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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, 1996
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-6233
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1st SOURCE CORPORATION
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(Exact name of registrant as specified in its charter)
Indiana 35-1068133
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N. Michigan Street, South Bend, Indiana 46601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 219/235-2000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock - without par value
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(Title of Class)
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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
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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. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 14, 1997.
Common Stock, without par value - $186,551,668.
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The number of shares outstanding of each of the registrant's classes of
common stock as of February 14, 1997.
Common Stock, without par value - 15,738,236 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31,
1996 are incorporated by reference into Part II.
Portions of the annual proxy statement for the 1997 annual meeting of
shareholders are incorporated by reference into Parts II and III.
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PART I
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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 "Company" refers to 1st Source
Corporation and its subsidiaries. At December 31, 1996, the Company had
assets of $2.08 billion, deposits of $1.63 billion and total shareholders'
equity of $171.8 million. Pages 16 through 38 of the Company's Annual Report
to Shareholders for the year ended December 31, 1996 are incorporated herein
by reference.
The Company, 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 42 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 eight counties in northern Indiana and two counties on
southwestern Michigan. South Bend, in St. Joseph County, is the largest city
in a 55-mile radius, and is a regional center for educational institutions,
health care, financial, accounting and legal services and retailing.
The Company'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, and Trustcorp Mortgage Company, a mortgage banking
company with three offices in Indiana and one each in Ohio, Illinois and
Missouri. The Company's inactive subsidiaries include 1st Source Travel,
Inc., 1st Source Auto Leasing, Inc., and FBT Capital Corporation.
The principal executive office of the Company is located at 100 North
Michigan Street, South Bend, Indiana 46601 and its telephone number is (219)
235-2000.
BUSINESS STRATEGY AND OBJECTIVES
The Company, 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 the
Company 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.
The Company has employed the following strategies in furtherance of its
Vision 2000 objectives:
1. Increase market share in each market served and as a percentage
of each customer's relationship. The Company opened ten new banking
locations in 1996 as part of its banking center expansion program designed to
maintain its position as one of the dominant financial institutions in the
South Bend/Elkhart market area -- which includes eight counties in northern
Indiana and two counties in southwestern lower Michigan. Two of the new
banking locations were located in Michigan, which are the Company's first
locations in Michigan as a result of new reciprocal legislation passed during
1996
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between Michigan and Indiana permitting de novo branching across state
lines. Management believes that such a strategy allows the most effective
and efficient use of the Company's marketing resources and assures that the
Company's banking offices are accessible to a majority of the people residing
in the markets served. The Company'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. The Company currently provides a
number of fee-based services to its clients, the major services being trust,
mortgage banking, equipment leasing, property and casualty insurance, and
securitized loan servicing. The Company believes that additional sources of
fee income are available from existing relationships and that the existing
fee-based product line can be used effectively in developing new
relationships with customers. The Company 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 the
Company. The Company's fee-based businesses are designed to deepen the
strength of the relationship between the Company and its customers.
3. Expand the national niche businesses across the United States
taking advantage of specialized opportunities. The Company 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 Transportation and Equipment Financing
Group, which provides such services. Additional experienced sales people
have been and will be added to ensure better geographic coverage in areas of
opportunity. The Company has also pursued a strategy of securitizing loan
receivables so that business growth is not totally dependent on deposit
funding.
4. Actively managing credit quality. The Company 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 the Company's independent loan review
department. Senior management is actively involved in the management of the
process and incentive compensation is impacted by the Company's overall credit
experience.
BANKING AND FINANCIAL SERVICES
The organization provides financial services through the following
groups:
* Personal and Small Business Banking Group --
The Bank's Personal and Small Business Banking Group serves
individuals and small businesses with direct lending, credit
cards, auto leasing, personal trust, brokerage services, and a
wide range of deposit products. The Group's operations are
conducted through the Bank's main office, its 42 branch
offices, two free-standing drive-up facilities and 41 automatic
teller machines. Loans of approximately $367 million and
deposits of approximately $1.41 billion were attributable to
the Group at December 31, 1996. The Bank's Personal Trust
Division managed approximately 1,421 accounts at December 31,
1996, consisting of $493 million in assets. The Personal Trust
Division earned $4.15 million in fee income during 1996.
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Besides traditional branch locations, alternative delivery
systems are in place to enhance customer service. Certificates
of deposit are offered on the Internet and customers also can
use their telephone to check their account balances and
transfer funds 24 hours a day. A centralized "loan by phone"
system provides customers with immediate loan decisions while
they are on the phone and coordinates product delivery through
the local banking offices. The organization's goal is to
continue to improve the match between a customer's individual
needs and the Bank's products and services.
* Commercial Banking Group --
The Bank's Commercial Banking Group provides a wide range of
services to business customers, including loans and leases,
investments, international services, corporate cash management
and employee benefit trust services. Customers can initiate
deposit and loan transactions, check balances and account
clearings, and transfer funds among accounts on a daily basis
using a direct-access PC to communicate with the Bank. The
Group's primary focus is privately-held or closely-controlled
firms, which have annual sales between $2 million and $100
million and are doing business or are located within an 80-mile
radius of South Bend. Loans of approximately $473 million and
deposits of approximately $68 million were attributable to the
Group at December 31, 1996. The Bank's Employee Benefit
Division managed approximately 498 retirement plans at December
31, 1996, consisting of $456 million in assets. The Employee
Benefit Division earned $2.58 million in fee income during
1996.
* Transportation and Equipment Financing Group --
The Bank's Transportation and Equipment Financing Group offers
specialized financing services nationwide. The Group serves a
limited number of high-quality automobile leasing and rental
companies, truck leasing companies and manufacturers of
specialized truck bodies, finances used aircraft nationwide,
and provides lending services to dealers, contractors and other
end users of construction equipment. The Group has employees
located in Georgia, Indiana, Kansas, Michigan, Pennsylvania,
Texas, Washington and Wisconsin. Loans of approximately $552
million, or 37.9% of the Company's consolidated total loans,
were attributable to the Group at December 31, 1996. The Group
also services approximately $165 million of off-balance sheet
loans, primarily as the result of securitizations.
* Mortgage Banking Group --
Trustcorp Mortgage Company, a subsidiary of the Company, is a
mortgage banking company operating on a regional basis. The
principal business activities include origination, purchase,
sale and servicing of mortgage loans for investors. Locations
include three offices in Indiana, one in Columbus, Ohio and
newly opened offices in suburban St. Louis and Chicago. As of
December 31, 1996, Trustcorp Mortgage Company had outstanding
loans of $64 million and serviced a mortgage portfolio of $1.28
billion.
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OWNERSHIP
As of February 14, 1997, the directors and executive officers of the
Company and their immediate families owned approximately 43.5% of the
Company's common stock and, as a result, exercise substantial control over
the Company.
COMPETITION
The activities in which the Company 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 the Company's principal
market. Larger financial institutions competing within the Company's
principal market, but headquartered elsewhere, include KeyBank, NorWest Bank,
Standard Federal Bank and Valley American Bank and Trust Company.
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 their primary service
areas, the Bank also competes with 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 the
Company'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 the Company in
providing some services.
The Company competes against larger financial institutions, which have
the advantage of certain economies of scale not enjoyed by a financial
institution the size of the Company, by relying on a history in the market
dating back to 1863, with the relationships long-term employees have with
their customers and with the capacity for quick local decision-making.
EMPLOYEES
The Company employs approximately 895 persons on a full-time equivalent
basis. The Company provides a wide range of employee benefits and considers
employee relations to be good.
REGULATION AND SUPERVISION
GENERAL. The Company 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 the Company. The operations of the Company may be
affected by legislative changes and by the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of
the effects on its business and
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earnings that fiscal or monetary policies, economic controls or new federal
or state legislation may have in the future.
The Company is a registered bank holding company under 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"). The Company
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).
RECENT AND PENDING LEGISLATION. The enactment of the legislation
described below has significantly affected the banking industry generally and
will have an ongoing effect on the Company and the Bank in the future.
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. FIRREA, among other things, enhanced the
supervisory and enforcement powers for the federal bank regulatory agencies,
required insured financial institutions to guaranty repayment of losses
incurred by the FDIC in connection with the failure of an affiliated
financial institution, required financial institutions to provide their
primary federal regulator with notice (under certain circumstances) of
changes in senior management and broadened authority for bank holding
companies to acquire savings institutions.
Under FIRREA, federal banking regulators have greater flexibility to
bring enforcement actions against insured institutions and institution-
affiliated parties, including cease and desist orders, prohibition orders,
civil money penalties, termination of insurance and the imposition of
operating restrictions and capital plan requirements. These enforcement
actions, in general, may be initiated for violations of laws and regulations
and unsafe or unsound practices. FIRREA granted the FDIC back-up enforcement
authority to recommend enforcement action to an appropriate federal banking
agency and to bring such enforcement action against a financial institution
or an institution-affiliated party if such federal banking agency fails to
follow the FDIC's recommendation. FIRREA also requires, except under certain
circumstances, public disclosure of final enforcement actions by the federal
banking agencies.
The Federal Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
adopted to recapitalize the Bank Insurance Fund ("BIF") and impose certain
supervisory and regulatory reforms on insured depository institutions.
FDICIA, in general, includes provisions, among others, to (i) increase the
FDIC's line of credit with the U.S. Treasury in order to provide the FDIC
with additional funds to cover the losses of federally insured banks,
(ii) reform the deposit insurance system, including the implementation of
risk-based deposit insurance premiums, (iii) establish a format for closer
monitoring of financial institutions to enable prompt corrective action by
banking regulators when a financial institution begins to experience
financial difficulty, (iv) establish 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,
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(v) require the banking regulators to set operational and managerial
standards for all insured depository institutions and their holding
companies, including limits on excessive compensation to executive officers,
directors, employees and principal shareholders, and establish standards for
loans secured by real estate, (vi) adopt certain accounting reforms and
require annual on-site examinations of federally insured institutions,
including the ability to require independent audits of banks and thrifts,
(vii) revise risk-based capital standards to ensure that they (a) take
adequate account of interest-rate changes, concentration of credit risk and
the risks of nontraditional activities, and (b) reflect the actual
performance and expected risk of loss of multi-family mortgages, and
(viii) restrict state-chartered banks from engaging in activities not
permitted for national banks unless they are adequately capitalized and have
FDIC approval. FDICIA also permits the FDIC to make special assessments on
insured depository institutions, in amounts determined by the FDIC to be
necessary to give it adequate assessment income to repay amounts borrowed
from the U.S. Treasury and other sources or for any other purpose the FDIC
deems necessary and grants authority to the FDIC to establish semiannual
assessment rates on BIF and SAIF member banks so as to maintain these funds
at the designated reserve ratios.
