Source sold $276 million of aircraft and auto loans in 1999 resulting in a recognized gain of $6.70 million. 25 Approximately $1.1 million of cash and $16.4 million of other assets shown on the December 31, 1999 consolidated statement of financial condition are assets of 1st Source Funding Corporation ("Funding"), a qualified special-purpose entity of 1st Source Bank, and represent Funding's beneficial (i.e., retained) interests in certain assets of the 1st Source Master Trust in accordance with 1st Source's loan securitization transactions. Funding was established in 1998 as a qualified special-purpose entity for purposes of SFAS No. 125 and has been structured to be bankruptcy-remote from 1st Source and its other affiliates. MORTGAGE SERVICING RIGHTS -- The costs of purchasing the rights to service mortgage loans originated by others are deferred and amortized as reductions of mortgage servicing fee income over the estimated servicing period in proportion to the estimated servicing income to be received. Gains and losses on the sale of mortgage servicing rights are recognized as non-interest income in the period in which such rights are sold on a servicing released basis. SFAS No. 125 allows companies that intend to sell originated or purchased loans and retain the related servicing rights, to allocate a portion of the total costs of the loans to servicing rights, based on estimated fair value. Fair value is estimated based on market prices, when available, or the present value of future net servicing income, adjusted for such factors as discount and prepayment rates. As of December 31, 1999, and 1998, $23.6 million and $20.5 million, respectively, of mortgage servicing rights have been capitalized. As of these dates, the servicing rights had a fair value of $40.0 million and $35.0 million respectively. Mortgage servicing rights are being amortized using a method which approximates the effective yield method and for the years ended December 31, 1999, 1998 and 1997, $5.79 million, $4.09 million and $2.72 million of amortization expense has been recognized. SFAS No. 125 also requires 1st Source to assess its capitalized servicing rights for impairment based on their current fair value. 1st Source disaggregates its servicing portfolio based on loan type and interest rate, and the predominant risk characteristics of the (page 25) NOTE A -- ACCOUNTING POLICIES (continued) underlying loans. There were no valuation allowances associated with capitalized mortgage servicing rights at December 31, 1999 and 1998. REVENUE RECOGNITION -- Interest on loans is included in interest income on the accrual method over the terms of the loans based upon principal balances outstanding. The accrual of interest on loans is discontinued when a loan becomes contractually delinquent for 90 days, except for installment loans where payments are being received regularly and mortgage loans, which are placed on nonaccrual at the time the loan is placed in foreclosure. When interest accruals are discontinued, interest credited to income in the current year is reversed, and interest accrued in the prior year is charged to the reserve for loan losses. Management may elect to continue the accrual of interest when the net realizable value of collateral is sufficient to cover the principal and accrued interest. Certain loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized to interest income generally over the contractual life of the related loan or commitment. RESERVE FOR LOAN LOSSES -- A loan is considered impaired, based on current information and events, if it is probable that 1st Source will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. 26 The provision for loan losses charged to expense is based upon the actual net loan losses incurred as determined by credit loss experience, the evaluation of potential losses in the portfolio and the evaluation of impaired loans. Loans are charged against the reserve for loan losses when deemed uncollectible. PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed generally by the straight-line method, primarily with useful lives of 5, 7, 15 and 31-1/2 years. LEASED ASSETS -- 1st Source finances various types of equipment and automobiles under leases principally classified as operating leases. These assets are being depreciated on a straight-line method over the life of the lease. TRUST FEES -- Trust fees are recognized on the accrual basis. INCOME TAXES -- Deferred income taxes are determined under the liability method. The net deferred tax assets are comprised of the tax effect of net temporary differences related principally to differing methods of accounting for loan losses offset by differing methods of accounting for depreciation on premises and leased equipment and amortization of mortgage servicing rights. NET INCOME PER COMMON SHARE -- Net income per common share is computed in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding which were as follows (in thousands): 1999, 18,936; 1998, 18,995; and 1997, 18,935. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the dilutive effect of outstanding stock options. The weighted average number of common shares, increased for the dilutive effect of stock options, used in the computation of diluted earnings per share were as follows (in thousands): 1999, 19,239; 1998, 19,371; and 1997, 19,543. FUNDS HELD IN TRUST FOR INVESTORS AND MORTGAGORS -- As of December 31, 1999 and 1998, serviced loans which were owned by investors aggregated $2.21 billion and $1.87 billion, respectively. Funds held in trust at 1st Source for the payment of principal, interest, taxes and insurance premiums applicable to mortgage loans being serviced for others, aggregated approximately $29.2 million and $50.8 million at December 31, 1999 and December 31, 1998, respectively. CASH FLOW INFORMATION -- For purposes of the consolidated and parent company only statements of cash flows, 1st Source considers cash and due from banks as cash and cash equivalents. Cash paid during the years ended December 31, 1999, 1998 and 1997, for interest and for income taxes was $102.9 million and $11.0 million, $100.2 million and $7.8 million, and $83.7 million and $10.7 million, respectively. OFF-BALANCE SHEET FINANCIAL INVESTMENTS -- 1st Source enters into interest rate swap agreements as part of its interest rate risk management strategies. These instruments are accounted for under the accrual basis of accounting, whereby the income or expense is recorded as a component of interest income. If a swap is terminated, the resulting gain or loss is deferred and amortized over the remaining life of the off-balance sheet investment product. SEGMENT INFORMATION -- In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This Statement changes the manner in which public companies report segment information in annual reports and requires companies to report selected segment information in interim financial reports. Companies are now required to report financial and descriptive information about the company's operating segments. 