-----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, DKYaIq9OqrFKv+Ca1HrHYN/wtc0TMcBNr/pm37CPQ58NpRJuw1pjXeIKVpq3ylWW Lu+rpSL1/lGKRohzGkB2+g== 0000034782-99-000010.txt : 19990816 0000034782-99-000010.hdr.sgml : 19990816 ACCESSION NUMBER: 0000034782-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99687479 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 QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1999 ----------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-5907 -------- 1st SOURCE CORPORATION ---------------------- (Exact name of registrant as specified in its charter) INDIANA 35-1068133 ------- ---------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 North Michigan Street South Bend, Indiana 46601 - ---------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (219) 235-2702 -------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Number of shares of common stock outstanding as of June 30, 1999 - 18,952,650 shares. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Page Consolidated statements of financial condition -- 3 June 30, 1999, and December 31, 1998 Consolidated statements of income -- 4 three months and six months ended June 30, 1999 and 1998 Consolidated statements of cash flows -- 5 six months ended June 30, 1999 and 1998 Notes to the Consolidated Financial Statements 6 - 2 - CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 1st Source Corporation and Subsidiaries (Dollars in thousands) June 30, December 31, 1999 1998 -------- ------------ ASSETS Cash and due from banks .......................... $ 131,275 $ 132,514 Federal funds sold and interest bearing deposits with other banks ..... 12,916 41,951 Investment securities: Securities available-for-sale, at fair value (amortized cost of $429,359 and $440,147 at June 30, 1999 and December 31, 1998) ...... 427,991 443,691 Securities held-to-maturity, at amortized cost (fair value of $90,987 and $99,734 at June 30, 1999 and December 31, 1998) ......... 88,870 96,008 ----------- ----------- Total Investment Securities ...................... 516,861 539,699 Loans - net of unearned discount ................. 1,997,006 1,881,696 Reserve for loan losses ........................ (43,300) (40,929) ----------- ----------- Net Loans ........................................ 1,953,706 1,840,767 Operating leases, net of accumulated depreciation 63,088 54,170 Premises and equipment, net of accumulated depreciation ............... 31,299 31,227 Other assets ..................................... 98,908 91,693 ----------- ----------- Total Assets ..................................... $ 2,808,053 $ 2,732,021 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing ............................ $ 290,164 $ 294,810 Interest bearing ............................... 1,934,608 1,882,297 ----------- ----------- Total Deposits ................................... 2,224,772 2,177,107 Federal funds purchased and securities sold under agreements to repurchase ............ 155,506 159,478 Other short-term borrowings ...................... 100,601 82,681 Other liabilities ................................ 45,026 38,957 Long-term debt ................................... 11,907 13,189 ----------- ----------- Total Liabilities ................................ 2,537,812 2,471,412 Guaranteed preferred beneficial interests in the Company's subordinated debentures ....... 44,750 44,750 Shareholders' equity: Common stock-no par value ...................... 6,883 6,270 Capital surplus ................................ 179,905 121,456 Retained earnings .............................. 51,561 97,863 Less cost of common stock in treasury .......... (12,813) (12,723) Net unrealized appreciation (depreciation) of securities available-for-sale ................ (45) 2,993 ----------- ----------- Total Shareholders' Equity ....................... 225,491 215,859 ----------- ----------- Total Liabilities and Shareholders' Equity ....... $ 2,808,053 $ 2,732,021 =========== =========== The accompanying notes are a part of the consolidated financial statements. - 3 -