FDICIA also contained the Truth in Savings Act, which requires clear
and uniform disclosure of the rates of interest payable on deposit accounts
by depository institutions, and the fees assessable against deposit accounts,
so that consumers can make a meaningful comparison between the competing
claims of financial institutions with regard to deposit accounts and
products.
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 will have the right, commencing in June, 1997 (or
sooner, if the states in question "opt in" prior to June, 1997), to convert
the banks which its owns in different states to branches of a single bank. A
state is permitted to "opt out" of the law which will permit conversion of
separate banks to branches, but is not permitted to "opt out" of the law
allowing bank holding companies from other states to enter the state. A
state may also determine, at its option, to permit interstate branching
through the establishment of de novo branches by out-of-state banks. The
states of Indiana and Michigan have "opted in" early to the interstate
branching provisions of the Interstate Act and have also authorized the
establishment of de novo branches of out-of-state banks. The Bank
established two such branches in Michigan during 1996. The Interstate Act
also establishes limits on acquisitions by large banking organizations,
providing that no acquisition may be undertaken if it would result in the
organization having deposits exceeding either 10% of all bank deposits in the
United States or 30% of the bank deposits in the state in which the
acquisition would occur.
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. Under EGRPRA, qualified bank holding
companies may commence a regulatorily approved non-banking activity without
prior notice to the Federal Reserve; written notice is required within 10
days after commencing the activity. Under EGRPRA, the prior notice period
is reduced to 12 days in the event of any non-banking acquisition or share
purchase, assuming the size of the acquisition does not exceed 10% of
risk-weighted assets of the acquiring bank holding company and the
consideration does not exceed 15% of Tier 1 capital.
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EGRPRA also provides for the recapitalization of the Savings
Association Insurance Fund ("SAIF"), which generally insures the deposits of
thrift institutions, in order to bring it into parity with the BIF. As a
result of this recapitalization, the overall FDIC assessment rate for 1997
for the Bank is 1.29 basis points for each $100 of BIF assessable deposits.
Pending Legislation. Because of concerns relating to competitiveness
and the safety and soundness of the banking industry, Congress is considering
a number of wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Among such
bills are new proposals to merge the BIF and the SAIF insurance funds, to
alter the statutory separation of commercial and investment banking and to
further expand the powers of banks, bank holding companies and competitors of
banks. It cannot be predicted whether or in what form any of these proposals
will be adopted or the extent to which the business of the Company may be
affected thereby.
BANK AND BANK HOLDING COMPANY REGULATION. As noted above, both
the Company and the Bank are subject to extensive regulation and supervision.
Bank Holding Company Act. Under the Bank Holding Company Act of 1956,
as amended (the "BHCA"), the activities of a bank holding company, such as
the Company, are limited to business so closely related to banking, managing
or controlling banks as to be a proper incident thereto. The Company 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, directly or indirectly, ownership or control of any voting
shares of another bank or bank holding company if, after such acquisition, it
would own or control more than 5% of such shares (unless it already owns or
controls the majority of such shares), (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. The Federal Reserve will
not approve any acquisition, merger or consolidation that would have a
substantially anticompetitive result, unless the anticompetitive effects of
the proposed transaction are clearly outweighed by a greater public interest
in meeting the convenience and needs of the community to be served. The
Federal Reserve also considers capital adequacy and other financial and
managerial factors in reviewing acquisitions or mergers.
The BHCA also prohibits a bank holding company, with certain limited
exceptions, (i) from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a
bank or bank holding company, or (ii) from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities 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. The Federal Reserve, in making such determination, considers whether
the performance of such activities by a bank holding company can be expected
to produce benefits to the public such as greater convenience, increased
competition or gains in efficiency in resources, which can be expected to
outweigh the risks of possible adverse effects such as decreased or unfair
competition, conflicts of interest or unsound banking practices.
Insurance of Accounts. The FDIC provides insurance, through the BIF,
to deposit accounts at the Bank to a maximum of $100,000 for each insured
depositor. On January 1, 1996, the FDIC adopted an amendment to its BIF
risk-based assessment schedule which effectively eliminated deposit insurance
assessments for most commercial banks and other depository institutions with
deposits insured by the BIF only. Following enactment of EGRPRA, the overall
assessment rate for 1997 for institutions in the
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lowest risk-based premium category was revised to equal 1.29 cents for each
$100 of BIF-assessable deposits. Deposits insured by the SAIF continue to
be assessed at a higher rate. At this time, the deposit insurance
assessment rate for institutions in the lowest risk-based premium category
is zero, and all of the assessments paid by institutions in this category
are used to service debt issued by the Financing Corporation, a federal
agency established to finance the recapitalization of the former Federal
Savings and Loan Insurance Corporation.
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 Federal Reserve and the FDIC adopted risk-based capital guidelines
for banks and bank holding companies that are designed to make regulatory
capital requirements more sensitive to differences in risk profile among
banks and bank holding companies, to account for off-balance sheet exposure
and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. Under
these guidelines, all bank holding companies and federally regulated banks
must maintain a minimum risk-based total capital ratio equal to 8%, of which
at least one-half must be Tier 1 capital.
The Federal Reserve also has implemented a leverage ratio, which is
Tier 1 capital to total assets, to be used as a supplement to the risk-based
guidelines. The principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank holding company may leverage
its equity capital base. The Federal Reserve requires a minimum leverage
ratio of 3%. For all but the most highly-rated bank holding companies and
for bank holding companies seeking to expand, however, the Federal Reserve
expects that additional capital sufficient to increase the ratio by at least
100 to 200 basis points will be maintained.
Management of the Company believes that the risk-weighting of assets
and the risk-based capital guidelines do not have a material adverse impact
on the Company's operations or on the operations of the Bank.
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 the Company 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
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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 as, and following credit underwriting
procedures that are not less stringent than, 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 $49.3 million or less (subject to adjustment by the
Federal Reserve) and an initial reserve of $1,479,000 plus 10% (subject to
adjustment by the Federal Reserve to a level between 8% and 14%) must be
maintained against that portion of total transaction accounts in excess of
such amount. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements.
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 the Company 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 the Company and the Bank cannot be
predicted.
FORWARD LOOKING STATEMENTS
Statements contained in this Report and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 (Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended). There can be no assurance, in light of
these risks and uncertainties, that such forward-looking statements will in
fact transpire. The following important factors, risks and
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uncertainties, among others, could cause actual results to differ materially
from such forward-looking statements:
* Credit risk: While the Company has had excellent credit quality
in recent years, approximately 62% of its loans at December 31,
1996 were in commercial, financial, agricultural and
transportation and equipment loans. Changes in local economic
conditions could adversely affect credit quality in the
Company's local business loan portfolio, while national
regulatory or economic condition changes could negatively
impact the quality of the transportation and equipment
portfolio.
* Interest rate risk: Although the Company actively manages its
interest rate sensitivity, such management is not an exact
science. Rapid increases or decreases in interest rates could
adversely impact the Company's net interest margin if changes
in its cost of funds do not correspond to the changes in
income yields. Such fluctuations could also negatively impact
the Company's mortgage banking operations, which are very
interest rate sensitive, by increasing the runoff rates in the
servicing portfolio, reducing loan origination activities, or
increasing its funding costs.
* Competition: The Company's activities in both its local and
national niche businesses involve competition with other banks
as well as other financial institutions and enterprises. Also,
the financial service markets have and likely will continue to
experience substantial changes, which could significantly
change the Company's competitive environment in the future.
* Retail expansion: The Company's planned future growth includes
an emphasis on retail expansion, both with the ten new branches
opened in 1996 and those to be opened in 1997 and beyond. This
expansion has and will continue to increase the Company's
operating costs. The Company needs to achieve the revenue
growth anticipated from this expansion in order to maintain its
efficiency and profitability trends in future years.
* Legislative and regulatory environment: The Company operates in
a rapidly changing legislative and regulatory environment. It
cannot be predicted how or to what extent future developments
in these areas will affect the Company. These developments
could negatively impact the Company through increased operating
expenses for compliance with new laws and regulations,
restricted access to new products and markets, or in other
ways.
* General business and economic trends: These factors, including
the impact of inflation levels, influence the Company's results
in numerous ways, including operating expense levels, deposit
and loan activity, and availability of trained individuals
needed for future growth.
The foregoing list should not be construed as exhaustive and the Company
disclaims any obligation to subsequently update or revise any forward-looking
statements after the date of this Report.
11
<PAGE> 12
ITEM 1. BUSINESS (Continued)
<TABLE>
SELECTED STATISTICAL INFORMATION
Distribution of Assets, Liabilities and Shareholders' Equity
Interest Rates and Interest Differential
(Dollars in Thousands)
<CAPTION>
Year ended December 31, 1996 1995 1994
------------------------------- ------------------------------- -----------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------------------------- ------------------------------- -----------------------------------
ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing
deposits $3,101 $154 4.97% $1,062 $30 2.79% $971 $14 1.42%
Investment securities:
Taxable 250,054 15,120 6.05% 244,567 15,184 6.21% 256,404 14,667 5.72%
Tax-exempt <F1> 146,176 11,787 8.06% 129,409 11,285 8.72% 103,872 10,077 9.70%
Net loans <F2> <F3> 1,352,068 124,684 9.22% 1,172,438 111,115 9.48% 1,066,752 91,523 8.58%
Other investments 15,656 841 5.37% 22,227 1,307 5.88% 7,893 399 5.05%
------------------------------- ------------------------------- -----------------------------------
Total Earning Assets 1,767,055 152,586 8.64% 1,569,703 138,921 8.85% 1,435,892 116,680 8.13%
Cash and due from banks 75,378 72,647 74,240
Reserve for loan losses (28,482) (26,081) (23,685)
Other assets 81,263 70,291 60,518
----------- ----------- -----------
Total $1,895,214 $1,686,560 $1,546,965
=========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing
deposits $1,337,345 64,214 4.80% $1,181,219 56,185 4.76% $1,094,197 42,012 3.84%
Short-term borrowings 156,053 7,843 5.03% 135,373 6,938 5.13% 109,944 3,788 3.45%
Long-term debt 19,826 1,372 6.89% 23,302 1,823 7.82% 27,248 1,909 7.01%
------------------------------- ------------------------------- -----------------------------------
Total Interest
Bearing Liabilities 1,513,224 73,429 4.85% 1,339,894 64,946 4.85% 1,231,389 47,709 3.87%
Noninterest
bearing deposits 186,804 173,234 162,233
Other liabilities 33,862 30,765 25,892
Shareholders' equity 161,324 142,667 127,451
----------- ----------- -----------
Total $1,895,214 $1,686,560 $1,546,965
=========== =========== ===========
------- ------- -------
Net Interest Income $79,157 $73,975 $68,971
======= ======= =======
Net Yield on Earning
Assets on a Taxable ------ ------ ------
Equivalent Basis 4.48% 4.71% 4.80%
====== ====== ======
<FN>
<F1> Interest income includes the effects of taxable equivalent adjustments,
using a 40.525% rate. Tax equivalent adjustments were $3,635 in 1996,
$3,635 in 1995 and $3,512 in 1994.