1st Source's principal business is banking, and management (page 26) NOTE A -- ACCOUNTING POLICIES (concluded) has not separately organized the business beyond commercial banking and mortgage banking. Its wholly owned mortgage subsidiary, Trustcorp Mortgage Company, constitutes a segment by definition of SFAS No. 131, however, it does not meet the quantitative thresholds for separate disclosure as set forth by this Statement. Trustcorp Mortgage Company's revenue is less than 10 percent of consolidated revenue, the absolute amount of its reported income is less than 10 percent of the absolute amount of the consolidated net income of 1st Source, and, finally, its assets are less than 10 percent of consolidated assets. 27 RECENT ACCOUNTING PRONOUNCEMENTS -- 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). That implementation date was recently established 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. RECLASSIFICATIONS -- Certain amounts in the 1997 and 1998 consolidated financial statements have been reclassified to conform with the 1999 presentation. These reclassifications had no effect on total assets, shareholders' equity or net income as previously reported. NOTE B -- FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values of 1st Source's financial instruments as of December 31, 1999 and 1998, are summarized in the following table. The following methods and assumptions were used by 1st Source in estimating the fair value of its financial instruments: CASH AND CASH EQUIVALENTS -- The carrying values reported in the consolidated statements of financial condition for cash and due from banks, federal funds sold and interest bearing deposits with other banks approximate their fair values. INVESTMENT SECURITIES -- Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated based on quoted market prices of comparable investments. LOANS -- 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 certain real estate loans (e.g., one-to-four single family residential mortgage loans) are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of 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. DEPOSITS -- The fair values for all deposits other than time deposits are equal to the amounts payable on demand (the carrying value). Fair values of variable rate time deposits are equal to their carrying values. Fair values for fixed rate time deposits are estimated using discounted cash flow analyses using interest rates currently being offered for deposits with similar remaining maturities. SHORT-TERM BORROWINGS -- The carrying values of federal funds purchased, securities sold under repurchase agreements and other short-term borrowings approximate their fair values. LONG-TERM DEBT -- The fair values of 1st Source's long-term debt are estimated using discounted cash flow analyses, based on 1st Source's current estimated incremental borrowing rates for similar types of borrowing arrangements. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S SUBORDINATED DEBENTURES (CUMULATIVE TRUST PREFERRED SECURITIES) -- Fair values are based on quoted market prices. GUARANTEES AND LOAN COMMITMENTS -- Contract and fair values for certain of 1st Source's off-balance-sheet financial instruments (guarantees and loan commitments) are estimated based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. INTEREST RATE SWAPS -- Fair values for interest rate swaps are based on the net amount necessary to currently settle the transaction. LIMITATIONS -- Fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of 1st Source's financial instruments, fair value (page 27) 28 NOTE B -- FAIR VALUES OF FINANCIAL INSTRUMENTS (concluded) estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other such factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, 1st Source has a substantial annual trust net fee income. The trust business is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, premises and equipment and other assets. In addition, for investment and mortgage-backed securities, the income tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. Also, the fair value estimates for deposits do not include the bent that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
Carrying or Carrying or Contract Value Fair Value Contract Value Fair Value -------------- ---------- -------------- ---------- (Dollars in thousands) 1999 1998 ASSETS: Cash and due from banks ............................. $ 101,911 $ 101,911 $ 132,514 $ 132,514 Federal funds sold and interest bearing deposits with other banks ................... 1,399 1,399 41,951 41,951 Investment securities, available-for-sale ........... 470,040 470,040 443,691 443,691 Investment securities, held-to-maturity ............. 77,190 78,462 96,008 99,734 Loans, net of reserve for loan losses ............... 2,022,979 2,030,450 1,843,067 1,905,335 LIABILITIES: Deposits ............................................ 2,127,452 2,126,901 2,177,107 2,189,910 Short-term borrowings ............................... 409,742 409,742 242,159 242,159 Long-term debt ...................................... 12,174 12,317 13,189 13,755 Guaranteed preferred beneficial interests in the Company's subordinated debentures ............ 44,750 42,993 44,750 47,036 OFF-BALANCE-SHEET INSTRUMENTS* ...................... -- (1,622) -- (351)
*Represents estimated cash outflows required to currently settle the obligations at current market rates. NOTE C -- RESTRICTIONS ON CASH DUE FROM BANKS 1st Source Bank is required to maintain reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 1999 was approximately $17.6 million. Under available line of credit agreements, 1st Source may borrow up to $3 million. At December 31, 1999, there were no outstanding borrowings under these lines, which were assigned to support commercial paper borrowings. (page 28) 29 NOTE D -- INVESTMENT SECURITIES The amortized cost and estimated aggregate fair value of securities classified as available-for-sale and held-to-maturity at December 31, 1999, are as follows:
Available-For-Sale ------------------ Gross Gross Unrealized Unrealized Estimated (Dollars in thousands) Amortized Holding Holding Aggregate Cost Gains Losses Fair Value -------- -------- -------- ---------- Equity Securities: Marketable securities .......................... $ 20,694 $ 534 $ (1,556) $ 19,672 Other equity securities ........................ 3,975 -- -- 3,975 -------- -------- -------- -------- Total equity securities ........................... 24,669 534 (1,556) 23,647 Debt Securities: United States Treasury and agency securities ... 264,982 36 (2,632) 262,386 Obligations of states and political subdivisions 97,033 55 (920) 96,168 Debt securities issued by foreign governments .. 2,265 1,548 (1) 3,812 Corporate securities ........................... 20,137 8 (222) 19,923 Mortgage-backed securities ..................... 20,331 51 (455) 19,927 Other debt securities .......................... 17,593 24 (272) 17,345 Commercial paper ............................... 29,970 -- -- 29,970 -------- -------- -------- -------- Total debt securities ............................. 452,311 1,722 (4,502) 449,531 -------- -------- -------- -------- Total Investment Securities ....................... $476,980 $ 2,256 $ (6,058) $473,178 ======== ======== ======== ======== Held-To-Maturity ------------------ Gross Gross Unrealized Unrealized Estimated Amortized Holding Holding Aggregate Cost Gains Losses Fair Value -------- -------- -------- ---------- Equity Securities: Other equity securities $ 12,233 -- -- $ 12,233 Debt Securities: Obligations of states and political subdivisions 64,957 1,280 (8) 66,229 -------- -------- -------- -------- Total Investment Securities $ 77,190 $ 1,280 $ (8) $ 78,462 ======== ======== ======== ========
