-----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, FTVP4JYWgVYDvPyXuZUlqHvmV5aZIbLmhkbpvFI9CIgxK2QFmVFA8nW1AxKwa/oF xSsgBSSEr2N6CrtNEgZv8Q== 0000034782-98-000005.txt : 19980814 0000034782-98-000005.hdr.sgml : 19980814 ACCESSION NUMBER: 0000034782-98-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 1ST SOURCE CORP CENTRAL INDEX KEY: 0000034782 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351068133 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-06233 FILM NUMBER: 98685199 BUSINESS ADDRESS: STREET 1: 100 N MICHIGAN ST CITY: SOUTH BEND STATE: IN ZIP: 46601 BUSINESS PHONE: 2192352702 MAIL ADDRESS: STREET 1: P O BOX 1602 STREET 2: P O BOX 1602 CITY: SOUTH BEND STATE: IN ZIP: 46634 FORMER COMPANY: FORMER CONFORMED NAME: FBT BANCORP INC DATE OF NAME CHANGE: 19820818 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-5907 1st SOURCE CORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1068133 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 North Michigan Street South Bend, Indiana 46601 (Address of principal executive offices) (Zip Code) (219) 235-2702 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of common stock outstanding as of June 30, 1998 - 17,253,450 shares. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Page Consolidated statements of financial condition -- 3 June 30, 1998, and December 31, 1997 Consolidated statements of income -- 4 three months and six months ended June 30, 1998 and 1997 Consolidated statements of cash flows -- 5 six months ended June 30, 1998 and 1997 Notes to the Consolidated Financial Statements 6-7
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 1st Source Corporation and Subsidiaries (Dollars in thousands) June 30, December 31, 1998 1997 ASSETS Cash and due from banks $ 154,690 $ 90,864 Interest bearing deposits with other banks 912 1,677 Federal funds sold -- 10,000 Investment securities: Securities available-for-sale, at fair value (amortized cost of $299,114 and $298,438 at June 30, 1998 and December 31, 1997) 301,189 299,933 Securities held-to-maturity, at amortized cost (fair value of $111,247 and $119,369 at June 30, 1998 and December 31, 1997) 107,559 114,975 Total Investment Securities 408,748 414,908 Loans - net of unearned discount 1,934,580 1,796,781 Reserve for loan losses (39,709) (35,424) Net Loans 1,894,871 1,761,357 Premises and equipment 30,559 30,782 Other assets 129,146 108,566 Total Assets $2,618,926 $2,418,154 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 242,966 $ 274,906 Interest bearing 1,823,710 1,616,885 Total Deposits 2,066,676 1,891,791 Federal funds purchased and securities sold under agreements to repurchase 167,379 117,987 Other short-term borrowings 80,863 117,019 Other liabilities 42,674 34,998 Long-term debt 12,674 16,656 Total Liabilities 2,370,266 2,178,451 Guaranteed preferred beneficial interests in the company's subordinated debentures 44,750 44,750 Shareholders' equity: Common stock-no par value 6,270 5,700 Capital surplus 121,456 69,947 Retained earnings 84,170 124,394 Less cost of common stock in treasury (10,218) (6,978) Unrealized appreciation of investment securities, net 2,232 1,890 Total Shareholders' Equity 203,910 194,953 Total Liabilities and Shareholders' Equity $2,618,926 $2,418,154 The accompanying notes are a part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME 1st Source Corporation and Subsidiaries (Dollars in thousands, except per share amounts) Three Months Ended Six Months Ended June 30 June 30 Interest Income: Loans, including fees $ 42,953 $ 36,414 $ 84,725 $ 69,424 Investment Securities: Taxable 4,130 4,223 8,176 8,245 Tax-exempt 1,982 2,056 3,979 4,090 Other 253 65 330 145 Total Interest Income 49,318 42,758 97,210 81,904 Interest Expense: Deposits 21,927 17,648 41,911 34,136 Short-term borrowings 3,556 3,154 7,988 5,824 Long-term debt 224 281 456 598 Total Interest Expense 25,707 