<F2> Loan income includes fees on loans of $3,136 in 1996, $2,739 in 1995
and $3,111 in 1994. Loan income also includes the effects of taxable
equivalent adjustments, using a 40.525% rate. Tax equivalent
adjustments were $131 in 1996, $171 in 1995 and $226 in 1994.
<F3> For purposes of this computation, nonaccruing loans are included in the
daily average loan amounts outstanding.
</TABLE>
12
<PAGE> 13
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:
<TABLE>
<CAPTION>
Increase (Decrease) Due To <F1>
--------------------------------------------
Volume Rate Net
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
1996 compared to 1995
Interest earned on:
Loans $ 16,516 $ (2,947) $ 13,569
Investment securities:
Taxable 391 (455) (64)
Tax-exempt 1,201 (699) 502
Interest-bearing deposits with
other banks 88 36 124
Federal funds sold and other
money market investments (361) (105) (466)
--------- --------- ---------
Total Earning Assets 17,835 (4,170) 13,665
--------- --------- ---------
Interest paid on:
Savings deposits (44) (42) (86)
Other time deposits 8,938 (823) 8,115
Short-term borrowings 1,037 (132) 905
Long-term debt (255) (196) (451)
--------- --------- ---------
Total Interest-Bearing
Liabilities 9,676 (1,193) 8,483
--------- --------- ---------
Net Interest Income $ 8,159 $ (2,977) $ 5,182
========= ========= =========
1995 compared to 1994
Interest earned on:
Loans $ 9,501 $ 10,091 $ 19,592
Investment securities:
Taxable (612) 1,129 517
Tax-exempt 2,051 (843) 1,208
Interest-bearing deposits with
other banks 2 14 16
Federal funds sold and other
money market investments 833 75 908
--------- --------- ---------
Total Earning Assets 11,775 10,466 22,241
--------- --------- ---------
Interest paid on:
Savings deposits (1,015) 381 (634)
Other time deposits 6,556 8,251 14,807
Short-term borrowings 1,013 2,137 3,150
Long-term debt (438) 352 (86)
--------- --------- ---------
Total Interest-Bearing
Liabilities 6,116 11,121 17,237
--------- --------- ---------
Net Interest Income $ 5,659 $ (655) $ 5,004
========= ========= =========
<FN>
<F1> 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.
</TABLE>
13
<PAGE> 14
ITEM 1. BUSINESS (Continued)
INVESTMENT PORTFOLIO
The carrying amounts of investment securities at the dates indicated are
summarized as follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
U.S. Treasury and government agencies and corporations $253,434 $239,658 $223,115
States and political subdivisions 150,044 140,319 108,468
Other 19,618 16,398 18,302
-------- -------- --------
Total $423,096 $396,375 $349,885
======== ======== ========
</TABLE>
The following table shows the maturities of investment securities at December
31, 1996, 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.
The weighted average yields are calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security. The
taxable equivalent adjustment represents the annual amounts of income from
tax-exempt obligations divided by .59475 (which includes the effect of state
income taxes), less the amount of such tax-exempt income.
14
<PAGE> 15
ITEM 1. BUSINESS (Continued)
<TABLE>
<CAPTION>
Maturing
--------------------------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------------- ------------------- ------------------ -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
government agencies
and corporations $62,893 5.72% $105,762 5.80% $15,993 6.23% $68,786 6.14%
States and
political subdivisions 15,095 6.15 53,030 7.55 67,862 8.44 14,057 7.94
Other - - 1,429 7.22 2,987 7.55 15,202 6.35
--------- ----- ---------- ----- --------- ----- --------- -----
$77,988 5.80% $160,221 6.39% $86,842 8.00% $98,045 6.43%
========= ===== ========== ===== ========= ===== ========= =====
</TABLE>
At December 31, 1996, there were $53,643 of securities in the portfolio which
were issued by the state of Indiana, or political subdivisions thereof, whose
aggregate carrying value was 31.22% of shareholders' equity.
LOAN PORTFOLIO
The following table shows the Company's loan distribution at the end of each
of the last five years for December 31:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Domestic Loans:
Loans Held for Sale $102,362 $80,093 $60,759 $27,804 $25,823
Transportation and
equipment 561,042 457,930 358,128 382,483 346,513
Commercial, financial
and agricultural 335,192 314,421 293,171 256,467 238,445
Real estate 365,747 327,935 316,773 288,954 272,328
Installment 91,220 79,036 71,882 64,105 73,307
---------- ---------- ---------- ---------- --------
Total Domestic Loans $1,455,563 $1,259,415 $1,100,713 $1,019,813 $956,416
========== ========== ========== ========== ========
</TABLE>
15
<PAGE> 16
ITEM 1. BUSINESS (Continued)
LOAN PORTFOLIO (Continued)
The following table shows the rate sensitivity of loans (excluding
residential mortgages for 1-4 family residences, installment loans and lease
financing) outstanding as of December 31, 1996. The amounts due after one
year are also classified according to the sensitivity to changes in interest
rates.
<TABLE>
<CAPTION>
Rate Sensitivity
-----------------------------------------------------------------------------
Within After One But After
One Year Within Five Years Five Years Total
-------- ----------------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Transportation and
equipment $312,625 $229,635 $7,614 $549,874
Commercial, financial
and agricultural 229,662 39,797 13,272 282,731
Real estate 66,776 52,125 80,744 199,645
-------- -------- -------- ----------
Total $609,063 $321,557 $101,630 $1,032,250
======== ======== ======== ==========
<CAPTION>
Rate Sensitivity
----------------------------------
Fixed Variable
Rate Rate
---- ----
<S> <C> <C>
Due after one year but within five years $283,644 $37,913
Due after five years 14,374 87,256
-------- --------
Total $298,018 $125,169
======== ========
</TABLE>
The following table summarizes the nonaccrual, past due and restructured loans:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $6,678 $4,893 $3,314 $3,175 $4,024
Accruing loans past
due 90 days or more 557 274 477 494 354
Restructured loans - - 133 667 3,185
------ ------ ------ ------ ------
Total Nonperforming Loans $7,235 $5,167 $3,924 $4,336 $7,563
====== ====== ====== ====== ======
</TABLE>
16
<PAGE> 17
ITEM 1. BUSINESS (Continued)
LOAN PORTFOLIO (Concluded)
Information with respect to nonaccrual and restructured loans at December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1996 1995
------ ------
(In Thousands)
<S> <C> <C>
Nonaccrual loans $6,678 $4,893
Interest income which would have been
recorded under original terms 813 612
Interest income recorded during the period 280 229
</TABLE>
At December 31, 1996, $6,553,000 of the nonaccrual loans are collateralized.
Potential Problem Loans
- -----------------------
At December 31, 1996, management was not aware of any potential problem loans
that would have a material affect on loan delinquency or loan charge-offs.
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, 1996, 16.8% of total business loans were concentrated with
borrowers in truck and automobile leasing companies. Loans to air
transportation and aircraft dealers accounted for 12.0% of all business loans
at December 31, 1996.
17
<PAGE> 18
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:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding
at end of period $1,455,563 $1,259,415 $1,100,713 $1,019,813 $956,416
========== ========== ========== ========== ========
Average amount of net loans
outstanding during period $1,352,068 $1,172,438 $1,066,752 $ 986,958 $894,163
========== ========== ========== ========== ========
Balance of reserve for loan
losses at beginning of
period $ 27,470 $ 23,868 $ 22,350 $ 19,141 $ 16,417
Charge-offs:
Transportation and
equipment 347 36 29 560 1,017
Commercial, financial
and agricultural 2,385 985 1,007 809 783
Real estate 230 597 816 92 565
Installment 324 372 205 560 708
---------- ---------- ---------- ---------- --------
Total charge-offs 3,286 1,990 2,057 2,021 3,073
---------- ---------- ---------- ---------- --------
Recoveries:
Transportation and
equipment 593 2,224 225 699 202
Commercial, financial
and agricultural 383 287 166 359 889
Real estate 359 122 215 362 120
Installment 172 202 214 277 68
---------- ---------- ---------- ---------- --------
Total recoveries 1,507 2,835 820 1,697 1,279
---------- ---------- ---------- ---------- --------
Net charge-offs (recoveries) 1,779 (845) 1,237 324 1,794
Additions charged to
operating expense 4,649 2,757 4,197 3,533 3,724
Recaptured reserve due
to loan securitization (824) - (1,442) - -
Increase resulting from
acquisitions - - 794
---------- ---------- ---------- ---------- --------
Balance at end of period $ 29,516 $ 27,470 $ 23,868 $ 22,350 $ 19,141
========== ========== ========== ========== ========
Ratio of net charge-offs
(recoveries) to average net
loans outstanding 0.13% (0.07%) 0.12% 0.03% 0.20%
</TABLE>
18
<PAGE> 19
The Company'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 possible losses from loans presently outstanding. The
provision made to this reserve is determined by management based on
assessment of the risk factors affecting the loan portfolio, including
general economic conditions, changes in the portfolio mix, past loan loss
experience and the financial condition of the borrower. Management of the
Company 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 1996, after management's assessment of loan quality, the Company made a
charge of $4,649,000 to operations as a provision for loan losses. At
December 31, 1996, the reserve for loan losses was $29,516,000, or 2.03% of
loans outstanding net of unearned discount. Effective January 1, 1995, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118. Under the new standard, a loan is considered impaired, based on current
information and events, if it is probable that the Company 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. The adoption of SFAS No. 114 had no impact on the
1996 provision for loan losses as reported.
As of December 31, 1996, impaired loans totaled $8,130,000, of which
$5,780,000 had corresponding specific reserves for loan losses totaling
$1,520,000. The remaining $2,350,000 of impaired loans had no specific
reserves for loan losses associated with them. The vast majority of the
impaired loans are nonaccrual loans; interest is not recognized on nonaccrual
loans subsequent to the date the loan is placed in nonaccrual status.
Interest on the remainder of the impaired loans is recognized on an accrual
basis. For 1996, the average recorded investment in impaired loans was
$9,410,000 and interest income recognized on impaired loans totaled $464,000.