The amortized cost and estimated aggregate fair value of debt securities classified as available-for-sale and held-to-maturity at December 31, 1999, by contractual maturity (except for mortgage-backed securities), are shown at the top of page 30. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. (page 29) 30 NOTE D -- INVESTMENT SECURITIES (continued) (Dollars in thousands)
Available-For-Sale Held-To-Maturity ------------------ ---------------- Estimated Estimated Aggregate Aggregate Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- --------- --------- Due in one year or less $126,610 $126,273 $ 6,262 $ 6,287 Due after one year through five years 263,573 260,245 33,975 34,645 Due after five years through ten years 19,642 19,585 22,149 22,698 Due after ten years 25,024 26,306 2,571 2,599 Mortgage-backed securities 17,462 17,122 -- -- -------- -------- -------- -------- Total $452,311 $449,531 $ 64,957 $ 66,229 ======== ======== ======== ========
The amortized cost and estimated aggregate fair value of securities classified as available-for-sale and held-to-maturity at December 31, 1998, were as follows:
Available-For-Sale ------------------ Gross Gross Unrealized Unrealized Estimated (Dollars in thousands) Amortized Holding Holding Aggregate Cost Gains Losses Fair Value -------- -------- -------- ---------- Equity Securities: Marketable securities $ 14,315 $ 1,304 $ (91) $ 15,528 Other equity securities 3,465 17 -- 3,482 -------- -------- -------- -------- Total equity securities 17,780 1,321 (91) 19,010 Debt Securities: United States Treasury and agency securities 243,003 1,019 (85) 243,937 Obligations of states and political subdivisions 69,115 1,007 (24) 70,098 Debt securities issued by foreign governments 2,205 1,492 -- 3,697 Corporate securities 20,276 394 (31) 20,639 Mortgage-backed securities 40,681 172 (211) 40,642 Other debt securities 20,549 105 (36) 20,618 Commercial paper 28,128 -- -- 28,128 -------- -------- -------- -------- Total debt securities 423,957 4,189 (387) 427,759 -------- -------- -------- -------- Total Investment Securities $441,737 $ 5,510 $ (478) $446,769 ======== ======== ======== ======== Held-To-Maturity ------------------ Gross Gross Unrealized Unrealized Estimated Amortized Holding Holding Aggregate Cost Gains Losses Fair Value -------- -------- -------- ---------- Equity Securities: Other equity securities $ 11,633 $ -- $ -- $ 11,633 Debt Securities: Obligations of states and political subdivisions 84,375 3,726 -- 88,101 -------- -------- -------- -------- Total Investment Securities $ 96,008 $ 3,726 $ -- $ 99,734 ======== ======== ======== ========
(page 30) 31 NOTE D -- INVESTMENT SECURITIES (concluded) Other equity securities classified as held-to-maturity at December 31, 1999 and 1998 include securities such as Federal Reserve Bank and Federal Home Loan Bank stock, which are not traded on established exchanges and have only redemption capabilities. Fair values for such equity securities are considered to approximate cost. Debt securities issued by foreign governments (classified as available-for-sale) with an amortized cost of $1.59 million and estimated aggregate fair values of $3.14 million and $3.08 million at December 31, 1999 and 1998, respectively, are included in the above debt securities, but are classified as loans in the accompanying 1999 and 1998 consolidated statements of financial condition. 1st Source had no trading securities as of December 31, 1999 and 1998. The following represents the segregation of cash flows between securities available-for-sale and held-to-maturity:
1999 1998 1997 ---- ---- ---- Available- Held-To- Available- Held-To- Available- Held-To- For-Sale Maturity Total For-Sale Maturity Total For-Sale Maturity Total -------- -------- ----- -------- -------- ----- -------- -------- ----- (Dollars in thousands) Purchase of securities $270,835 $ 606 $271,441 $372,883 $ 521 $373,404 $139,534 $ 4,957 $144,491 Proceeds from sales of securities 3,315 -- 3,315 13,437 -- 13,437 16,684 -- 16,684 Proceeds from maturities and prepayments of securities 231,121 19,300 250,421 216,752 18,823 235,575 133,051 9,829 142,880
Gross gains of $630,000 were realized during 1999 on the sale of securities available-for-sale. There was a loss of $199,135 in 1998 on the sale of securities available-for-sale. During 1999, 1998 and 1997, gross losses of $400,000, $300,000 and $324,037, respectively, were realized on the sale of securities held-to-maturity. These gross losses were due to the write-off of venture capital investments. At December 31, 1999 and 1998, investment securities with carrying values of $279.2 million and $237.9 million, respectively, were pledged as collateral to secure government, public and trust deposits and for other purposes. The mortgage-backed securities held by 1st Source consist primarily of FNMA, GNMA and FHLMC pass-through certificates which are guaranteed by those respective agencies of the United States government. NOTE E -- LOANS TO RELATED PARTIES 1st Source and its subsidiaries have extended loans to officers and directors of 1st Source and its subsidiaries and to their associates. The aggregate dollar amount of these loans was $20.83 million and $15.74 million at December 31, 1999 and 1998, respectively. During 1999, $12.59 million of new loans were made and repayments and other reductions totaled $7.50 million. NOTE F -- RESERVE FOR LOAN LOSSES At December 31, 1999 and 1998, loans amounting to $11.97 million and $9.27 million, respectively, substantially all of which are collateralized, are considered to be nonaccrual or restructured loans. Interest income for the years ended December 31, 1999, 1998 and 1997 would have increased by approximately $866,000, $719,000, and $786,000, respectively, if these loans earned interest at their full contract rate. As of December 31, 1999 and 1998, impaired loans totaled $31.57 million and $13.30 million, respectively, of which $20.71 million and $3.73 million had corresponding specific reserves for loan losses totaling $5.59 million and $1.18 million, respectively. The remaining balances of impaired loans had no specific reserves for loan losses associated with them. A total of $11.09 million of the impaired loans are nonaccrual loans; interest is not recognized (page 31) 32 NOTE F-- RESERVE FOR LOAN LOSSES (concluded) on nonaccrual loans subsequent to the date the loan is placed in nonaccrual status. While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections on interest and principal are generally applied as a reduction to principal