21,083 50,355 40,558 Net Interest Income 23,611 21,675 46,855 41,346 Provision for Loan Losses 2,689 479 5,090 1,708 Net Interest Income After Provision for Loan Losses 20,922 21,196 41,765 39,638 Non-Interest Income: Trust fees 2,094 1,723 4,160 3,492 Service charges on deposit accounts 1,432 1,287 2,838 2,536 Loan servicing and sale income 3,516 1,518 6,036 2,940 Equipment rental income 2,936 1,506 5,283 2,662 Other income 2,382 1,484 4,827 2,868 Investment securities and other gains (losses) (584) (484) (706) (303) Total Non-Interest Income 11,776 7,034 22,438 14,195 Non-Interest Expense: Salaries and employee benefits 11,674 10,051 23,361 19,742 Net occupancy expense 1,227 1,022 2,445 2,194 Furniture and equipment expense 1,697 1,732 3,339 3,276 Depreciation - leased equipment 2,162 1,241 3,982 2,009 Business development and marketing expense 933 1,389 1,520 1,882 Other 2,794 2,571 5,694 5,146 Total Non-Interest Expense 20,487 18,006 40,341 34,249 Income Before Income Taxes & Subsidiary Trust Distributions 12,211 10,224 23,862 19,584 Income taxes 4,309 3,222 8,235 6,457 Distribution on preferred securities of subsidiary trusts, net of tax 560 561 1,125 620 Net Income $ 7,342 $ 6,441 $ 14,502 $ 12,507 Other Comprehensive Income, Net of Tax: Unrealized Gain (Loss) on Securities (53) 814 342 (25) Comprehensive Income $ 7,289 $ 7,255 $ 14,844 $ 12,482 Per Common Share: Basic Net Income Per Common Share $ 0.43 $ 0.38 $ 0.84 $ 0.73 Diluted Net Income Per Common Share $ 0.42 $ 0.36 $ 0.82 $ 0.70 Dividends $ 0.073 $ 0.068 $ 0.146 $ 0.134 Basic Weighted Average Common Shares Outstanding 17,312,644 17,231,546 17,328,975 17,214,876 Diluted Weighted Average Common Shares Outstanding 17,659,709 17,777,844 17,685,298 17,742,850 The computation of per share data gives retroactive recognition to a 10% stock dividend declared on January 20, 1998, and a five-for-four stock split declared on January 21, 1997. The accompanying notes are a part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS 1st Source Corporation and Subsidiaries (Dollars in thousands) Six Months Ended June 30 1998 1997 Operating Activities: Net income $ 14,502 $ 12,507 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,090 1,708 Depreciation of premises and equipment 5,797 3,662 Amortization of investment security premiums and accretion of discounts, net 438 428 Deferred income taxes 1,010 (659) Realized investment securities (gains) losses 706 303 Increase in interest receivable (1,545) (1,266) Increase in interest payable 4,222 4,980 Other (8,537) (9,982) Net Cash Provided by Operating Activities 21,683 11,681 Investing Activities: Proceeds from sales and maturities of investment securities 101,485 55,260 Purchases of investment securities (95,886) (61,976) Net decrease (increase) in short-term investments 10,765 (282) Loans sold or participated to others 67,983 84,349 Net increase in loans made to customers and principal collections on loans (206,592) (243,660) Net increase in leased assets (7,344) (6,748) Purchases of premises and equipment (19,868) (2,285) Other 14,293 (2,862) Net Cash Used in Investing Activities (135,164) (178,204) Financing Activities: Net increase (decrease) in demand deposits, NOW accounts and savings accounts 66,590 (2,927) Net increase in certificates of deposit 108,295 81,237 Net increase in short-term borrowings 13,236 9,855 New long-term debt 67 -- Payments on long-term debt (4,049) (3,091) New issuance of trust preferred securities -- 44,750 Acquisition of treasury stock (4,302) (1,247) Cash dividends (2,542) (2,300) Other 12 (8) Net Cash Provided by Financing Activities 177,307 126,269 Increase (Decrease) in Cash and Cash Equivalents 63,826 (40,254) Cash and Cash Equivalents, Beginning of Year 90,864 137,588 Cash and Cash Equivalents, End of Period $154,690 $ 97,334 The accompanying notes are a part of the consolidated financial statements.