19
<PAGE> 20
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:
<TABLE>
<CAPTION>
(Dollars in Thousands)
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ -------------------
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
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation and
equipment $ 4,553 38.0% $ 3,608 36.4% $ 2,917 32.5% $ 2,864 37.5% $ 3,032 36.2%
Commercial, financial
and agricultural 3,530 19.5 3,396 25.0 2,565 26.6 3,011 25.1 3,141 24.9
Real estate 1,360 28.5 1,868 32.4 2,060 34.3 2,119 31.1 904 31.2
Installment 1,212 14.0 1,147 6.2 1,166 6.5 920 6.3 917 7.7
Unallocated 18,861 - 17,451 - 15,160 - 13,436 - 11,147 -
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $29,516 100.0% $27,470 100.0% $23,868 100.0% $22,350 100.0% $19,141 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
20
<PAGE> 21
ITEM 1. BUSINESS (Continued)
DEPOSITS
The average daily amounts of deposits and rates paid on such deposits are
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- ---------------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing
demand deposits $ 186,804 - $ 173,234 - $ 162,233 -
Interest bearing demand
deposits 135,328 2.21% 174,059 2.22% 177,232 2.15%
Savings deposits 279,608 2.76 242,504 2.85 277,021 2.75
Other time deposits 922,409 5.80 764,656 5.94 639,944 4.78
---------- ---------- ----------
Total $1,524,149 $1,354,453 $1,256,430
========== ========== ==========
</TABLE>
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, 1996, by time
remaining until maturity is as follows (in thousands):
<TABLE>
<S> <C>
Under 3 months $ 222,292
4 to 6 months 39,885
7 to 12 months 32,424
Over 12 months 41,446
---------
Total $ 336,047
=========
</TABLE>
21
<PAGE> 22
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:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Percentage of net income to:
Average shareholders' equity 14.38% 14.75% 14.49%
Average total assets 1.22 1.25 1.19
Percentage of dividends declared
per common share to net income
per common share 18.21 17.48 17.50
Percentage of average shareholders' equity to
average total assets 8.51 8.46 8.24
</TABLE>
22
<PAGE> 23
ITEM 1. BUSINESS (Concluded)
SHORT-TERM BORROWINGS
The following table shows the distribution of the Company'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, as well as weighted average interest
rates for the last three years.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Federal Funds
Purchased and
Security Other
Repurchase Commercial Short-Term Total
1996 Agreements Paper Borrowings Borrowings
- ----------------------------- ---------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $112,580 $6,109 $106,174 $224,863
Maximum amount outstanding
at any month-end 129,335 7,758 106,174 243,267
Average amount outstanding 94,171 5,082 56,751 156,004
Weighted average interest
rate during the year 5.01% 5.13% 5.05% 5.03%
Weighted average interest rate
for outstanding amounts at
December 31, 1996 5.10% 5.21% 5.99% 5.52%
1995
- -----------------------------
Balance at December 31, 1995 $101,166 $4,515 $ 47,298 $152,979
Maximum amount outstanding
at any month-end 123,393 5,318 52,835 180,616
Average amount outstanding 96,091 4,369 34,913 135,373
Weighted average interest
rate during the year 5.16% 5.61% 4.97% 5.13%
Weighted average interest rate
for outstanding amounts at
December 31, 1995 5.13% 5.54% 6.84% 5.67%
1994
- -----------------------------
Balance at December 31, 1994 $ 76,403 $ 844 $ 23,318 $100,565
Maximum amount outstanding
at any month-end 127,854 2,131 31,149 148,261
Average amount outstanding 94,935 1,100 13,909 109,944
Weighted average interest
rate during the year 3.44% 3.84% 3.46% 3.45%
Weighted average interest rate
for outstanding amounts at
December 31, 1994 4.31% 4.79% 6.12% 4.74%
</TABLE>
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 days.
23
<PAGE> 24
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.
The Company also owns property and buildings on which 27 of the bank
subsidiary's 42 banking offices are located, including the facilities in
Marshall, Elkhart, LaPorte, Porter, and Starke Counties in the state of
Indiana, as well as a parking facility, two buildings housing drive-in
banking plazas and a computer operations center. In 1995, the Company
reacquired its former headquarters building through foreclosure. It is being
refurbished for additional tenants and Company use. The remaining properties
utilized by the banking 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 15 of the
annual shareholders report for the year ended December 31, 1996, is
incorporated herein by reference. There were 1,125 shareholders of 1st Source
Common Stock as of December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Consolidated Financial Data" on
page 7 of the annual shareholders report for the year ended December 31, 1996,
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 6 through 15 of the
annual shareholders report for the year ended December 31, 1996, 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.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent accountants and the consolidated financial
statements of the Company and its subsidiaries are included on pages 16
through 38 in the annual shareholders report for the year ended December 31,
1996, 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 16 of the proxy statement dated March 14, 1997,
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 14, 1997, 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 14, 1997, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the last paragraph on page 5 and in the first two
paragraphs on page 6 of the proxy statement dated March 14, 1997, is
incorporated herein by reference.
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 1996.
(c) Exhibits -- The response to this portion of Item 14 is submitted as
a separate section of this report.
(d) Financial Statement Schedules -- None.
25
<PAGE> 26
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
President and a Director
Date: January 21, 1997
-----------------------------------------
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/ ERNESTINE M. RACLIN,
- ----------------------------------------------
Ernestine M. Raclin, Chairman of the Board and a
Director (Principal Executive
Officer)
Date: January 21, 1997
-----------------------------------------
/s/ CHRISTOPHER J. MURPHY III
- ----------------------------------------------
Christopher J. Murphy III, President and a Director
Date: January 21, 1997
-----------------------------------------
/s/ VINCENT A . TAMBURO
- ----------------------------------------------
Vincent A. Tamburo, Secretary and General Counsel
Date: January 21, 1997
-----------------------------------------
/s/ LARRY E. LENTYCH
- ----------------------------------------------
Larry E. Lentych, Treasurer (Chief Financial
and Accounting Officer)
Date: January 21, 1997
-----------------------------------------
26
<PAGE> 27
/s/ E. WILLIAM BEAUCHAMP, c.s.c.
- ----------------------------------------------
Reverend E. William Beauchamp, Director
Date: January 21, 1997
-----------------------------------------
/s/ PAUL R. BOWLES
- ----------------------------------------------
Paul R. Bowles, Director
Date: January 21, 1997
-----------------------------------------
/s / PHILIP J. FACCENDA
- ----------------------------------------------
Philip J. Faccenda, Director
Date: January 21, 1997
-----------------------------------------
/s/ DANIEL B. FITZPATRICK
- ----------------------------------------------
Daniel B. Fitzpatrick, Director
Date: January 21, 1997
-----------------------------------------
/s/ LAWRENCE E. HILER
- ----------------------------------------------
Lawrence E. Hiler, Director
Date: January 21, 1997
-----------------------------------------
/s/ LEO J. MCKERNAN
- ----------------------------------------------
Leo J. McKernan, Director
Date: January 21, 1997
-----------------------------------------
/s/ WILLIAM P. JOHNSON
- ----------------------------------------------
William P. Johnson, Director
Date: January 21, 1997
-----------------------------------------
27
<PAGE> 28
/s/ REX MARTIN
- ----------------------------------------------
Rex Martin, Director
Date: January 21, 1997
-----------------------------------------
/s/ JO ANN R. MEEHAN
- ----------------------------------------------
Jo Ann R. Meehan, Director
Date: January 21, 1997
-----------------------------------------
/s/ DANE A. MILLER
- ----------------------------------------------
Dane A. Miller, Director
Date: January 21, 1997
-----------------------------------------
/s/ RICHARD J. PFEIL
- ----------------------------------------------
Richard J. Pfeil, Director
Date: January 21, 1997
-----------------------------------------
28
<PAGE> 29
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (1) AND (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1996
1ST SOURCE CORPORATION
SOUTH BEND, INDIANA
F-1
<PAGE> 30
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,
1996, are incorporated by reference in Item 8:
Report of independent accountants
Consolidated statements of financial condition --
December 31, 1996 and 1995
Consolidated statements of income --
Years ended December 31, 1996, 1995 and 1994
Consolidated statements of shareholders' equity --
Years ended December 31, 1996, 1995 and 1994
Consolidated statements of cash flows --
Years ended December 31, 1996, 1995 and 1994
Notes to consolidated financial statements --
December 31, 1996, 1995 and 1994
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
<PAGE> 31
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (3) AND 14(c)
LIST OF EXHIBITS
YEAR ENDED DECEMBER 31, 1996
1ST SOURCE CORPORATION
SOUTH BEND, INDIANA
E-1
<PAGE> 32
FORM 10-K -- Item 14(a) (3) and 14(c)
1st SOURCE CORPORATION AND SUBSIDIARIES
LIST OF EXHIBITS<F*>
3(a) -- Restated Articles of Incorporation of Registrant, filed as exhibit
to Form 10-K, dated December 31, 1996, attached hereto.
3(b) -- By-Laws of Registrant, as amended April 19, 1993, filed as exhibit
to Form 10-K, dated December 31, 1992 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 to the Commission upon request
copies of long-term debt instruments and related agreements.
10(a) -- Employment Agreement of Christopher J. Murphy III, dated January 1,
1992, filed as exhibit to Form 10-K, dated December 31, 1991, and
incorporated herein by reference.
10(b) -- 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(c)(1) -- Form of Company's Employees' Profit Sharing Plan and Trust
Agreement dated January 1, 1989, and 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) -- Amendment to 1st Source Corporation Employees' Profit Sharing
Plan and Trust Agreement, dated September 30, 1996, filed as
exhibit to Form 10-K, dated December 31, 1996, attached hereto.
10(d) -- 1st Source Corporation Employee Stock Purchase Plan dated April
23, 1992, filed as exhibit to Form 10-K, dated December 31, 1992
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, filed as
exhibit to Form 10-K, dated December 31, 1982, and incorporated
herein by reference.
10(g) -- 1st Source Corporation Non-Qualified Stock Option Agreements with
Christopher J. Murphy III, and Wellington D. Jones III, dated March
1, 1988, filed as exhibit to Form 10-K, dated December 31,
1988, and incorporated herein by reference.
10(h) -- 1st Source Corporation Non-Qualified Stock Option Agreement with
Christopher J. Murphy III, dated December 31, 1991, filed as
exhibit to Form 10-K, dated December 31, 1991, and incorporated
herein by reference.
E-2
<PAGE> 33
10(i) -- 1st Source Corporation 1992 Stock Option Plan, dated April 23,
1992, filed as exhibit to Form 10-K, dated December 31, 1992,
and incorporated herein by reference.
10(j) -- 1st Source Corporation Non-Qualified Stock Option Agreement with
Richard Q. Stifel, dated January 1, 1992, filed as exhibit to
Form 10-K, dated December 31, 1992, and incorporated herein by
reference.
11 -- Computation of Earnings Per Share, attached hereto.
13 -- Portions of Annual Report to Security Holders for the year ended
December 31, 1996, attached hereto.
21 -- Subsidiaries of Registrant, attached hereto.
23 -- Consent of Independent Accountants, attached hereto.
27 -- Financial data schedule, attached hereto.
[FN]
- -------------------
<F*> 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-3
<PAGE> 1
EXHIBIT 3(a)
RESTATED ARTICLES OF INCORPORATION
----------------------------------
OF
--
1ST SOURCE CORPORATION
----------------------
ARTICLE I
---------
Name
----
The name of the Corporation is 1st Source Corporation.