CONSOLIDATED STATEMENTS OF INCOME 1st Source Corporation and Subsidiaries (Dollars in thousands, except per share amounts) Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Interest Income: Loans, including fees ...................................... $ 42,594 $ 42,953 $ 83,580 $ 84,725 Investment securities: Taxable ................................................ 5,033 4,130 9,950 8,176 Tax-exempt ............................................. 1,983 1,982 3,895 3,979 Other .................................................. 262 253 345 330 ------------ ------------ ------------ ------------ Total Interest Income ....................................... 49,872 49,318 97,770 97,210 Interest Expense: Deposits ................................................. 21,797 21,927 42,471 41,911 Short-term borrowings .................................... 3,065 3,556 6,483 7,988 Long-term debt ........................................... 227 224 454 456 ------------ ------------ ------------ ------------ Total Interest Expense ...................................... 25,089 25,707 49,408 50,355 ------------ ------------ ------------ ------------ Net Interest Income ......................................... 24,783 23,611 48,362 46,855 Provision for Loan Losses ................................... 1,443 2,689 2,736 5,090 ------------ ------------ ------------ ------------ Net Interest Income After Provision for Loan Losses ................................ 23,340 20,922 45,626 41,765 Noninterest Income: Trust fees ............................................... 2,302 2,094 4,568 4,160 Service charges on deposit accounts ...................... 1,696 1,432 3,236 2,838 Loan servicing and sale income ........................... 4,618 3,516 9,161 6,036 Equipment rental income .................................. 4,090 2,936 7,503 5,283 Other income ............................................. 2,547 2,382 5,048 4,827 Investment securities and other investment (losses) ...... (400) (584) (477) (706) ------------ ------------ ------------ ------------ Total Noninterest Income .................................... 14,853 11,776 29,039 22,438 ------------ ------------ ------------ ------------ Noninterest Expense: Salaries and employee benefits ........................... 13,082 11,674 26,054 23,361 Net occupancy expense .................................... 1,310 1,227 2,568 2,445 Furniture and equipment expense .......................... 1,960 1,697 3,971 3,339 Depreciation - leased equipment .......................... 3,097 2,162 6,077 3,982 Business development and marketing expense ............... 1,053 933 1,784 1,520 Other expense ............................................ 4,199 2,794 7,847 5,694 ------------ ------------ ------------ ------------ Total Noninterest Expense ................................... 24,701 20,487 48,301 40,341 ------------ ------------ ------------ ------------ Income Before Income Taxes and Subsidiary Trust Distributions 13,492 12,211 26,364 23,862 Income taxes ................................................ 4,614 4,309 9,052 8,235 Distribution on preferred securities of subsidiary trusts, net of income tax benefit .............. 551 560 1,105 1,125 ------------ ------------ ------------ ------------ Net Income .................................................. $ 8,327 $ 7,342 $ 16,207 $ 14,502 ============ ============ ============ ============ Other Comprehensive Income, Net of Tax: Change in unrealized appreciation (depreciation) of available-for-sale securities ........................... (2,311) (53) (3,038) 342 ------------ ------------ ------------ ------------ Total Comprehensive Income .................................. $ 6,016 $ 7,289 $ 13,169 $ 14,844 ============ ============ ============ ============ Per Common Share: Basic Net Income Per Common Share ......................... $ 0.43 $ 0.38 $ 0.85 $ 0.76 ============ ============ ============ ============ Diluted Net Income Per Common Share ....................... $ 0.43 $ 0.38 $ 0.84 $ 0.74 ============ ============ ============ ============ Dividends ................................................. $ 0.080 $ 0.066 $ 0.153 $ 0.132 ============ ============ ============ ============ Basic Weighted Average Common Shares Outstanding ............ 19,009,240 19,043,909 18,961,502 19,061,873 ============ ============ ============ ============ Diluted Weighted Average Common Shares Outstanding .......... 19,323,740 19,425,680 19,282,622 19,453,828 ============ ============ ============ ============ The computation of per share data gives retroactive recognition to a 10% stock dividend declared on January 14, 1999. The accompanying notes are a part of the consolidated financial statements.