Notes to the Consolidated Financial Statements 1. The unaudited consolidated condensed financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The information furnished herein reflects all adjustments (all which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods for which this report is submitted. The 1997 1st Source Corporation Annual Report on Form 10-K and quarterly report on Form 10-Q for the quarter ended March 31, 1998, should be read in conjunction with these statements. 2. 1st Source has adopted Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income," as of March 31, 1998. SFAS No. 130 establishes standards for the reporting and disclosure of comprehensive income and its components in a full set of general purpose financial statements. Presently, the only component of comprehensive income not included in net income is unrealized gains or losses on available-for-sale investment securities. 3. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information." This Statement changes the manner in which public companies report significant 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. In the year of adoption, companies are not required to disclose interim period information. 1st Source will adopt the Statement in 1998. 4. On June 15, 1998, the Financial Accounting Standards Board (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, 1999 (January 1, 2000 for 1st Source). 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 whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. 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 the Company's results of operations or its financial position. 5. On July 16, 1998, 1st Source completed a securitization financing of $400 million in loans; $215 million for new funding, $100 million for future growth, and $85 million for replacement funding. The purpose of the securitization is to fund the continued national growth of the 1st Source Bank Specialty Finance Group. PART I. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis should be read in conjunction with the Company's consolidated condensed financial statements and the financial and statistical data appearing elsewhere in this report and the 1997 1st Source Corporation Annual Report on Form 10-K and the quarterly report on Form 10-Q for the quarter ended March 31, 1998. The amounts shown in this analysis have been adjusted to reflect tax-exempt income on a tax equivalent basis using a 40.525% rate. Except for historical information contained herein, the matters discussed in this document, and other information contained in the Company's SEC filings, may express "forward-looking statements." Those "forward-looking statements" may involve risk and uncertainties, including statements concerning future events or performance and assumptions and other statements concerning future events or performance and assumptions and other statements that are other than statements of historical facts. The Company wishes to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. Readers are advised that various factors--including, but not limited to, changes in laws, regulations or generally accepted accounting principles; the Company's competitive position within the markets served of increasing consolidation within the banking industry; certain customers and vendors of critical systems or services failing to comply with Year 2000 programming issues; unforeseen changes in interest rates; any unforeseen downturns in the local, regional or national economies--could cause the Company's actual results or circumstances for future periods to differ materially from those anticipated or projected. 1st Source does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date of such statements. COMPARISON OF THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 Net income for the three-month and six-month periods ended June 30, 1998, was $7,342,000 and $14,502,000 respectively, compared to $6,441,000 and $12,507,000 for the equivalent periods in 1997. The primary reasons for the increase were an increase in net interest income and a significant increase in non-interest income offset by an increase in non-interest expense. Diluted net income per common share increased to $0.42 and $0.82, respectively, for the three-month and six-month periods ended June 30, 1998, from $0.36 and $0.70 in 1997. Return on average common shareholders' equity was 14.58% for the six months ended June 30, 1998, compared to 14.26% in 1997. The return on total average assets was 1.18% for the six months ended June 30, 1998, compared to 1.21% in 1997. NET INTEREST INCOME The taxable equivalent net interest income for the three-month period ended June 30, 1998, was $24,522,000, an increase