ARTICLE II
----------
Purposes
--------
The purpose for which the Corporation is organized is to engage in any
lawful business for which corporations may be incorporated under the Indiana
Business Corporation Law or any successor thereto (the "Act").
ARTICLE III
-----------
Amount of Capital Stock
-----------------------
The total number of shares of capital stock which the Corporation has
authority to issue is 50,000,000, all of which shall be divided into two
classes of shares to be designated "Common Stock" and "Preferred Stock,"
respectively, as follows:
40,000,000 shares of Common Stock, no par value; and,
10,000,000 shares of Preferred Stock
ARTICLE IV
----------
Terms and Voting Rights of Capital Stock
----------------------------------------
(1) Common Stock. Each share of Common Stock with no par value shall
------------
be equal to every other share of Common Stock and the holders of the
outstanding shares of Common Stock shall have the right to notice of
shareholders' meetings and to vote on all matters presented to shareholders
on the basis of one vote for each share of Common Stock held of record.
Subject to the rights of any series of Preferred Stock authorized by
the Board of Directors as provided in Section 2 below, the holders of the
outstanding shares of Common Stock shall be entitled to dividends as and when
declared by the Board of Directors out of funds of the Corporation legally
available for payment of dividends, and said holders shall be entitled to
receive the net assets of the Corporation on dissolution.
<PAGE> 2
EXHIBIT 3(a)
(2) Preferred Stock. Shares of Preferred Stock may be issued from
---------------
time to time in one or more series which may be redeemed, purchased or
otherwise acquired by the Corporation, subject to such limitations contained
in the terms of any series, and may be reissued except as otherwise provided
by law.
The Board of Directors, upon resolution, is authorized to determine the
number of shares of each series of Preferred Stock it elects to issue. The
terms, preferences, limitations, and relative voting and other rights of the
Preferred Stock shall be wholly determined by the Board of Directors of the
Corporation without the necessity of shareholder action.
ARTICLE V
---------
Data Respecting Directors
-------------------------
(1) Number. The number of Directors may be from time to time fixed
------
by the By-Laws of the Corporation at any number not less than three (3) or
more than twenty-five (25). In the absence of a By-Law fixing the number of
Directors, the number shall be twelve (12).
(2) Qualification. Directors need not be shareholders of the
-------------
Corporation. A majority of the Directors at any time shall be citizens of
the United States.
ARTICLE VI
----------
Provisions for Regulation of Business and
-----------------------------------------
Conduct of Affairs of Corporation
---------------------------------
(1) Meetings of Shareholders and Directors may be held outside the
State of Indiana if the By-Laws so provide. The books and records of the
Corporation may be kept (subject to any provision contained in the Act)
outside the State of Indiana at such place or places as may be designated
from time to time by the Board of Directors in the By-Laws of the
Corporation. Election of Directors need not be by ballot unless the By-Laws
of the Corporation shall so provide.
(2) The Board of Directors is empowered, from time to time, subject to
such restrictions as may be contained in the Act, to declare and pay
dividends, in cash or property, upon its outstanding shares.
(3)(A) No contract or transaction between the Corporation and one or
more of its Directors, or between the Corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors, officers, trustees, or general partners are Directors of this
Corporation, or in which any Director of the Corporation has a material
financial interest, shall be void or voidable solely for this reason, or
solely because the Director is present at or participates in the meeting of
the Board or committee thereof which authorizes the contract or transaction,
or solely because his or their votes are counted for such purpose, if
<PAGE> 3
EXHIBIT 3(a)
(i) The material facts as to his interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
committee, and the Board or committee authorizes, approves or ratifies the
contract or transaction by a majority vote without counting the vote of the
interested Director or Directors, provided, that more than one disinterested
Director is required to act under this section;
(ii) The material facts as to his interest and as to contract or
transaction are disclosed or are known to the stockholders entitled to vote,
and the contract or transaction is authorized, approved, or ratified by
majority vote of the Stockholders; or
(iii) The contract or transaction was fair to the Corporation.
(B) Common or interested Directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction
(4) Any notice given to the holder of record of any share or shares of
capital stock of this Corporation, at the latest address of such holder
appearing on the records maintained by the transfer agent or if no transfer
agent has been appointed for the class of stock held by such shareholder then
as shown by the stock record book of this Corporation, and in the manner
prescribed by the By-Laws of this Corporation and the laws under which it is
organized (including all laws mandatory thereof or supplemental thereto)
shall be deemed notice to the actual owner and holder of such share or shares.
(5) Shareholders or Directors may remove one or more directors with or
without cause as provided in the By-Laws from time to time.
(6) If there are nine (9) or more Directors, the By-Laws may provide
for staggering their terms by dividing the total number of Directors into two
(2) or three (3) groups, with each group containing one-half (1/2) or
one-third (l/3) of the total, as near as may be. In that event, the terms of
Directors in the first group expire at the first annual shareholders' meeting
after their election, the terms of the second group expire at the second
annual shareholders' meeting after their election, and the terms of the third
group, if any, expire at the third annual shareholders' meeting after their
election. At each annual shareholders' meeting held thereafter, Directors
shall be chosen for a term of two (2) years or three (3) years, as the case
may be, to succeed those whose terms expire.
ARTICLE VII
-----------
Indemnification
---------------
The Corporation shall, to the fullest extent permitted in and in the
manner provided by Chapter 37 of the Act, indemnify every person who is or
was a Director of the Corporation. The Corporation may advance expenses to
every person who is or was a Director of the Corporation to the fullest
extent permitted in and in the manner provided by Chapter 37 of the Act. The
Corporation shall indemnify and advance expenses to every person
<PAGE> 4
EXHIBIT 3(a)
who is or was an Officer of the Corporation to the same extent as if such person
were a Director of the Corporation. The foregoing indemnification and advance
of expenses for Directors and Officers of the Corporation shall apply when such
persons are serving in their official capacity with the Corporation, when
serving at the Corporation's request while a Director or Officer of the
Corporation as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise, whether for profit or not, and
when serving as a director or officer of any corporation at least eighty
percent (80%) of the voting capital stock of which is owned of record by the
Corporation. All references in this paragraph to Chapter 37 of the Act shall
be deemed to include any amendment or successor thereto. Nothing contained
in this paragraph shall limit or preclude the exercise of any right relating
to indemnification or advance of expenses to any person who is or was a
Director or Officer of the Corporation or the ability of the Corporation to
otherwise indemnify or advance expenses to any such person. The foregoing
provisions shall be binding upon any successor to the Corporation so that
each person who is or was a Director or Officer of the Corporation shall be
in the same position with respect to any resulting, surviving, or succeeding
entity as he or she would have been had the separate legal existence of the
Corporation continued; provided, that unless expressly provided or agreed
otherwise, this sentence shall be applicable only to Directors and Officers
acting in such capacity prior to termination of the separate legal existence
of the Corporation. If any word, clause, or sentence of the foregoing
provisions regarding indemnification or advancement of expenses shall be held
invalid as contrary to law or public policy, it shall be severable and the
provisions remaining shall not be otherwise affected. This paragraph shall
be interpreted and enforced so as to give maximum rights to indemnification
and advance of expenses to each person who is or was a Director or Officer of
the Corporation. If any Court holds any word, clause, or sentence of this
paragraph invalid, the Court is authorized and empowered to rewrite these
provisions to achieve such purpose.
ARTICLE VIII
------------
Business Combinations
---------------------
Voting Rights on Business Combinations. The affirmative vote of the
holders of not less than eighty percent (80%) of the outstanding shares of
the Common Stock of 1st Source shall be required to approve a Business
Combination (as below defined) with a "Related Person" (as below defined),
unless two-thirds (2/3) of the entire Board of Directors of 1st Source as
Continuing Directors (as below defined), has first approved the said business
combination in which case the required vote, if any, shall be as provided by
law.
For the purpose of this Article VIII, "1st Source" as used herein
(except in connection with the terms "Board of Directors" and "Continuing
Board") includes any of its subsidiaries. An "Affirmative Vote" as used
herein means such a vote notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or in any
agreement between 1st Source and any other party including any national
securities exchange. "Affiliate" or "Affiliated" and "Associate" or
"Associated" have the meaning ascribed to such terms under the Rules and
Regulations of the Securities Exchange
<PAGE> 5
EXHIBIT 3(a)
Act of 1934, as amended.
"Business Combination" as set forth herein shall include:
i) Any merger of 1st Source with a Related Person, or
ii) Any sale, lease, exchange or disposition of any kind or nature of
any material part of the assets of 1st Source to or with a Related
Person, or
iii) Any liquidation or dissolution of 1st Source or adoption of any
plan with respect thereof involving a Related Person, or
iv) Any reclassification of securities or recapitalization of 1st
Source or any transaction which has the effect, directly or
indirectly, of increasing the proportionate ownership of the
outstanding shares of any class of equity or convertible
securities of 1st Source which is directly or indirectly
owned by any Related Person.
"Related Person" as used herein is any person, corporation, company,
association, partnership or entity of any kind or nature, whether acting
directly or indirectly alone or as part of any group including any Affiliate
or Associate other than 1st Source or any employee benefit plan of 1st Source
that beneficially owns 5 percent (5%) or more of the voting rights of 1st
Source Corporation. A Related Person does not include any person who as of
the date of the adoption of this Article VIII would otherwise be a Related
Person. A majority of the Continuing Directors shall have the power and duty
to determine, on the basis of information known to such Directors after
reasonable inquiry, whether or not a person is a Related Person and whether a
person is an Affiliate or Associate of a Related Person.
"Continuing Directors" as used herein shall mean any member of the
Board of Directors of 1st Source who is not a Related Person or affiliated or
associated with a Related Person who was a member of the Board prior to the
time that the Related Person made a proposal for a Business Combination or
became a Related Person, and any successor of a Continuing Director who is
not an Affiliate or Associate of a Related Person and is elected to succeed a
Continuing Director by a majority of Continuing Directors then on the Board.
Article VIII shall not be amended, modified or repealed except by the
affirmative vote of the holders of not less than eighty percent (80%) of the
outstanding shares of Common Stock of 1st Source Corporation, at a lawfully
called shareholders' meeting for that purpose, on a proposal adopted by the
vote of not less than two-thirds (2/3) of the Continuing Directors of 1st
Source.
<PAGE> 1
EXHIBIT 10(c)(2)
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
"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 Employer desires to amend the Plan.