- 4 - CONSOLIDATED STATEMENTS OF CASH FLOWS 1st Source Corporation and Subsidiaries (Dollars in thousands) Six Months Ended June 30 1999 1998 --------- --------- Operating Activities: Net income .................................... $ 16,207 $ 14,502 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ..................... 2,736 5,090 Depreciation of premises and equipment ........ 8,006 5,797 Amortization of investment security premiums and accretion of discounts, net ............. 855 438 Deferred income taxes ......................... (706) 1,010 Realized investment securities losses ......... 477 706 Realized (gains) on securitized loans ......... (150) (16) Increase in interest receivable ............... (1,027) (1,545) Increase in interest payable .................. 2,406 4,222 Other ......................................... 10,503 (3,573) --------- --------- Net Cash Provided by Operating Activities ....... 39,307 26,631 Investing Activities: Proceeds from sales and maturities of investment securities .................... 155,022 101,485 Purchases of investment securities ............ (138,428) (95,886) Net decrease in short-term investments ........ 29,035 10,765 Loans sold or participated to others .......... 157,846 67,983 Net increase in loans made to customers and principal collections on loans .......... (273,717) (206,592) Net increase in leased assets ................. (7,915) (7,344) Purchases of premises and equipment ........... (1,646) (19,868) Increase in servicing assets .................. (7,596) (4,948) Other ......................................... (6,432) 14,293 --------- --------- Net Cash Used in Investing Activities ........... (93,831) (140,112) Financing Activities: Net increase in demand deposits, NOW accounts and savings accounts ............... 42,424 66,590 Net increase in certificates of deposit ....... 5,240 108,295 Net increase in short-term borrowings ......... 13,948 13,236 Proceeds from issuance of long-term debt ...... 579 67 Payments on long-term debt .................... (1,860) (4,049) Acquisition of treasury stock ................. (4,134) (4,302) Cash dividends ................................ (2,912) (2,542) Other ......................................... -- 12 --------- --------- Net Cash Provided by Financing Activities ....... 53,285 177,307 Increase (Decrease) in Cash and Cash Equivalents (1,239) 63,826 Cash and Cash Equivalents, Beginning of Year .... 132,514 90,864 --------- --------- Cash and Cash Equivalents, End of Period ........ $ 131,275 $ 154,690 ========= ========= The accompanying notes are a part of the consolidated financial statements. - 5 - Notes to the Consolidated Financial Statements 1. The unaudited consolidated condensed financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The information furnished herein reflects all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods for which this report is submitted. The 1998 1st Source Corporation Annual Report on Form 10-K and quarterly report on Form 10-Q for the quarter ended March 31, 1999, should be read in conjunction with these statements. 2. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for 1st Source). This is after the recent deferral of the effective date by SFAS No. 137. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the intended use of the derivative and its resulting designation. 1st Source anticipates that due to its limited use of derivative instruments, the adoption of SFAS No. 133 will not have a significant effect on 1st Source's results of operations or its financial position. - 6 - 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 1st Source's consolidated condensed financial statements and the financial and statistical data appearing elsewhere in this report and the 1998 1st Source Corporation Annual Report on Form 10-K and the quarterly report on Form 10-Q for the quarter ended March 31, 1999. Except for historical information contained herein, the matters discussed in this document, and other information contained in 1st Source's SEC filings, may express "forward-looking statements." Those "forward-looking statements" may involve risk and uncertainties, including statements concerning future events 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. 1st Source wishes to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. Readers are advised that various factors-including, but not limited to, changes in laws, regulations or generally accepted accounting principles; 1st Source's competitive position within the markets served 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 1st Source's actual results or circumstances for future periods to differ materially from those anticipated or projected. 