outstanding. Interest on the remainder of the impaired loans is recognized on the accrual basis. For 1999 and 1998, the average recorded investment in impaired loans was $19.32 million and $13.28 million, respectively, and interest income recognized on impaired loans totaled $2.18 million and $1.23 million, respectively. Changes in the reserve for loan losses for each of the three years ended December 31 were as follows: (Dollars in thousands) 1999 1998 1997 ------- ------- ------- Balance,beginning of year $38,629 $35,424 $29,516 Provision for loan losses 7,442 9,156 6,052 Charge-offs, net of recoveries of $639 in 1999, $1,148 in 1998 and $1,266 in 1997 (2,388) (3,651) (144) Recaptured reserve due to loan securitizations (3,473) (2,300) -- ------- ------- ------- Balance, end of year $40,210 $38,629 $35,424 ======= ======= ======= NOTE G -- LONG-TERM DEBT Details of long-term debt are as follows: December 31 (Dollars in thousands) 1999 1998 ------- ------- Term loan (7.40%) $10,000 $10,000 Subordinated capital notes (4.47%) -- 1,145 Federal Home Loan Bank borrowings (5.54%-6.98%) 1,029 1,037 Other 1,145 1,007 ------- ------- Total Long-Term Debt $12,174 $13,189 ======= ======= Annual maturities of long-term debt at December 31, 1999 are as follows (in thousands): 2000, $360; 2001, $315; 2002, $10,226; 2003, $358; and, 2004, $18. The $10.0 million term loan has a fixed interest rate of 7.40% payable quarterly with principal due at maturity, October 1, 2002. The Term Loan Agreement contains, among other provisions, a make-whole provision for early extinguishment of debt, and certain covenants relating to existence and mergers, capital structure and financial requirements. During 1999, $572,000 of the subordinated capital notes matured and $573,000 were redeemed at par value. At December 31, 1999, the Federal Home Loan Bank borrowings represent a source of funding for certain residential mortgage activities and consist of five fixed rate notes with maturities ranging from 2003 to 2018. These notes are collateralized by $1.65 million of certain real estate loans. NOTE H -- COMMON STOCK Effective January 1, 1996, 1st Source adopted SFAS No. 123, "Accounting for Stock-Based Compensation," on a disclosure basis only. The disclosure requirements include reporting the pro forma effect on net income and net income per share of compensation expense that is attributable to the fair value of stock options and other stock-based compensation that have been issued to employees under the Stock Option Plans and the Employee Stock Purchase Plan. 1st Source will continue to apply APB No. 25 in accounting for these plans. The Executive Incentive Plan, the Special Long-Term Incentive Award Plan and the Restricted Stock Award Plan are already being accounted for as compensatory plans in accordance with the provisions of SFAS No. 123. Compensation cost that has been charged against income for these plans was $3.22 million, $3.05 million, and $1.83 million for the years ended December 31, 1999, 1998 and 1997, respectively. (page 32) 33 NOTE H -- COMMON STOCK (continued) STOCK OPTION PLANS -- 1st Source's incentive stock option plans include the 1992 Stock Option Plan (the "1992 Plan") and a certain other stock option agreement which became effective January 1, 1992. As of December 31, 1999, an aggregate 1,957,654 shares of common stock are reserved for issuance under the above plans. Under the 1992 Plan, the exercise price of each option equals the market price of 1st Source stock on the date of grant and an option's term is 10 years. Options under the 1992 Plan generally vest in one to five years from date of grant. Options are granted on a discretionary basis by the Executive Compensation Committee (the "Committee") of the 1st Source Board of Directors. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1999: dividend yield of 1.16%; expected volatility of 20.54%; risk-free interest rate of 6.42%; and expected life of 6.25 years. The following is a summary of the activity with respect to 1st Source's stock option plans for the years ended December 31, 1997, 1998 and 1999: Weighted Number of Average Shares Exercise Price Options oustanding, January 1, 1997 1,009,126 $ 8.13 Options granted 12,100 17.98 Options exercised (259,649) 4.82 Options forfeited (8,701) 9.86 Options outstanding, December 31, 1997 752,876 9.36 Options granted 332,750 34.25 Options exercised (44,287) 9.88 Options forfeited (378) 13.72 Options outstanding, December 31, 1998 1,040,961 17.29 Options granted 10,000 25.50 Options exercised (132,965) 7.06 Options forfeited (1,100) 35.45 Options outstanding, December 31, 1999 916,896 18.84 Options exercisable, December 31, 1999 822,481 $18.59 The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING ------------------- Weighted- Average Weighted- Range of Number Remaining Average Exercise Outstanding Contractual Exercise Prices at 12/31/99 Life (Years) Price ------ ----------- ------------ ----- $ 6.00 to $12.99 404,604 3.41 $ 8.09 13.00 to 29.99 180,642 6.82 14.66 30.00 to 35.99 331,650 8.55 34.24
OPTIONS EXERCISABLE ------------------- Weighted- Range of Number Average Exercise Exercisable Exercise Prices at 12/31/99 Price ------ ----------- ----- $ 6.00 to $12.99 404,604 $ 8.09 13.00 to 29.99 113,287 13.90 30.00 to 35.99 304,590 34.29
34 EMPLOYEE STOCK PURCHASE PLAN -- 1st Source also has an employee stock purchase plan for substantially all employees with at least two years of service on the effective date of an offering under the plan. Eligible employees may elect to purchase any dollar amount of stock so long as such amount does not exceed 25% of their base rate of pay and the aggregate stock accrual rate for all offerings does not exceed $25,000 in any calendar year. Payment for the stock is made through payroll deductions over the offering period, and employees may discontinue the deductions at any time and exercise the option or take the funds out of the program. The most recent offering began June 1, 1999, and runs through May 31, 2001, with $424,786 in stock value to be purchased at $32.13 per share. The fair value of the employees' purchase rights for the 1999 offering was estimated using the Black-Scholes model with the following assumptions: dividend yield of 1.08%; expected volatility of 18.23%; risk-free interest rate of 5.54%; and expected life of two years. Pro forma net income and diluted net income per common share, reported as if compensation expense had been recognized under the fair value provisions of SFAS No. 123 for the stock option and employee stock purchase plans, are as follows: 1999 1998 1997 ------- ------- ------- Net income (000s): As reported $35,768 $31,457 $26,489 Pro forma 34,376 30,345 26,146 Diluted net income per common share: As reported $1.86 $1.62 $1.36 Pro forma 1.80 1.58 1.35 (page 33) 35 NOTE H -- COMMON STOCK (concluded) EXECUTIVE INCENTIVE PLAN -- 1st Source has an Executive Incentive Plan which is administered by the Committee. Awards under the plan include "Book Value" shares of common stock. These shares are awarded annually based on weighted performance criteria and vest over a period