NOW, THEREFORE, the Employer hereby amends the Plan effective as of
January 1, 1996, as follows:
1. Article XIV is amended to include the following Section 14.08.
14.08 QDRO - ALTERNATE PAYEE: Notwithstanding any provisions of this
Plan to the contrary, if the Plan Administrator determines that an
Order is a Qualified Domestic Relations Order (QDRO), the Plan
Administrator shall comply with the QDRO and make immediate
payment of all amounts due to the Alternate Payee(s) consistent
with the terms of the QDRO, even if the Employee continues to work
for the Employer and the "earliest retirement date" for purposes
of this Plan for the limited purpose of making immediate
distributions to an Alternate Payee under a QDRO shall be the date
the QDRO is determined to be a QDRO by the Plan Administrator.
2. Except as hereby amended, the provisions of the Plan are hereby
reaffirmed in its entirety. This amendment shall be implemented by inserting
the corrected page 61 as attached hereto into the Plan document without the
necessity of re-executing the Plan.
<PAGE> 2
EXHIBIT 10(c)(2)
IN WITNESS WHEREOF, the parties hereto affix their signatures on the
30th day of September, 1996, effective as of the 1st day of January, 1996.
1ST SOURCE CORPORATION - "Sponsoring Employer"
By: /s/ Larry E. Lentych
--------------------------------------
Title: CFO
--------------------------------------
1ST SOURCE BANK - "Trustee"
By: /s/ Patrick C. Doran
--------------------------------------
Title: Vice President
--------------------------------------
1ST SOURCE BANK - "Participating Employer"
By: /s/ Larry E. Lentych
--------------------------------------
Title: CFO
--------------------------------------
1ST SOURCE LEASING, INC. - "Participating Employer"
By: /s/ Larry E. Lentych
--------------------------------------
Title: Treasurer
--------------------------------------
1ST SOURCE INSURANCE - "Participating Employer"
By: /s/ Larry E. Lentych
--------------------------------------
Title: Treasurer
--------------------------------------
1ST SOURCE CAPITAL CORPORATION - "Participating Employer"
By: /s/ Larry E. Lentych
--------------------------------------
Title: Treasurer
--------------------------------------
<PAGE> 3
EXHIBIT 10(c)(2)
ARTICLE XIV
ENTIRE AGREEMENT
14.01 RESTRICTION OF RIGHTS AGAINST EMPLOYER OR TRUSTEE: No
Employee of the Employer nor anyone else shall have any rights
whatsoever against the Employer or the Trustee as a result of this
Agreement except those expressly granted to them hereunder.
Nothing herein shall be construed to give any Participant the
right to remain an Employee of the Employer.
14.02 GENDER AND NUMBER: For purposes of this Agreement, the masculine
shall be read for the feminine and the singular shall be read for
the plural, whenever the person or context shall plainly so
require.
14.03 EXECUTION IN MULTIPLE COUNTERPARTS: This Agreement may be
executed and/or confirmed in any number of counterparts, each of
which shall be deemed an original and shall be construed and
enforced according to the laws of the state in which the Plan is
executed.
14.04 CONTINUITY OF AGREEMENT: Subject to the provisions herein
contained with respect to earlier termination, the Trust created
hereunder shall continue in existence for the longest period
permitted by law.
14.05 SEGREGATION OF PROVISIONS: In case any provisions of this
Agreement shall be held illegal or invalid for any reason, said
illegal or invalid provision shall not affect the remaining parts
of this agreement but this agreement shall be construed and
enforced as if said illegal or invalid provisions had never been
inserted therein.
14.06 PAYMENT OF BENEFITS: Each Participant shall look solely to the
assets of the Plan for the payment of any benefits to which such
Participant is entitled unless otherwise provided by law.
14.07 CODE SECTIONS 401(k), 401(m) AND 415: The provisions of Code
Sections 401(k), 401(m) and 415 shall be effective for plan years
beginning after December 31, 1986.
14.08 QDRO - ALTERNATE PAYEE: Notwithstanding any provisions of this
Plan to the contrary, if the Plan Administrator determines that an
Order is a Qualified Domestic Relations Order (QDRO), the Plan
Administrator shall comply with the QDRO and make immediate
payment of all amounts due to the Alternate Payee(s) consistent
with the terms of the QDRO, even if the Employee continues to work
for the Employer and the "earliest retirement date" for purposes
of this Plan for the limited purpose of making immediate
distributions to an Alternate Payee under a QDRO shall be the date
the QDRO is determined to be a QDRO by the Plan Administrator.
<PAGE> 1
EXHIBIT 11
<TABLE>
1ST SOURCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Year Ended December 31
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Income $23,203,372 $21,041,832 $18,464,689
----------- ----------- -----------
Average shares outstanding <F1> 15,997,519 16,033,579 15,975,735
----------- ----------- -----------
Net Income (Loss) per share: $1.45 $1.31 $1.16
=========== =========== ===========
<FN>
<F1> The computation of average shares outstanding gives retroactive
recognition to a five for four stock split declared January 21,1997; a 5%
stock dividend declared January 22, 1996; a 3:2 stock split declared
July 18, 1995; and a 5% stock dividend declared January 23, 1995.
</TABLE>
E-4
<PAGE> 1
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 $2.08 billion in total assets, $1.63 billion in total deposits
and $171.8 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 96% of the total consolidated assets of
1st Source. 1st Source Bank has 42 banking centers in 10 counties and is one
of the largest independent banks in both assets and deposits headquartered in
its principal market area of Northern Indiana and Southwestern Michigan.
The bank offers a broad range of commercial banking, personal banking
and trust services. In addition, 1st Source Corporation 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. These services are marketed
nationwide.
1st Source Bank opened ten new branches in 1996, including two in the
State of Michigan. This is the largest one-year physical growth in the
company's history and increases the number of branches by 30%. Additionally,
offices for Trustcorp Mortgage were opened near Chicago and St. Louis. Plans
are for continued expansion in 1997.
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.
1st Source cautions that any forward looking statements contained in
this report, or by any report incorporating reference to 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.
Average Loans (In Millions)
[BAR GRAPH]
92 93 94 95 96
(894) (987) (1,067) (1,172) (1,352)
Average Deposits (In Millions)
[BAR GRAPH]
92 93 94 95 96
(1,091) (1,169) (1,256) (1,354) (1,524)
Average Assets (In Millions)
[BAR GRAPH]
92 93 94 95 96
(1,330) (1,440) (1,547) (1,687) (1,895)
Average Shareholders' Equity (In Millions)
[BAR GRAPH]
92 93 94 95 96
(101) (115) (127) (143) (161)
6
<PAGE> 2
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)
<CAPTION>
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 148,820 $ 135,115 $ 112,942 $ 104,104 $ 106,319
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense 73,429 64,946 47,709 44,578 50,227
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 75,391 70,169 65,233 59,526 56,092
- -------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 4,649 2,757 4,197 3,533 3,724
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 70,742 67,412 61,036 55,993 52,368
- -------------------------------------------------------------------------------------------------------------------------------
Other income 25,479 19,492 14,874 14,301 12,216
- -------------------------------------------------------------------------------------------------------------------------------
Other expense 60,622 54,861 49,577 46,428 43,674
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 35,599 32,043 26,333 23,866 20,910
- -------------------------------------------------------------------------------------------------------------------------------
Income taxes 12,396 11,001 7,868 7,144 6,296
- -------------------------------------------------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change 23,203 21,042 18,465 16,722 14,614
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of
accounting change<F1> -- -- -- -- (696)
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 23,203 $ 21,042 $ 18,465 $ 16,722 $ 13,918
===============================================================================================================================
===============================================================================================================================
Average assets $1,895,214 $1,686,560 $1,546,965 $1,440,018 $1,329,980
- -------------------------------------------------------------------------------------------------------------------------------
Average long-term debt 19,876 23,302 27,248 20,865 14,188
- -------------------------------------------------------------------------------------------------------------------------------
Average equity 161,324 142,667 127,451 115,186 101,143
- -------------------------------------------------------------------------------------------------------------------------------
Net income per
common share<F2> 1.45 1.31 1.16 1.05 .88
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends per
common share<F2> .264 .229 .203 .175 .148
- -------------------------------------------------------------------------------------------------------------------------------
Return on average equity 14.38% 14.75% 14.49% 14.52% 13.76%
- -------------------------------------------------------------------------------------------------------------------------------
Return on average
total assets 1.22% 1.25% 1.19% 1.16% 1.05%
===============================================================================================================================
<FN>
<F1> Amount represents an after-tax charge for the cumulative effect of a
change in the method of accounting for employee postretirement
benefits as required by SFAS No. 106. Without the charge, net income
for 1992 would have been $14.6 million, or $0.93 per share.
<F2> The computation of per share data gives retroactive recognition to a
five-for-four stock split declared January 21, 1997; a 5% stock
dividend declared January 22, 1996; a three-for-two stock split
declared July 18, 1995; a 5% stock dividend declared January 23, 1995;
a 5% stock dividend declared January 24, 1994; and a three-for-two
stock split declared January 25, 1993.
</TABLE>
7
<PAGE> 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Continued
- -------------------------------------------------------------------------------
Results of Operations
Net income in 1996 was $23.2 million, up from $21.0 million in 1995 and
$18.5 million in 1994. Net income per share was $1.45 in 1996, $1.31 in 1995
and $1.16 in 1994 after giving retroactive recognition to stock splits and
stock dividends.
Return on average total assets was 1.22% in 1996, compared to 1.25% in
1995 and 1.19% in 1994. Return on average equity was 14.38% in 1996 versus
14.75% in 1995 and 14.49% in 1994.
Net income in 1996 was favorably affected by a strong increase in other
income and reduced FDIC insurance premiums, partially offset by a higher
provision for loan losses due to increased loan outstandings. In addition,
expense increases occurred in salaries, occupancy, supplies and
communication, marketing and leased equipment depreciation. Most of these
expense increases, except leased equipment depreciation, were directly or
indirectly the result of our branch expansion program.
Dividends declared on common stock in 1996 amounted to $.26 per share,
compared to $.23 in 1995 and $.20 in 1994. 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,
1996 and 1995 are summarized below.
<TABLE>
Quarterly Results of Operations
(Dollars in thousands, except per share amounts)
<CAPTION>
Three Months Ended
------------------
March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
- --------------------------------------------------------------------------------------------------------------
Interest income $35,231 $36,881 $38,041 $38,667
- --------------------------------------------------------------------------------------------------------------
Net interest income 17,836 18,788 19,260 19,507
- --------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,209 1,193 1,431 816
- --------------------------------------------------------------------------------------------------------------
Investment securities and other
investment gains 38 89 -- 104
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 8,205 8,853 9,281 9,260
- --------------------------------------------------------------------------------------------------------------
Net income 5,366 5,781 6,023 6,033
- --------------------------------------------------------------------------------------------------------------
Net income per common share<F1> .34 .36 .37 .38
==============================================================================================================
1995
Interest income $31,362 $33,860 $34,771 $35,122
- --------------------------------------------------------------------------------------------------------------
Net interest income 17,054 17,569 17,763 17,783
- --------------------------------------------------------------------------------------------------------------
Provision for loan losses 960 181 1,059 557
- --------------------------------------------------------------------------------------------------------------
Investment securities and other
investment gains (losses) (153) 8 (15) 330
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 7,386 7,653 8,362 8,642
- --------------------------------------------------------------------------------------------------------------
Net income 4,854 5,112 5,433 5,643
- --------------------------------------------------------------------------------------------------------------
Net income per common share<F1> .30 .32 .34 .35
==============================================================================================================
<FN>
<F1> The computation of per share data gives retroactive recognition to a
five-for-four stock split declared January 21, 1997; a 5% stock
dividend declared January 22, 1996, and a three-for-two stock split
declared July 18, 1995.