1st Source does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date of such statements. - 7 - COMPARISON OF THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 Net income for the three-month and six-month periods ended June 30, 1999, was $8,327,000 and $16,207,000 respectively, compared to $7,342,000 and $14,502,000 for the equivalent periods in 1998. The primary reasons for the increase were an increase in net interest income, a strong increase in noninterest income and a decrease in the provision for loan losses. This was offset by an increase in noninterest expense. Diluted net income per common share increased to $0.43 and $0.84, respectively, for the three-month and six-month periods ended June 30, 1999, from $0.38 and $0.74 in 1998. Return on average common shareholders' equity was 14.75% for the six months ended June 30, 1999, compared to 14.58% in 1998. The return on total average assets was 1.22% for the six months ended June 30, 1999, compared to 1.18% in 1998. NET INTEREST INCOME The taxable equivalent net interest income for the three-month period ended June 30, 1999, was $25,689,000, an increase of 4.76% over the same period in 1998, resulting in a net yield of 4.16% compared to 4.23% in 1998. The fully taxable equivalent net interest income for the six-month period ended June 30, 1999, was $50,170,000, an increase of 3.07% over 1998, resulting in a net yield of 4.15% compared to 4.28% in 1998. Total average earning assets increased 6.47% and 6.22%, respectively, for the three-month and six-month periods ended June 30, 1999, over the comparative periods in 1998. Total average investment securities increased 18.82% and 19.44%, respectively for the three-month and six-month periods over one year ago primarily due to an increase of investments in U.S. Government Securities. An increase in average loans of 3.50% and 3.07% for the three-month and six-month periods was achieved despite additional loan securitizations of $220 million of auto fleet and aircraft loans during the last twelve months. The taxable equivalent yields on total average earning assets were 8.22% and 8.65% for the three-month periods ended June 30, 1999, and 1998, and 8.24% and 8.70% for the six-month periods ended June 30, 1999, and 1998, respectively. Average deposits increased 9.21% and 10.02%, respectively, for the three-month and six-month periods over the same periods from 1998. The cost rate on average interest-bearing funds was 4.70% and 5.18% for the three-months ended June 30, 1999, and 1998, and 4.74% and 5.17% for the six-month periods ended June 30, 1999 and 1998. The majority of the growth in deposits from last year has occurred in NOW accounts. The following table sets forth consolidated information regarding average balances and rates. - 8 -
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL (Dollars in thousands) Three Months Ended June 30 ------------------------------------ 1999 1998 -------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ASSETS: Investment securities: Taxable ................. $ 343,196 $ 5,033 5.88% $ 274,569 $ 4,130 6.03% Tax exempt .......... 162,915 2,843 7.00% 151,367 2,840 7.53% Net loans ......... 1,949,409 42,639 8.77% 1,883,477 43,006 9.16% Other investments ......... 23,067 263 4.57% 18,554 253 5.47% ---------- -------- ----- ---------- ------- ---- Total Earning Assets 2,478,587 50,778 8.22% 2,327,967 50,229 8.65% Cash and due from banks ... 114,612 84,975 Reserve for loan losses ... (42,336) (38,279) Other assets .............. 188,094 154,104 ---------- ---------- Total ..................... $2,738,957 $2,528,767 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,898,133 $21,797 4.61% $1,752,291 $21,927 5.02% Short-term borrowings ... 230,487 3,064 5.33% 227,213 3,555 6.28% Long-term debt .......... 12,939 228 7.07% 12,660 225 7.12% ---------- ------- ----- ---------- ------- ----- Total Interest Bearing Liabilities ............. 2,141,559 25,089 4.70% 1,992,164 25,707 5.18% Noninterest bearing deposits 284,432 246,131 Other liabilities ....... 88,715 87,672 Shareholders' equity .... 224,251 202,800 ---------- ---------- Total ..................... $2,738,957 $2,528,767 ========== ========== ------- ------- Net Interest Income ....... $25,689 $24,522 ======= ======= Net Yield on Earning Assets on a Taxable ----- ----- Equivalent Basis ........ 4.16% 4.23% ===== ===== Six Months Ended June 30 ------------------------------------- 1999 1998 -------------------------------------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ASSETS: Investment securities: Taxable ................. $ 345,904 $ 9,950 5.80% $ 272,904 $ 8,176 6.04% Tax exempt .......... 159,322 5,610 7.10% 150,107 5,695 7.65% Net loans ......... 1,917,540 83,673 8.80% 1,860,377 84,829 9.20% Other investments ......... 15,383 346 4.53% 12,044 330 5.53% ---------- ------- ----- ---------- ------- ---- Total Earning Assets ...... 