of 8.49% over the same period in 1997, resulting in a net yield of 4.23% compared to 4.50% in 1997. The fully taxable equivalent net interest income for the six-month period ended June 30, 1998, was $48,675,000, an increase of 12.61% over 1997, resulting in a net yield of 4.28% compared to 4.47% in 1997. Total average earning assets increased 15.60% and 17.62%, respectively, for the three-month and six-month periods ended June 30, 1998, over the comparative periods in 1997. Total average investment securities increased 0.65% and 0.51%, respectively for the three-month and six-month periods, while a 18.87% and 22.05% increase for the three-month and six-month periods for average loans occurred primarily in commercial mortgage, transportation and equipment loans. The taxable equivalent yields on total average earning assets were 8.65% and 8.70% for the three-month periods ended June 30, 1998, and 1997, and 8.70% and 8.66% for the six-month periods ended June 30, 1998 and 1997. Average deposits increased 20.30% and 19.09%, respectively, for the three-month and six-month periods over the same periods from 1997. The cost rate on average interest-bearing funds was 5.18% and 5.02% for the three-months ended June 30, 1998, and 1997, and 5.17% and 4.95% for the six-month periods ended June 30, 1998 and 1997. The majority of the growth in deposits from last year has occurred in time deposits of $100 thousand and over and time deposits greater than one year. The following table sets forth consolidated information regarding average balances and rates.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDER'S EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL (Dollars in thousands) Three Months Ended June 30 1998 1997 Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ASSETS: Investment Securities: Taxable $ 274,569 $ 4,130 6.03% $ 271,198 $ 4,224 6.25% Tax exempt (1) 151,367 2,840 7.53% 151,999 2,951 7.79% Net loans (2 & 3) 1,883,477 43,006 9.16% 1,584,549 36,444 9.23% Other investments 18,554 253 5.47% 5,983 66 4.42% Total Earning Assets 2,327,967 50,229 8.65% 2,013,729 43,685 8.70% Cash and due from banks 84,975 70,953 Reserve for loan losses (38,279) (31,191) Other assets 154,104 101,330 Total $2,528,767 $2,154,821 LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,752,291 $21,927 5.02% $1,450,089 $17,648 4.88% Short-term borrowings 227,213 3,555 6.28% 218,310 3,154 5.79% Long-term debt 12,660 225 7.12% 16,195 281 6.95% Total Interest Bearing Liabilities 1,992,164 25,707 5.18% 1,684,594 21,083 5.02% Noninterest bearing deposits 246,131 211,168 Other liabilities 87,672 79,629 Shareholders' equity 202,800 179,430 Total $2,528,767 $2,154,821 Net Interest Income $24,522 $22,602 Net Yield on Earning Assets on a Taxable Equivalent Basis 4.23% 4.50%
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL (Dollars in thousands) Six Months Ended June 30 1998 1997 Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expens Rate Balance Expense Rate ASSETS: Investment Securities: Taxable $ 272,904 $ 8.176 6.04% $ 269,673 $ 8,245 6.17% Tax exempt 150,107 5,695 7.65% 151,172 5,900 7.87% Net loans 1,860,377 84,829 9.20% 1,524,335 69,491 9.19% Other investments 12,044 330 5.53% 6,370 146 4.62% Total Earning Assets 2,295,432 99,030 8.70% 1,951,550 83,782 8.66% Cash and due from banks 81,751 70,556 Reserve for loan losses (37,202) (30,516) Other assets 148,636 97,483 Total $2,488,617 $2,089,073 LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,690,902 $41,911 5.00% $1,420,196 $34,136 4.85% Short-term borrowings 259,891 7,998 6.20% 214,578 5,824 5.47% Long-term debt 12,983 456 7.09% 17,383 598 6.94% Total Interest Bearing Liabilities 1,963,776 50,355 5.17% 1,652,157 40,558 4.95% Noninterest bearing deposits 239,611 200,835 Other liabilities 84,627 59,147 Shareholders' equity 200,603 176,934 Total $2,488,617 $2,089,073 Net Interest Income $48,675 $43,224 Net Yield on Earning Assets on a Taxable Equivalent Basis 4.28% 4.47% Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1998 and 1997. Tax equivalent adjustments for the three-month periods were $858 in 1998 and $895 in 1997 and for the six-month periods were $1,716 in 1998 and $1,811 in 1997. Loan income includes fees on loans for the three-month periods of $1,221 in 1998 and $718 in 1997 and for the six-month periods of $2,315 in 1998 and $1,761 in 1997. Loan income also includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1998 and 1997. The tax equivalent adjustments for the three-month periods were $53 in 1998 and $31 in 1997 and for the six-month periods were $104 in 1998 and $67 in 1997. For purposes of this computation, non-accruing loans are included in the daily average loan amounts outstanding.