of five years. The plan shares may only be sold to 1st Source, and such sale is mandatory in the event of death, retirement, disability or termination of employment. Grants under the plan for 1999, 1998 and 1997 are summarized below: 1999 1998 1997 ------ ------ ------ Number of shares 54,804 47,996 39,491 Weighted-average grant-date fair value $11.27 $10.14 $9.07 SPECIAL LONG-TERM INCENTIVE AWARD -- During February 1996 and March 1991, 1st Source granted special long-term incentive awards, including 1st Source common stock, to participants in the Executive Incentive Plan. Shares granted under the plan vest over a period of ten years. The first 10% was vested at the time of the grants. Subsequent vesting requires (i) the participant to remain an employee of 1st Source and (ii) that 1st Source be profitable on an annual basis based on the determination of the Committee. RESTRICTED STOCK AWARD PLAN -- 1st Source also has a restricted stock award plan for key employees. Awards under the plan are made to employees recommended by the Chief Executive Officer and approved by the Committee. Shares granted under the plan vest over a five to ten-year period, and vesting is based upon meeting certain criteria, including continued employment by 1st Source. Grants under the plan for 1999, 1998 and 1997 are summarized below: 1999 1998 1997 ------- ------- ------- Number of shares 1,165 4,805 1,915 Weighted-average grant-date fair value $29.75 $32.04 $19.01 NOTE I -- PREFERRED STOCK AND CUMULATIVE PREFERRED SECURITIES As of December 31, 1999, 1st Source has 10 million shares of authorized but unissued preferred stock. The Board of Directors of 1st Source is authorized to determine the terms, preferences, limitations, voting rights and number of shares of each series it elects to issue. In 1997, 1st Source raised $44.75 million through the issuance of Cumulative Trust Preferred Securities. 1st Source Capital Trust I issued $27.5 million of 9.00% Cumulative Trust Preferred Securities. 1st Source Capital Trust II issued $17.25 million of floating rate Cumulative Trust Preferred Securities. 1st Source Capital Trust I and 1st Source Capital Trust II are wholly owned, consolidated subsidiaries of 1st Source. The holders of the fixed rate Cumulative Trust Preferred Securities are entitled to receive preferential cumulative cash distributions from 1st Source Capital Trust I, at the annual rate of 9.00% of the liquidation amount of $25 per Preferred Security, accruing from the date of original issuance and payable quarterly in arrears on the last day of March, June, September and December of each year. Holders of the floating rate Cumulative Trust Preferred Securities are entitled to receive preferential cumulative cash distributions from 1st Source Capital Trust II, at an annual rate equal to the sum of the three-month Treasury adjusted to a constant maturity, plus 2.25%, applied to the liquidation amount of $25 per Floating Rate Preferred Security accruing from the date of original issuance and payable quarterly in arrears on the last day of March, June, September and December of each year. NOTE J -- EMPLOYEE BENEFIT PLANS 1st Source maintains a defined contribution money purchase pension plan covering the majority of its employees. Contributions to the plan are based on 2% of participants' eligible compensation. For the years ended December 31, 1999, 1998 and 1997, total pension expense for this plan amounted to $445,000, $422,000, and $433,000, respectively. 1st Source also maintains a defined contribution profit sharing and savings plan covering the majority of its employees. The plan allows eligible employees to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. 1st Source is required under the plan to match 100% of participant contributions up to 4% of compensation and one-half of any additional participant contributions up to 6% of compensation provided that 1st Source is profitable for the respective plan year. 1st Source may also make discretionary contributions to the plan, depending on its profitability. Contribution expense for this plan for the years ended December 31, 1999, 1998 and 1997, amounted to $1.58 million, $1.34 million, and $1.29 million, respectively. (page 34) 36 NOTE J -- EMPLOYEE BENEFIT PLANS (concluded) Trustcorp Mortgage Company contributes to a defined contribution plan for all of its employees who meet the general eligibility requirements of the plan. The contributions, which in part are based on amounts of compensation deferred by the participants in the plan, were $94,000 in 1999, $78,000 in 1998 and $54,000 in 1997. In addition, Trustcorp Mortgage Company made discretionary contributions of $115,000 in 1999, $145,000 in 1998, and $103,000 in 1997. In addition to the pension and profit sharing plans, 1st Source provides certain health care and life insurance benefits for substantially all of their retired employees. All of 1st Source's full-time employees become eligible for these retiree benefits upon reaching age 55 with 20 years of credited service. Generally, the medical plan pays a stated percentage of eligible medical expenses reduced for any deductibles and payments made by government programs and other group coverage. The lifetime maximum benefit payable under the medical plan is $15,000 and $3,000 for life insurance. 1st Source's accrued postretirement benefit cost and net periodic postretirement benefit cost recognized in the consolidated financial statements for the years ended December 31, 1999, 1998 and 1997 were not material. NOTE K -- INCOME TAXES Income tax expense is comprised of the following: (Dollars in thousands) 1999 1998 1997 ------- ------- ------- Current: Federal $15,897 $ 7,171 $ 6,969 State 3,500 2,539 2,584 ------- ------- ------- Total Current 19,397 9,710 9,553 Deferred: Federal (637) 6,328 3,824 State (289) 1,805 1,015 ------- ------- ------- Total Deferred (926) 8,133 4,839 ------- ------- ------- Total Provision $18,471 $17,843 $14,392 ======= ======= ======= Deferred tax assets as of December 31, 1999 and 1998 consisted of the following: (Dollars in thousands) 1999 1998 ------- ------- Deferred tax assets: Reserve for loan losses $19,480 $17,303 Accruals for employee benefits 3,064 3,323 Net unrealized (appreciation) depreciation of securities available-for-sale 1,541 (2,039) Asset securitization 1,432 1,627 Deferred income 292 376 Excess servicing 171 249 Mortgage loans-- Section 475 4 416 Other 913 792 ------- ------- Total $26,897 $22,047 ======= ======= Deferred tax liabilities as of December 31, 1999 and 1998 consisted of the following: (Dollars in thousands) 1999 1998 ------- ------- Deferred tax liabilities: Differing depreciable bases in premises and leased equipment $13,426 $10,597 Purchased servicing 6,360 5,259 Originated mortgage servicing rights 3,090 2,456 Differing bases in assets related to acquisitions 737 1,000 Discounts accreted on investment securities 182 157 Other 234 636 ------- ------- Total $24,029 $20,105 ======= ======= There was no valuation allowance at December 31, 1999 or 1998. (page 35) 37 NOTE K -- INCOME TAXES (concluded) The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate (35 percent) to income before income taxes are as follows:
Year Ended December 31 ---------------------- 1999 1998 1997 ---- ---- ---- Percent of Percent of Percent of Pretax Pretax Pretax Amount Income Amount Income Amount Income ------ ------ ------ ------ ------ ------ (Dollars in thousands) Statutory federal income tax $19,774 35.0% $18,032 35.0% $14,917 35.0% Increase (decrease) in income taxes resulting from: Tax-exempt interest income (2,892) (5.1) (2,894) (5.6) (2,968) (7.0) State taxes, net of federal income tax benefit 2,087 3.7 2,823 5.4 2,339 5.5 Interest expense incurred to carry tax-exempt securities 406 0.7 403 0.8 417 1.0 Contributions of appreciated stock -- -- (150) (0.3) (358) (0.8) Other (904) (1.6) (371) (0.7) 45 0.1 Total $18,471 32.7% $17,843 34.6% $14,392 33.8%
NOTE L -- LEASES 1st Source and its subsidiaries are obligated under operating leases for certain office premises and equipment. The headquarters building is leased for a remaining term of 12 years with options to renew for up to 15 additional years. Approximately 30% of the facility is subleased to other tenants. At December 31, 1999, future minimum rental commitments for all noncancellable operating leases, reduced by future minimum rentals from subleases of $1.52 million, aggregate $15.14 million. Annual rental commitments and sublease rentals for noncancellable operating leases (excluding operating costs) for the five years succeeding December 31, 1999, are as follows: Rental Sublease (Dollars in thousands) Commitments Rentals ----------- -------- 2000 $2,092 $388 2001 1,698 386 2002 1,464 382 2003 1,351 76 2004 1,245 76 Thereafter $8,818 $216 Rental expense of office premises and equipment and related sublease income were as follows: Year Ended December 31 (Dollars in thousands) 1999 1998 1997 ------ ------ ------ Gross rental expense $2,596 $2,243 $2,190 Sublease rental income (700) (672) (677) Net Rental Expense $1,896 $1,571 $1,513 NOTE M -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK 1st Source and its subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These off-balance-sheet financial instruments include commitments to originate, purchase and sell loans, standby letters of credit and interest rate swaps. The instruments involve, to varying degrees, elements of (page 36) 38 NOTE M-- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (concluded) credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. 1st Source's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the dollar amount of those instruments. 1st Source uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Trustcorp Mortgage Company grants mortgage loan commitments to borrowers, subject to normal loan underwriting standards. The interest rate risk associated with these loan commitments is managed by entering into contracts for future deliveries of loans. Letters of credit are conditional commitments issued by 1st Source to guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. As of December 1999 and 1998, 1st Source and its subsidiaries had commitments outstanding to originate and purchase loans aggregating $142 million and $362 million, respectively. Outstanding commitments to sell loans aggregated $76 million at December 31, 1999 and $198 million at December 31, 1998. Commercial and standby letters of credit totaled $92 million and $82 million at December 31, 1999 and 1998, respectively. 1st Source Bank participates in interest rate swap agreements as part of its program to manage the impact of fluctuating interest rates, namely with respect to floating rate loans. Interest rate swaps generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying notional amount. Notional amounts represent agreed upon amounts on which calculations of interest payments to be exchanged are based. Notional amounts do not represent direct credit exposures. The actual market or credit exposure of this type of financial instrument is significantly less than the notional amount. 1st Source's direct credit exposure is limited to the net difference between the calculated "to be paid" and "to be received" amounts on each transaction, which is generally netted and paid or received monthly, and the inability of the counterparty to meet the terms of the contract. This risk is normally a small percentage of the notional amount and fluctuates as interest rates move up and down. Market risk to 1st Source is more directly measured by the fair values of the interest rate swap agreements. At December 31, 1999, 1st Source had three outstanding amortizing interest rate swap agreements with an aggregate notional value of $49.6 million. The agreements have maturities of March 25, 2001, January 25, 2002, and April 10, 2003. The notional amounts and lives of amortizing swaps change based on certain interest rate indices. Generally, as rates fall, the notional amounts of amortizing swaps decline more rapidly and as rates increase notional amounts decline more slowly. Unrealized gains/(losses) based on fair value approximated $(1,110,000) at December 31, 1999 and $70,000 at December 31, 1998. NOTE N -- CONCENTRATION OF CREDIT RISK Most of 1st Source's commercial and agricultural, real estate and consumer loan activity is with customers located in north-central Indiana and southwest lower Michigan. 1st Source's commercial loans secured by transportation and construction equipment are with customers located throughout the United States. Included in loans as of December 31, 1999 and 1998, are business loans to companies in the following industries:
Percentage of Total Amount Business Loans ------ -------------- (Dollars in thousands) 1999 1998 1999 1998 -------- -------- ------ ------ Air transportation and aircraft dealers $258,460 $199,459 15.7% 13.9% Truck and automobile leasing 233,404 200,005 14.2 13.9 Construction equipment and contractors 153,550 149,288 9.4 10.4 Real estate operators, managers and developers 93,601 64,381 5.7 4.5 Agriculture 62,441 58,992 3.8 4.1 Van conversion, manufactured housing and recreational vehicle industries 62,350 61,405 3.7 4.3
(page 37) 39 NOTE N -- CONCENTRATION OF CREDIT RISK (concluded) Generally, these loans are collateralized by assets of the borrower. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrower. 1st Source requires collateral on substantially all borrowings in these categories, which is typically the item being financed. NOTE O -- CAPITAL ADEQUACY 1st Source is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on 1st Source's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, 1st Source must meet specific capital guidelines that involve quantitative measures of 1st Source's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. 1st Source's capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require 1st Source to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 1999, that 1st Source meets all capital adequacy requirements to which it is subject. As of December 31, 1999, the most recent notification from the federal bank regulators categorized 1st Source Bank, the largest of 1st Source's subsidiaries, as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" 1st Source must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes changed the institution's category. 1st Source and its largest subsidiary, 1st Source Bank's actual capital amounts and ratios are presented in the table below:
To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Adequacy Action Provisions ------ -------- ----------------- (Dollars in thousands) $ Amount Ratio $ Amount Ratio $ Amount Ratio -------- ----- -------- ----- -------- ----- As of December 31, 1999: Total Capital (to Risk-Weighted Assets): Consolidated $312,704 13.20% $189,531 8.00% $236,914 10.00% 1st Source Bank 286,986 12.45 184,476 8.00 230,596 10.00 Tier I Capital (to Risk-Weighted Assets): Consolidated 282,959 11.94 94,766 4.00 142,149 6.00 1st Source Bank 258,021 11.19 92,238 4.00 138,357 6.00 Tier I Capital (to Average Assets): Consolidated 282,959 10.01 113,141 4.00 141,427 5.00 1st Source Bank 258,021 9.42 109,522 4.00 136,903 5.00
NOTE P -- COMMITMENTS AND CONTINGENT LIABILITIES 1st Source and its subsidiaries are defendants in various legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on 1st Source's consolidated financial position or results of operations. The consolidated financial statements do not reflect various commitments and contingent liabilities, such as guarantees and liability for assets held in trust, which arise in the normal course of business. (page 38) 40 NOTE Q -- 1ST SOURCE CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands) December 31 1999 1998 -------- -------- ASSETS Cash ...................................... $ 1 $ 1 Short-term investments with bank subsidiary 3,988 3,402 Investment securities, available for sale (amortized cost of $18,942 and $20,341 at December 31, 1999 and 1998, respectively) 18,892 20,999 Investments in: Bank Subsidiaries ....................... 255,904 230,647 Non-bank subsidiaries ................... 11,529 11,687 Loan receivables: Non-bank subsidiaries ................... 9,000 7,755 Premises and equipment, net ............... 4,757 3,150 Other assets .............................. 3,525 4,568 -------- -------- Total Assets .............................. $307,596 $282,209 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Commercial paper borrowings ............... $ 8,806 $ 6,171 Other liabilities ......................... 3,492 2,689 Long-term debt ............................ 56,478 56,556 Total Liabilities ......................... 68,776 65,416 Shareholders' Equity ...................... 238,820 216,793 -------- -------- Total Liabilities and Shareholders' Equity $307,596 $282,209 ======== ======== STATEMENTS OF INCOME (Dollars in thousands) Year Ended December 31 1999 1998 1997 ------- ------- ------- Income: Dividends from bank and non-bank subsidiaries $ 7,439 $ 6,596 $ 5,725 Rental income from subsidiaries .............. 2,422 2,363 2,273 Other ........................................ 2,814 2,883 3,447 ------- ------- ------- Total Income .................................... 12,675 11,842 11,445 Expenses: Interest on long-term debt ................... 4,556 4,612 3,810 Interest on commercial paper and other short-term borrowings .............. 402 264 309 Rent expense ................................. 1,074 1,076 1,076 Other ........................................ 2,099 2,501 2,681 ------- ------- ------- Total Expenses .................................. 8,131 8,453 7,876 Income Before Income Tax Credits and Equity in Undistributed Income of Subsidiaries .. 4,544 3,389 3,569 Income tax credits .............................. 1,162 1,556 925 ------- ------- ------- Income Before Equity in Undistributed Income of Subsidiaries .......................... 5,706 4,945 4,494 Equity in undistributed income of subsidiaries: Bank subsidiaries ............................ 27,817 23,631 19,736 Non-bank subsidiaries ........................ 2,245 2,881 2,259 ------- ------- ------- Net Income ...................................... $35,768 $31,457 $26,489 ======= ======= ======= (page 39) 41 NOTE Q-- 1ST SOURCE CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION (concluded) STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended December 31 1999 1998 1997 -------- -------- -------- Operating Activities: Net income ....................................................... $ 35,768 $ 31,457 $ 26,489 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries ................ (30,062) (26,512) (21,995) Depreciation of premises and equipment ........................ 264 225 201 Realized and unrealized investment securities (gains) losses .. (553) 99 176 Other ......................................................... 6,381 2,284 3,054 -------- -------- -------- Net Cash Provided by Operating Activities ........................ 11,798 7,553 7,925 Investing Activities: Proceeds from sales and maturities of investment securities ... 2,254 3,603 8,759 Purchase of investment securities ............................. (321) (6,195) (15,788) Sale (purchase) or premises and equipment, net ................ (1,871) 23 (422) Contributed capital for new non-bank subsidiary .............. -- -- (1,384) Decrease (increase) in short-term investments with bank subsidiary .......................................... (586) (1,158) 3,593 Decrease (increase) in loans made to subsidiaries, net ........ (1,245) 6,245 (34,000) -------- -------- -------- Net Cash Provided by (Used in) Investing Activities .............. (1,769) 2,518 (39,242) Financing Activities: Net increase (decrease) in commercial paper and other short-term borrowings ............................... 2,635 1,973 (2,269) Proceeds from issuance of cumulative trust preferred securities -- -- 44,750 Proceeds from issuance of long-term debt ...................... 112 434 1,452 Payments on long-term debt .................................... (191) (107) (2,834) Acquisition of treasury stock ................................. (6,646) (7,116) (5,023) Cash dividends ................................................ (5,922) (5,296) (4,723) Other ......................................................... (17) 12 (7) -------- -------- -------- Net Cash Provided by (Used in) Financing Activities .............. (10,029) (10,100) 31,346 -------- -------- -------- Increase (Decrease) in Cash and Cash Equivalents ................. 0 (29) 29 Cash and cash equivalents, beginning of year ..................... 1 30 1 -------- -------- -------- Cash and Cash Equivalents, End of Year ........................... $ 1 $ 1 $ 30 ======== ======== ========