2,438,149 99,579 8.24% 2,295,432 99,030 8.70% Cash and due from banks ... 109,961 81,751 Reserve for loan losses ... (41,772) (37,202) Other assets .............. 182,538 148,636 ---------- ---------- Total ..................... $2,688,876 $2,488,617 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,847,461 $42,471 4.64% $1,690,902 $41,911 5.00% Short-term borrowings ... 243,374 6,483 5.37% 259,891 7,988 6.20% Long-term debt .......... 13,045 455 7.03% 12,983 456 7.09% ---------- ------- ----- ---------- ------- ----- Total Interest Bearing Liabilities ............. 2,103,880 49,409 4.74% 1,963,776 50,355 5.17% Noninterest bearing deposits 276,524 239,611 Other liabilities ....... 86,844 84,627 Shareholders' equity .... 221,628 200,603 ---------- ---------- Total ..................... $2,688,876 $2,488,617 ========== ========== ------- ------- Net Interest Income ....... $50,170 $48,675 ======= ======= Net Yield on Earning Assets on a Taxable ----- ----- Equivalent Basis ........ 4.15% 4.28% ===== ===== Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1999 and 1998. Tax equivalent adjustments for the three-month periods were $860 in 1999 and $858 in 1998 and for the six-month periods were $1,715 in 1999 and $1,716 in 1998. Loan income includes fees on loans for the three-month periods of $1,391 in 1999 and $1,221 in 1998 and for the six-month periods of $2,800 in 1999 and $2,315 in 1998. Loan income also includes the effects of taxable equivalent adjustments, using a 40.525% rate for 1999 and 1998. The tax equivalent adjustments for the three-month periods were $45 in 1999 and $53 in 1998 and for the six-month periods were $93 in 1999 and $104 in 1998. For purposes of this computation, non-accruing loans are included in the daily average loan amounts outstanding.
- 9 - PROVISION FOR LOAN LOSSES The provision for loan losses for the three-month period ended June 30, 1999, and 1998, was $1,443,000 and $2,689,000, respectively, and was $2,736,000 and $5,090,000 for the six-month periods ended June 30, 1999 and 1998. Net Charge-offs of $223,000 have been recorded for the three-month period ended June 30, 1999, compared to $654,000 of Net Charge-offs for the same period in 1998. Year-to-date Net Charge-offs of $365,000 have been recorded in 1999, compared to Net Charge-offs of $805,000 through June 1998. The reserve for loan losses was $43,300,000 or 2.17% of net loans at June 30, 1999, compared to $40,929,000 or 2.18% of net loans at December 31, 1998. Non-performing assets at June 30, 1999, were $10,993,000 compared to $10,571,000 at December 31, 1998, an increase of 3.99%. At June 30, 1999, non-performing assets were 0.55% of net loans compared to 0.56% at December 31, 1998. It is management's opinion that the reserve for loan losses is adequate to absorb anticipated losses in the loan portfolio as of June 30, 1999. NONINTEREST INCOME Noninterest income for the three-month periods ended June 30, 1999, and 1998 was $14,853,000 and $11,776,000, respectively, and for the six-month periods was $29,039,000 in 1999 and $22,438,000 in 1998. For the six-month period, trust fees increased 9.82%, service charges on deposit accounts increased 13.99%, loan servicing and sale income increased 51.76%, equipment rental income increased 42.03% and other income increased 4.58%. The increase in servicing and sale income is due to increased loan securitization activity. The increase in equipment rental income was primarily due to growth in operating leases. Investment security and other net losses for the six-month period ended June 30, 1999, were $477,000 compared to net losses of $706,000 in 1998. The net losses for both years were primarily attributed to certain partnership and venture capital investments. NONINTEREST EXPENSE Noninterest expense for the three-month period ended June 30, 1999, was $24,701,000, an increase of 20.57% over the same period in 1998 and was $48,301,000 for the six-month period ended June 30, 1999, an increase of 19.73% over 1998. For the six-month period ended June 30, 1999, salaries and employee benefits increased 11.52%, net occupancy expense increased 5.03%, furniture and equipment expense increased 18.95%, depreciation on leased equipment increased 52.62%, business development and marketing expense increased 17.34%, and miscellaneous other expenses increased 37.81% over the same period in 1998. The increase in salaries and employee benefits is primarily attributed to a 10% increase in our employee base compared to 1998 and an increase in commissions. The increase in furniture and equipment expense is primarily due to software and computer charges, equipment rental and repair expenses. The increase in depreciation of leased equipment is due to a significant volume increase from the prior year. The miscellaneous other expense increase from one year ago is attributed primarily to Year 2000 consulting expenses. - 10 - INCOME TAXES The provision for income taxes for the three-month and six-month periods ended June 30, 1999, was $4,614,000 and $9,052,000, respectively, compared to $4,309,000 and $8,235,000 for the comparable periods in 1998. The provision for income taxes for the six months ended June 30, 1999, and 1998, is at a rate which management believes approximates the effective rate for the year. CAPITAL RESOURCES The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the soundness of a financial institution. These guidelines require all banks to maintain a minimum leverage capital ratio of 4.00% for adequately capitalized banks and 5.00% for well-capitalized banks. 