</TABLE>
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.
Source of Funds
Core Deposits -- 1st Source's major source of investable funds is
provided by stable core deposits consisting of all interest bearing and
noninterest bearing deposits, excluding certificates of deposit of $100,000 and
over. In 1996, average core deposits equaled 68.32% of average total assets,
compared to 71.59% in 1995 and 73.00% in 1994. The effective cost rate of core
deposits in 1996 was 3.98%, compared to 3.91% in 1995 and 3.22% in 1994.
Average demand deposits (noninterest bearing core deposits) increased
7.83% in 1996, compared to an increase of 6.78% in 1995. They represented
14.43% of total core deposits in 1996 compared to 14.35% in 1995 and 14.37%
in 1994.
8
<PAGE> 4
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Source of Funds -- Concluded
Purchased Funds -- 1st Source's purchased funds are used to supplement
core deposits and include certificates of deposit of $100,000 and over,
federal funds, securities sold under agreements to repurchase, commercial
paper and other short-term borrowings. Purchased funds are raised primarily
in our local market from customers seeking short-term investments and are
used to balance the bank's interest rate sensitivity. During 1996,
1st Source's reliance on purchased funds increased to 20.33% of average total
assets from 16.74% in 1995.
Loan Securitization -- During 1996, 1st Source securitized $58 million
of aircraft loans.
Shareholders' Equity -- Management continues to emphasize profitable
asset growth and retention of equity in the business. Average shareholders'
equity increased to 8.51% of average total assets compared to 8.46% in 1995.
Shareholders' equity was 8.26% of total assets at year-end 1996, compared to
8.48% at year-end 1995.
Investment of Funds
Investment Securities -- Investment securities increased 6.74% in 1996,
following a 13.29% increase in 1995. Investments in municipal securities
increased and the market value of the available-for-sale securities increased
due to the general decline in interest rates (see Note D of Notes to
Consolidated Financial Statements).
Loans and Leases -- Average loans, net of unearned discount, increased
15.32% in 1996, following a 9.91% increase in 1995. Loans, net of unearned
discount, at December 31, 1996, were $1.46 billion and were 69.99% of total
assets, compared to $1.26 billion or 70.00% of total assets at December 31,
1995.
Transportation and equipment loans at year-end 1996 increased 22.52%
from year-end 1995. The higher outstandings reflect considerable growth in
construction equipment, auto rental franchises and truck and automobile
leasing company financings. Aircraft financing increased 10.74% over 1995,
despite the $58 million securitization.
Excluding the purchase of $21.5 million in commercial paper, commercial
loan growth was flat for 1996.
The 11.53% growth in real estate loans is attributed, primarily, to a
23.76% increase in commercial real estate lending.
The 15.42% growth in installment loans reflects our increased direct
consumer lending as the result of greater marketing efforts coupled with the
new retail banking centers.
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 interest rate
sensitivity management is to stabilize net interest income during periods of
changing interest rates. The purpose of liquidity management is to match the
sources and uses of funds to anticipated customers' deposits, withdrawals and
borrowing requirements and to provide for the cash flow needs of 1st Source.
1st Source's principal source of liquidity is its investment portfolio.
At December 31, 1996, securities maturing within one year amounted to
$78.0 million. This represents 18.43% of the investment portfolio, compared
to 10.42% at year-end 1995. Other potential sources of funds are loan
repayments and securitizations. The liquidity of 1st Source is also enhanced
by a significant concentration of core deposits and locally purchased $100,000
and over certificates of deposit which provide a relatively stable funding
base.
Interest rate sensitivity analysis measures the responsiveness of
net interest income to changes in the level of market interest rates. The
Asset/Liability Management Committee of 1st Source monitors and manages the
relationship of earning assets to interest bearing liabilities and interest
rate forecasts. At December 31, 1996, the balance sheet was rate sensitive by
$119.0 million more liabilities than assets scheduled to reprice within one
year or 89%.
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 7.01% in 1996, following a 7.26% increase in 1995.
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 4.48% in 1996 compared to
4.71% in 1995 and 4.80% in 1994.
The yield on earning assets in 1996 was 8.64%, compared to 8.85% in 1995
and 8.13% in 1994. Average earning assets in 1996 increased 12.57%, following
a 9.32% increase in 1995. The effective rate on interest bearing liabilities
was 4.85% for both 1996 and 1995, and 3.87% in 1994.
Other Income -- Supplementing the growth in net interest income was an
increase in other income of 30.72% over 1995. The factors influencing the
growth were the recognition of originated mortgage servicing rights in
accordance with SFAS No. 122, income derived from the aircraft loan
securitizations and revenues generated from operating leases. Other income in
1995 increased 31.05% over 1994 due primarily to a full year of operating
results of Trustcorp Mortgage Company compared to only the fourth quarter in
1994. In addition,
9
<PAGE> 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Continued
- -------------------------------------------------------------------------------
<TABLE>
Maturities of Investment Securities at December 31, 1996
(Dollars in thousands)
<CAPTION>
U.S. Treasury States and Political Other
and Agencies Subdivisions Securities Total
================================================================================================================================
Amount Yield Amount Yield Amount Yield Amount Yield
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 - 1 Year $ 62,893 5.72% $ 15,095 6.15% $ -- --% $ 77,988 5.80%
- --------------------------------------------------------------------------------------------------------------------------------
1 - 5 Years 105,762 5.80 53,030 7.55 1,429 7.22 160,221 6.39
- --------------------------------------------------------------------------------------------------------------------------------
5 - 10 Years 15,993 6.23 67,862 8.44 2,987 7.55 86,842 8.00
- --------------------------------------------------------------------------------------------------------------------------------
Over 10 Years 68,786 6.14 14,057 7.94 15,202 6.35 98,045 6.43
- --------------------------------------------------------------------------------------------------------------------------------
Total $253,434 5.90% $150,044 7.85% $19,618 6.57% $423,096 6.62%
================================================================================================================================
================================================================================================================================
</TABLE>
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.
Composition of Average Assets (In Millions)
[BAR GRAPH]
1,330.0 1,440.0 1,547.0 1,686.6 1,895.2
92 93 94 95 96
Composition of Average Liabilities
and Shareholders' Equity (In Millions)
[BAR GRAPH]
1,330.0 1,440.0 1,547.0 1,686.6 1,895.2
92 93 94 95 96
1st Source experienced growth in trust fees, service charges on deposit
accounts, securitization income and rental income from operating leases.
Trust fees in 1996 were $6.73 million, compared to $6.64 million in 1995
and $6.13 million in 1994. Trust fees increased 1.40% in 1996, following an
8.39% increase in 1995.
Service charges on deposit accounts decreased by 2.13% resulting
in $4.83 million of income for 1996. The $4.93 million recorded in 1995 was
an increase of 5.99% over the $4.66 million of service charges on deposit
accounts generated in 1994.
1st Source recognized income from aircraft loan servicing of $1.10
million in 1996, compared to $628,000 in 1995. The increase resulted from
$118 million of
10
<PAGE> 6
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
Rate Sensitivity Analysis at December 31, 1996
(Dollars in thousands)
<CAPTION>
Total
0 - 3 3 - 6 6 - 12 Within Beyond
Months Months Months 1 Year 1 Year Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Net loans $ 576,471 $ 95,337 $142,791 $ 814,599 $640,964 $1,455,563
- -----------------------------------------------------------------------------------------------------------------------
Investment securities 52,903 31,810 61,161 145,874 277,222 423,096
- -----------------------------------------------------------------------------------------------------------------------
Interest bearing deposits
with other banks 600 - - 600 - 600
=======================================================================================================================
Total Earning Assets $ 629,974 $127,147 $203,952 $ 961,073 $918,186 $1,879,259
=======================================================================================================================
=======================================================================================================================
Interest Bearing Liabilities:
Interest bearing deposits $ 568,039 $149,125 $196,360 $ 913,524 $513,174 $1,426,698
- -----------------------------------------------------------------------------------------------------------------------
Short-term borrowings 156,306 1,850 190 158,346 66,517 224,863
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt 7,933 - 270 8,203 10,393 18,596
=======================================================================================================================
Total Interest Bearing
Liabilities $ 732,278 $150,975 $196,820 $1,080,073 $590,084 $1,670,157
=======================================================================================================================
=======================================================================================================================
Rate Sensitivity Gap $(102,304) $(23,828) $ 7,132 $ (119,000) $328,102 $ 209,102
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
securitized loans at the end of 1996, compared to $60 million at the end of
1995. Revenues generated from operating leases increased to $2.74 million in
1996, nearly a fivefold increase over 1995. The $574,000 recorded in 1995 was an
increase of 24.78% over 1994.
As a result of adopting SFAS No. 122 during 1996 (see Note A of Notes to
Consolidated Financial Statements), 1st Source recognized additional income
of $1.4 million, net of certain adjustments, including amortization. Gains of
$863,000 were recognized on the sale of mortgage loans and servicing in 1996
compared to gains of $783,000 in 1995. In addition, fees for servicing
mortgages grew from $1.38 million in 1995 to $1.63 million in 1996. As of
year end 1996, Trustcorp Mortgage Company's mortgage servicing portfolio
aggregates $1.28 billion, as compared to $1.19 billion one year ago.
Other Expense -- During 1996, the acquisition and implementation of
improved technologies and the opening of ten new branches increased our
operating expenses. Cost control across all business units and better
utilization of resources continues to be a major focus at 1st Source. Other
expense increased 10.50% during 1996. This compares to an increase of 10.66%
in 1995.
The increase in other expense during 1995 is primarily due to the
full-year inclusion of Trustcorp Mortgage Company, compared to only the fourth
quarter in 1994. Excluding the effect of Trustcorp Mortgage Company on other
expense for 1995 and 1994, total other expense increased only 4.30% in 1995.