PROVISION FOR LOAN LOSSES The provision for loan losses for the three-month period ended June 30, 1998, and 1997, was $2,689,000 and $479,000, respectively, and was $5,090,000 and $1,708,000 for the six-month periods ended June 30, 1998 and 1997. Net Charge-offs of $654,000 have been recorded for the three-month period ended June 30, 1998, compared to $406,000 of Net Recoveries for the same period in 1997. Year-to-date Net Charge-offs of $805,000 have been recorded in 1998, compared to Net Recoveries of $665,000 through June 1997. The reserve for loan losses was $39,709,000 or 2.05% of net loans at June 30, 1998, compared to $35,424,000 or 1.97% of net loans at December 31, 1997. Non-performing assets at June 30, 1998, were $9,879,000 compared to $11,436,000 at December 31, 1997, a decrease of 13.6%. At June 30, 1998, non-performing assets were .51% of net loans compared to .64% at December 31, 1997. It is management's opinion that the reserve for loan losses is adequate to absorb anticipated losses in the loan portfolio as of June 30, 1998. NON-INTEREST INCOME Non-Interest income for the three-month periods ended June 30, 1998, and 1997 was $11,776,000 and $7,034,000, respectively, and for the six-month periods was $22,438,000 in 1998 and $14,195,000 in 1997. For the six-month period, trust fees increased 19.13%, service charges on deposit accounts increased 11.91%, loan servicing and sale income increased 105.31%, equipment rental income increased 98.46% and other income increased 68.31%. The increase in servicing and sale income is due to income recognition required by SFAS No. 125. The significant increase in equipment rental income was primarily due to substantial growth in operating leases. Bank Owned Life Insurance income was primarily the reason for the increase in the Other Income category. Investment Security losses and other losses for the six-month period ended June 30, 1998, were $706,000 compared to net losses of $303,000 in 1997. The net losses in 1998 and 1997 were primarily attributed to certain partnership and venture capital investments. NON-INTEREST EXPENSE Non-Interest expense for the three-month period ended June 30, 1998, was $20,487,000, an increase of 13.78% over the same period in 1997 and was $40,341,000 for the six-month period ended June 30, 1998, an increase of 17.79% over 1997. For the six-month period ended June 30, 1998, salaries and employee benefits increased 18.33%, net occupancy expense increased 11.44%, furniture and equipment expense increased 1.92%, depreciation on leased equipment increased 98.20%, business development and marketing expense decreased 19.23%, and miscellaneous other expenses increased 10.65% over the same period in 1997. The increase in salaries and employee benefits is primarily attributed to the additional expense provisions being made to fund our stock incentive reserves. As a result of the increase in market price of 1st Source stock. Business development and marketing expense decreased due to a $590,000 decrease in charitable contributions. The increase in depreciation of leased equipment is due to a significant volume increase of operating leases from the prior year as mentioned above. INCOME TAXES The provision for income taxes for the three-month and six-month periods ended June 30, 1998, was $4,309,000 and $8,235,000, respectively, compared to $3,222,000 and $6,457,000 for the comparable periods in 1997. The provision for income taxes for the six months ended June 30, 1998, and 1997, is at a rate which management believes approximates the effective rate for the year. The increase in the effective tax rate was due to increased taxable income in 1998 and larger charitable contributions in 1997 compared to 1998. CAPITAL RESOURCES The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution. These guidelines require all banks to maintain a minimum leverage capital ratio of 4.00% for adequately capitalized banks and 5.00% for well-capitalized banks. 1st Source's leverage capital ratio was 9.64% at June 30, 1998. The Federal Reserve Board has established risk-based capital guidelines for U.S. banking organizations. The guidelines established a conceptual framework calling for risk weights to be assigned to on and off-balance sheet items in arriving at risk-adjusted total assets, with the resulting ratio compared to a minimum standard to determine whether a bank has adequate capital. The minimum standard risk-based capital ratios effective in 1998 are 4.00% for adequately capitalized banks and 6.00% for well-capitalized banks for Tier 1 risk-based capital and 8.00% and 10.00%, respectively, for total risk-based capital. 