(page 40) 42 REPORT OF INDEPENDENT ACCOUNTANTS PRICEWATERHOUSECOOPERS LLP To the Board of Directors and Shareholders of 1st Source Corporation: In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of 1st Source Corporation and its subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP South Bend, Indiana February 15, 2000 (page 41) 43 - --Full page graphic-- BANKING CENTER LOCATIONS - 1999 Visit 1st Source online at www.1stsource.com [MAP OF BANKING CENTER LOCATIONS] [1ST SOURCE BANK LOGO] (page 42) 44 OFFICERS AND DIRECTORS [1ST SOURCE CORPORATION LOGO] OFFICERS Christopher J. Murphy III Chairman of the Board, President and Chief Executive Officer Wellington D. Jones III Executive Vice President Larry E. Lentych Treasurer and Chief Financial Officer Vincent A. Tamburo Secretary and General Counsel DIRECTORS Rev. E. William Beauchamp Executive Vice President, University of Notre Dame Paul R. Bowles Former Vice President, Corporate Development, Clark Equipment Company Philip J. Faccenda General Counsel Emeritus University of Notre Dame Daniel B. Fitzpatrick Chairman, President and Chief Executive Officer, Quality Dining, Inc. Lawrence E. Hiler Chairman, Hiler Industries William P. Johnson Chief Executive Officer, Goshen Rubber Company, Inc. Wellington D. Jones III Executive Vice President Rex Martin Chairman, President and Chief Executive Officer NIBCO INC. Dane A. Miller President and Chief Executive Officer, Biomet, Inc. Christopher J. Murphy III Chairman, President and Chief Executive Officer Timothy K. Ozark Chairman and Chief Executive Officer, Aim Financial Corporation Richard J. Pfeil Chairman and President, Koontz-Wagner Electric Company, Inc. 45 [1ST SOURCE BANK LOGO] OFFICERS Christopher J. Murphy III Chairman of the Board and Chief Executive Officer Wellington D. Jones III President and Chief Operating Officer Allen R. Qualey President and Chief Operating Officer, Specialty Finance Group Richard Q. Stifel Executive Vice President, Business Banking Group Larry E. Lentych Senior Vice President, Treasurer and Chief Financial Officer, Finance and Administrative Services Group James S. Jackson Senior Vice President, Funds Management Division Larry A. Gardner Senior Vice President, Operations Group Steven J. Wessell Vice President, Trust Operations Group Vincent A. Tamburo Senior Vice President and Secretary, General Counsel Maggie M. Kernan Senior Vice President, Marketing Division Dan L. Craft Senior Vice President, Human Resources Division DIRECTORS Rev. E. William Beauchamp Executive Vice President, University of Notre Dame Paul R. Bowles Former Vice President, Corporate Development, Clark Equipment Company Philip J. Faccenda General Counsel Emeritus University of Notre Dame Daniel B. Fitzpatrick Chairman, President and Chief Executive Officer, Quality Dining, Inc. Terry L. Gerber President and Chief Executive Officer, Gerber Manufacturing Company, Inc. Lawrence E. Hiler Chairman, Hiler Industries Anne M. Hillman Civic Leader Hollis E. Hughes, Jr. Executive Director, United Way of St. Joseph County H. Thomas Jackson Chairman, Bornemann Coated Fabrics, Bornemann Products William P. Johnson Chief Executive Officer, Goshen Rubber Company, Inc. Wellington D. Jones III President Craig A. Kapson President, Jordan Ford, Toyota, Volvo, Lincoln Mercury David L. Lerman President, Steel Warehouse Co. Inc. Christopher J. Murphy III Chairman and Chief Executive Officer Richard J. Pfeil Chairman and President, Koontz-Wagner Electric Company, Inc. John T. Phair President, Holladay Partners- Midwest, Inc. Mark D. Schwabero President and Chief Executive Officer, Hendrickson International Elmer H. Tepe President, E.H. Tepe Co. (page 43) 46 SHAREHOLDERS' INFORMATION 1999 STOCK PERFORMANCE AND DIVIDENDS 1st Source Corporation common stock is traded on the Over-The-Counter market and is listed on the Nasdaq Stock Market under the symbol "SRCE." 1st Source is also listed on the National Market System tables in many daily papers under the symbol "1stSrc." High and low common stock prices, cash dividends paid for 1999 and book value were: Cash Dividends Quarter Ended High Low Paid - ------------- ------- ------- ------ March 31 $35-3/4 $29-3/4 $.073 June 30 33-1/4 29-1/2 .080 September 30 32-7/8 23-7/8 .080 December 31 29-7/8 24-7/8 .080 Book value per common share at December 31, 1999: $12.64 ANNUAL MEETING OF SHAREHOLDERS The Annual Meeting of Shareholders has been called for 10:00 am, EST, Tuesday, April 18, 2000, at 1st Source Center, 100 N. Michigan Street, South Bend, Indiana. All shareholders are invited to attend the meeting. COMMON STOCK LISTING The Nasdaq Stock Market National Market Symbol: "SRCE" CUSIP #336901 10 3 TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT 1st Source Bank Post Office Box 1602 South Bend, IN 46634 INDEPENDENT AUDITORS PricewaterhouseCoopers LLP P.O. Box 6877 South Bend, IN 46660-6877 SHAREHOLDER INQUIRIES 1st Source Corporation Larry E. Lentych Chief Financial Officer Post Office Box 1602 South Bend, IN 46634 (219) 235-2702 FORM 10-K INQUIRIES A copy of 1st Source Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, as required to be filed with the Securities and Exchange Commission, is available upon request. MARKET MAKERS (as of February 16, 2000) The following firms make a market in the common shares of 1st Source Corporation: ABN-AMRO Securities (USA), Inc. Howe, Barnes Investments, Inc. Keefe, Bruyette & Woods, Inc. NatCity Investments, Inc. Raymond James and Associates Sandler, O'Neill and Partners Sherwood Securities Corporation Spear, Leeds and Kellogg Stifel, Nicolaus & Company (page 44) EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a listing of all subsidiaries of 1st Source Corporation. Unless otherwise indicated, each subsidiary does business under its own name. The activities of each is described in Part I, Item I, of Form 10-K. NAME DATE OF INCORPORATION JURISDICTION - ------------------------------ --------------------- ------------ 1st Source Bank April 19, 1922 Indiana 1st Source Auto Leasing, Inc.* October 29, 1973 Indiana (Inactive) 1st Source Insurance, Inc.* July 12, 1978 Indiana 1st Source Travel, Inc.* March 4, 1982 Indiana (Inactive) FBT Capital Corporation February 6, 1970 Indiana (Inactive) 1st Source Leasing, Inc. November 29, 1979 Indiana 1st Source Capital Corporation* November 16, 1983 Indiana Trustcorp Mortgage Company December 5, 1973 Indiana 1st Source Capital Trust I February 20, 1997 Delaware 1st Source Capital Trust II February 27, 1997 Delaware Michigan Transportation Finance Corporation* August 1, 1997 Michigan 1st Source Funding Corporation* June 12, 1998 Delaware * Wholly-owned subsidiaries of 1st Source Bank E-5 EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements of 1st Source Corporation on Forms S-8 of our report dated February 15, 2000, on our audits of the consolidated financial statements of 1st Source Corporation and subsidiaries as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, which report appears in the 1999 Annual Report to Shareholders and is incorporated by reference in this Annual Report on Form 10-K of 1st Source Corporation for the year ended December 31, 1999. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP South Bend, Indiana March 16, 2000 E-6 EX-27 7 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1999 DEC-31-1999 101,911 0 1,399 0 470,040 77,190 78,461 2,063,189 40,210 2,872,945 2,127,452 409,742 40,007 56,924 0 0 6,883 231,937 2,872,945 171,575 27,944 910 200,429 84,839 100,726 99,703 7,442 153 99,023 56,498 35,768 0 0 35,768 1.89 1.86 4.15 7,549 843 0 0 38,629 3,027 (639) 40,210 25,565 0 14,645
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