1st Source's leverage capital ratio was 9.78% at June 30, 1999. The Federal Reserve Board has established risk-based capital guidelines for U.S. banking organizations. The guidelines established a conceptual framework calling for risk weights to be assigned to on and off-balance sheet items in arriving at risk-adjusted total assets, with the resulting ratio compared to a minimum standard to determine whether a bank has adequate capital. The minimum standard risk-based capital ratios effective in 1999 are 4.00% for adequately capitalized banks and 6.00% for well-capitalized banks for Tier 1 risk-based capital and 8.00% and 10.00%, respectively, for total risk-based capital. 1st Source's Tier 1 risk-based capital ratio on June 30, 1999 was 11.78% and the total risk-based capital ratio was 13.04%. 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, 1999, the consolidated statement of financial condition was rate sensitive by $141,861,000 more liabilities than assets scheduled to reprice within one year or 90.45%. Management adjusts the composition of its assets and liabilities to manage the interest rate sensitivity gap based upon its expectations of interest rate fluctuations. 1st Source has three off-balance sheet interest rate swaps as part of its interest rate risk management strategy. The swaps are being used to hedge against 1st Source's prime floating rate loans. The notional amount of the first swap as of June 30, 1999, is $5.9 million. It has a maturity date of January, 2002, and a current fair value of $1,854. The second swap has a notional amount of $5.9 million as of June 30, 1999. It has a maturity date of March, 2001, and a current fair value of $9,497. The third swap has a notional amount of $50.0 million as of June 30, 1999. It has a maturity date of April, 2003, and a current fair value of ($821,050). - 11 - 1st Source 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 The Y2K issue is the result of potential problems with computer systems or any equipment with computer chips that store the year portion of the date as just two digits (e.g., 98 for 1998). Systems using this two-digit approach may not be able to determine whether "00" represents the Year 2000 or 1900. The problem, if not corrected, may make those systems fail altogether or, even worse, allow them to generate incorrect calculations causing a disruption of normal operations. In 1997, a comprehensive project plan to address the Y2K issue as it relates to 1st Source's operations was developed, approved by the Board of Directors and implemented. The scope of the plan has five phases comprising Awareness, Assessment, Renovation, Validation and Implementation as defined by federal banking regulatory agencies. Two project teams were assigned. The first consisted of key members of the technology staff, representatives of functional business units and senior management. The second primarily consisted of lenders and credit personnel. The first team assessed our systems and equipment and vendors to ascertain their readiness and to develop the overall plan to bring our systems into compliance. The second team assessed the readiness of our customers and determined what risk, if any, our key customers pose to the bank with regards to their Y2K readiness. Additionally, the duties of the Senior Vice President of Operations were realigned to allow him to serve as the Year 2000 Project Manager. The scope of the project also includes other operational and environmental systems since they may be impacted if embedded computer chips control the functionality of those systems. From the assessment, 1st Source has identified and prioritized those systems deemed to be mission critical or those that have a significant impact on normal operations. 