1st Source's Tier 1 risk-based capital ratio on June 30, 1998, was 11.70% and the total risk based capital ratio was 12.97%. LIQUIDITY AND INTEREST RATE SENSITIVITY Asset and liability management includes the management of interest rate sensitivity and the maintenance of an adequate liquidity position. The purpose of liquidity management is to match the sources and uses of funds to anticipated customers' deposits and withdrawals, to anticipate borrowing requirements and to provide for the cash flow needs of 1st Source. The purpose of interest rate sensitivity management is to stabilize net interest income during periods of changing interest rates. Close attention is given to various interest rate sensitivity gaps and interest rate spreads. Maturities of rate sensitive assets are carefully maintained relative to the maturities of rate sensitive liabilities and interest rate forecasts. At June 30, 1998, the consolidated statement of financial condition was rate sensitive by $88,169,000 more assets than liabilities scheduled to reprice within one year or 106.69%. Management adjusts the composition of its assets and liabilities to manage the interest rate sensitivity gap based upon its expectations of interest rate fluctuations. 1st Source has two off-balance sheet interest rate swaps as part of its interest rate risk management strategy. The swaps are being used to hedge against the Company's Prime floating rate loans. The notional amount of the first swap as of June 30, 1998, is $20.5 million. It has a maturity date of January, 2002, and has a current fair value of $2,101. The second swap has a notional amount of $20.2 million as of June 30, 1998. It has a maturity date of March, 2001, and has a current fair value of $31,944. The Company pays a variable interest rate (one-month LIBOR) on each swap and receives a fixed rate. The interest rate swaps are the most efficient means of protecting the bank's net interest rate margin in a declining interest rate environment. Conversely, if interest rates increase, the increased contribution to net interest income from on-balance sheet assets will substantially offset any negative impact on net interest income from these swap transactions. YEAR 2000 During 1997, management formed a task force to analyze the business and operational risks associated with whether systems, software, and other date-specific applications are Year 2000 compliant. This study was completed at the end of 1997. Plans were developed to have all "mission critical" systems revised and tested by the end of 1998 and all other systems completed by June 1999. At this time, management feels we are on schedule to meet these goals and does not anticipate any material impact to 1st Source. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings. None ITEM 2. Changes in Securities. None ITEM 3. Defaults Upon Senior Securities. None ITEM 4. Submission of Matters to a Vote of Security Holders During the second quarter of 1998, 1st Source Corporation's shareholders elected Wellington D. Jones, III, and re-elected Philip J. Faccenda, Daniel B. Fitzpatrick, and Dane A. Miller, Ph.D., as directors at the April 16, 1998, annual meeting. They were elected for terms ending in April, 2001. The election showed that 15,809,918 votes were cast (representing 90.6% of all eligible shares) with all directors receiving a majority of the votes cast. 1st Source Corporation's shareholders also elected to approve the 1998 Performance Compensation Plan, a performance compensation plan for executive officers and other key employees of 1st Source and its subsidiaries under which the Executive Compensation Committee could make cash awards each year. The election tally showed that 15,361,534 votes were cast (representing 90.6% of all eligible shares) with the proposal receiving a majority of the votes cast. ITEM 5. Other Information. None ITEM 6. Exhibits and Reports on Form 8-K. None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 1st Source Corporation DATE 8/14/98 /s/ Christopher J. Murphy III (Signature) Christopher J. Murphy III Chairman of the Board and CEO DATE 8/14/98 /s/ Larry E. Lentych (Signature) Larry E. Lentych, Treasurer (Chief Accounting and Financial Officer) EX-27 2
9 1,000 6-MOS DEC-31-1997 JUN-30-1998 154,690 912 00 0 301,189 107,559 111,247 1,934,580 39,709 2,618,926 2,066,676 248,242 42,674 57,424 0 0 6,270 197,640 2,618,926 84,725 12,155 330 97,210 41,911 50,355 46,855 5,090 0 40,341 23,862 14,502 0 0 14,502 .84 .82 4.28 8,935 628 0 0 36,158 1,172 367 39,709 14,232 0 25,477
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