1st Source relies on third-party vendors and service providers for much of its data processing capabilities and to maintain its computer systems. Formal communications with these providers and other external counterparties were initiated in 1997 to assess the Y2K readiness of their products and services. Their progress in meeting their targeted schedules is being monitored continually for any indication that they may not be able to address the problems in time. Thus far, responses indicate that all of the significant providers currently have compliant versions available or are well into the renovation and testing phases. However, 1st Source can give no guarantee that the systems of these service providers and vendors on which 1st Source's systems rely will be timely renovated. Additionally, 1st Source has implemented a plan to manage the potential risk posed by the impact of the Y2K issue on its major borrowing customers. Formal communications have been initiated from normal loan operations, and the assessment was substantially complete on December 31, 1998. Loan losses attributed to the Y2K issue are not anticipated to be material to 1st Source. However, there can be no guarantee that any loss incurred will be immaterial. - 12 - 1st Source's total cost for the Y2K project is estimated to be between $2,400,000 and $2,500,000. The total amount expended on the project through June 30, 1999, was $1,812,000 of which approximately $1,685,000 related to the cost to repair or replace software. Approximately $116,000 was related to the cost of replacing equipment and approximately $11,000 was related to miscellaneous items such as training for employees and communications with customers. Funds have been provided from our normal operating budget and costs are expensed as they are incurred. The total cost to 1st Source of these Year 2000 readiness activities has not been, and is not anticipated to be, material to its financial position or results of operations in any given year. The project team feels that 1st Source's Y2K readiness project is on schedule. The following table provides a summary of the current status of the five phases involved and a projected timetable for completion. TARGET DATES FOR MISSION CRITICAL SYSTEMS PROJECT PHASE % COMPLETED ESTIMATED COMPLETION Awareness 100% -- Assessment 100% -- Renovation 100% -- Validation 100% -- Implementation 97% September 30, 1999 Much of the work done within this project is an acceleration of work that would have been done in the normal course of business. The costs and timetable in which 1st Source plans to complete the Year 2000 readiness activities are based on management's best estimates, which were derived using numerous assumptions of future events including the continued availability of certain resources, third-party plans and other factors. 1st Source can make no guarantee that these estimates will be achieved and actual results could differ from such plans. Based upon current information related to the progress of its major vendors and service providers, management has determined that the Y2K issue will not pose significant operational problems for its computer systems. This determination is based on the ability of those vendors and service providers to renovate, in a timely manner, the products and services on which 1st Source's systems rely. However, 1st Source can give no guarantee that the systems of these suppliers will be renovated in a timely manner. Realizing that some disruption may occur despite its best efforts, 1st Source is in the process of developing contingency plans for each critical system in the event that one or more of those systems fail. 1st Source cautions that this Y2K disclosure includes certain "forward-looking statements." The reader should refer to the "forward-looking statements" disclosure at the beginning of Part I, Item 2 for further discussion. - 13 - 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 1999, 1st Source Corporation's shareholders elected Timothy K. Ozark, and re-elected Lawrence E. Hiler, Rex Martin, and Christopher J. Murphy III, as directors at the April 15, 1999, annual meeting. They were elected for terms ending in April, 2002. The election showed that 17,740,652 votes were cast (representing 93.0% of all eligible shares) with all directors receiving a majority of the votes cast. ITEM 5. Other Information. None ITEM 6. Exhibits and Reports on Form 8-K. None - 14 - 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 8/12/99 /s/ Christopher J. Murphy III ---------- ---------------------------------------- (Signature) Christopher J. Murphy III Chairman of the Board, President and CEO DATE 8/12/99 /s/ Larry E. Lentych ---------- ---------------------------------------- (Signature) Larry E. Lentych Treasurer and Chief Financial Officer - 15 - EX-27 2
9 1,000 6-MOS DEC-31-1999 JUN-30-1999 131,275 1,916 11,000 0 427,991 88,870 90,987 1,997,006 43,300 2,808,053 2,224,772 256,107 45,026 56,657 6,883 0 0 218,608 2,808,053 83,580 13,845 345 97,770 42,471 49,408 48,362 2,736 (477) 48,301 26,364 16,207 0 0 16,207 0.85 0.84 4.15 7,549 843 0 0 40,929 695 (330) 43,330 22,430 0 20,870
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