Salaries and employee benefits comprised approximately 59% of total other
expense in 1996 and 1995. Salaries and employee benefits increased 10.72% in
1996, following a 14.89% increase in 1995. Salaries and wages increased
12.67% in 1996 and 12.10% in 1995. Excluding the effect of Trustcorp Mortgage
Company, salaries and wages increased only 4.22% during 1995. The number of
full-time equivalent employees stood at 895, 811 and 805 at the end of 1996,
1995 and 1994, respectively. Employee benefits increased 4.08% in 1996,
following a 25.50% increase in 1995. The reduced increase in employee benefits
had primarily two causes, in addition to the impact of Trustcorp Mortgage
Company. Additional provisions were made to fund our stock incentive reserves
during 1995 due to the significant 40% increase in the market price of
1st Source common stock during that year. Also, group insurance expense
increased 11.62% in 1996, following a 24.50% increase in 1995.
Occupancy expense in 1996 increased 24.73% from 1995, following an 8.41%
increase in 1995. The greater increase in occupancy expenses in 1996 is
attributed to reduced rental income and the branch expansion. Excluding
Trustcorp Mortgage Company, occupancy expenses increased only 1.02% during
1995.
Furniture and equipment expense increased in 1996 by 14.84%, following a
7.62% increase in 1995. Increases in 1996 occurred in depreciation, repair
and outside computer processing expenses. In addition, equipment and
furniture expenses relating, primarily, to the branch expansion contributed
to the increase.
Insurance expense fell dramatically for 1996 as the FDIC continued to
reduce the premium assessment to zero per $100 of assessable deposits. During
70092 the premium assessment was reduced to 4 from 23 per $100 of
assessable deposits. These actions resulted in a decrease in insurance
expense of 76.25% for 1996, following a decrease of 36.48% in 1995.
Business development and marketing expense increased 10.65% in
1996, following a decline of 22.94% in 1995.
11
<PAGE> 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Continued
- -------------------------------------------------------------------------------
<TABLE>
Selected Statistical Information
Distribution of Assets, Liabilities and Shareholders' Equity
Interest Rates and Interest Differential
(Dollars in thousands)
<CAPTION>
Year ended December 31, 1996
- --------------------------------------------------------------------------------------------------------------
Interest
Average Income/ Yield/
ASSETS Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest bearing deposits $ 3,101 $ 154 4.97%
- --------------------------------------------------------------------------------------------------------------
Investment securities:
Taxable 250,054 15,120 6.05
- --------------------------------------------------------------------------------------------------------------
Tax exempt<F1> 146,176 11,787 8.06
- --------------------------------------------------------------------------------------------------------------
Net loans<F2> & <F3> 1,352,068 124,684 9.22
- --------------------------------------------------------------------------------------------------------------
Other investments 15,656 841 5.37
- --------------------------------------------------------------------------------------------------------------
Total earning assets 1,767,055 152,586 8.64
==============================================================================================================
Cash and due from banks 75,378
- --------------------------------------------------------------------------------------------------------------
Reserve for loan losses (28,482)
- --------------------------------------------------------------------------------------------------------------
Other assets 81,263
- --------------------------------------------------------------------------------------------------------------
Total $1,895,214
==============================================================================================================
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits $1,337,345 64,214 4.80
- --------------------------------------------------------------------------------------------------------------
Short-term borrowings 156,003 7,843 5.03
- --------------------------------------------------------------------------------------------------------------
Long-term debt 19,876 1,372 6.89
- --------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,513,224 73,429 4.85
==============================================================================================================
Noninterest bearing deposits 186,804
- --------------------------------------------------------------------------------------------------------------
Other liabilities 33,862
- --------------------------------------------------------------------------------------------------------------
Shareholders' equity 161,324
- --------------------------------------------------------------------------------------------------------------
Total $1,895,214
==============================================================================================================
==============================================================================================================
Net interest income $ 79,157
==============================================================================================================
Net yield on earning assets
on a taxable equivalent basis 4.48%
==============================================================================================================
<FN>
<F1> Interest income includes the effects of taxable equivalent adjustments,
using a 40.525% rate. Tax equivalent adjustments were $3,635 in
1996, $3,635 in 1995 and $3,512 in 1994.
<F2> Loan income includes fees on loans of $3,136 in 1996, $2,739 in 1995
and $3,111 in 1994. Loan income also includes the effects of taxable
equivalent adjustments, using a 40.525% rate. Tax equivalent adjustments were
$131 in 1996, $171 in 1995 and $226 in 1994.
<F3> For purposes of this computation, nonaccruing loans are included in
the daily average loan balance outstanding.
</TABLE>
12
<PAGE> 8
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 1,062 $ 30 2.79% $ 971 $ 14 1.42%
- --------------------------------------------------------------------------------------------------------------------
244,567 15,184 6.21 256,404 14,667 5.72
- --------------------------------------------------------------------------------------------------------------------
129,409 11,285 8.72 103,872 10,077 9.70
- --------------------------------------------------------------------------------------------------------------------
1,172,438 111,115 9.48 1,066,752 91,523 8.58
- --------------------------------------------------------------------------------------------------------------------
22,227 1,307 5.88 7,893 399 5.05
- --------------------------------------------------------------------------------------------------------------------
1,569,703 138,921 8.85 1,435,892 116,680 8.13
====================================================================================================================
72,647 74,240
- --------------------------------------------------------------------------------------------------------------------
(26,081) (23,685)
- --------------------------------------------------------------------------------------------------------------------
70,291 60,518
- --------------------------------------------------------------------------------------------------------------------
$1,686,560 $1,546,965
====================================================================================================================
====================================================================================================================
$1,181,219 56,185 4.76 $1,094,197 42,012 3.84
- --------------------------------------------------------------------------------------------------------------------
135,373 6,938 5.13 109,944 3,788 3.45
- --------------------------------------------------------------------------------------------------------------------
23,302 1,823 7.82 27,248 1,909 7.01
- --------------------------------------------------------------------------------------------------------------------
1,339,894 64,946 4.85 1,231,389 47,709 3.87
====================================================================================================================
173,234 162,233
- --------------------------------------------------------------------------------------------------------------------
30,765 25,892
- --------------------------------------------------------------------------------------------------------------------
142,667 127,451
- --------------------------------------------------------------------------------------------------------------------
$1,686,560 $1,546,965
====================================================================================================================
====================================================================================================================
$ 73,975 $ 68,971
====================================================================================================================
4.71% 4.80%
====================================================================================================================
</TABLE>
13
<PAGE> 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Continued
- -------------------------------------------------------------------------------
The decline in 1995 was the result of appreciated stock valued at $2.3
million, with a cost basis of $1 million, being donated to the 1st Source
Foundation in 1994. Current and future earnings have and will be enhanced
since the donation prefunded several years of future Foundation
contributions.
An increase of 20.81% occurred in other expenses during 1996, compared
to a 33.57% increase in 1995. During 1996, 1st Source experienced increases
in depreciation on equipment leased to customers under operating leases and
communications expense. In 1995, increases were recorded in other real estate
expenses, professional fees and communications expense. In addition, costs of
$423,000 were expensed, in 1995, relating to the refinancing of holding
company debt (see Note G of Notes to Consolidated Financial Statements). This
action has and will benefit future earnings through lower interest expense.
Finally, other expense increased in 1995 due to the full-year inclusion
of Trustcorp Mortgage Company's other expenses, including the full-year
amortization of goodwill relating to the Trustcorp acquisition.
Income Taxes -- Federal income taxes were $9.13 million in 1996, or
28.24% of income after state taxes, compared to $8.07 million or 27.72% in
1995 and $5.44 million or 22.76% in 1994. The lower percentage of federal
income taxes in 1994 was the result of less taxable income and the
contribution of appreciated stock which resulted in favorable tax treatment
for that year. State income taxes were $3.27 million in 1996, compared to
$2.93 million in 1995 and $2.43 million in 1994.
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 reserve for loan losses is maintained to cover losses that may be
incurred in the normal course of lending. The provision made to the reserve
is determined by management based on the risk factors affecting the loan
portfolio, including general economic conditions, changes to the portfolio
mix, and past loan loss experience.
The provision for loan losses for 1996 was $4.65 million, compared to
$2.76 million in 1995 and $4.20 million in 1994. Net charge-offs of
$1.78 million were recorded in 1996, compared to net recoveries of $845,000
in 1995 and net charge-offs of $1.24 million in 1994.
The reserve for loan losses at December 31, 1996, totaled $29.52 million
and was 2.03% of loans, compared to $27.47 million or 2.18% of loans at
December 31, 1995, and $23.87 million or 2.17% of loans at December 31, 1994.
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, 1996.
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. When a loan is placed on nonaccrual status,
any current year accrued interest not collected is reversed and prior year
accruals are charged to the reserve for loan losses. Nonperforming assets
amounted to $7.77 million at December 31, 1996, compared to $6.58 million at
December 31, 1995 and $4.70 million at December 31, 1994.
<TABLE>
Nonperforming Assets at December 31
(Dollars in thousands)
<CAPTION>
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans past due over 90 days $ 557 $ 274 $ 477 $ 494 $ 354
- -------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans 6,678 4,893 3,314 3,175 4,024
- -------------------------------------------------------------------------------------------------------------------------------
Restructured loans - - 133 667 3,185
===============================================================================================================================
Total Nonperforming Loans 7,235 5,167 3,924 4,336 7,563
- -------------------------------------------------------------------------------------------------------------------------------
Other real estate 445 1,359 763 794 950
- -------------------------------------------------------------------------------------------------------------------------------
Other assets 93 58 13 158 1,079
===============================================================================================================================
Total Nonperforming Assets $7,773 $6,584 $4,700 $5,288 $9,592
===============================================================================================================================
===============================================================================================================================
Nonperforming assets to loans,
net of unearned discount .53% .52% .43% .52% 1.00%
===============================================================================================================================
</TABLE>
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, 1996, there were 1,125 holders of record of 1st Source common
stock.
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:
14
<PAGE> 10
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 Sales Price Cash 1995 Sales Price Cash
---------------- Dividends ---------------- Dividends
Common Stock Prices High Low Paid High Low Paid
================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended:
March 31 $18 1/4 $16 1/2 $.064 $14 $12 1/2 $.056
- ----------------------------------------------------------------------------------------------------------------
June 30 18 1/2 17 1/4 .064 15 1/2 13 3/4 .056
- ----------------------------------------------------------------------------------------------------------------
September 30 18 1/2 16 1/2 .064 18 14 1/2 .056
- ----------------------------------------------------------------------------------------------------------------
December 31 20 1/2 18 .072 18 1/4 16 1/2 .061
================================================================================================================
</TABLE>
The above information gives retroactive recognition to a five-for-four
stock split declared January 21, 1997; a 5% stock dividend declared
January 22, 1996, and a three-for-two stock split declared July 18, 1995. At
December 31, 1996, the total market capitalization of 1st Source was
approximately $305.7 million.
Leverage Capital Ratio (As a Percent)
[BAR GRAPH]
92 93 94 95 96
(7.43) (8.09) (8.33) (8.44) (8.48)
Book Value Per Common Share<F*>
[BAR GRAPH]
92 93 94 95 96
(6.90) (7.96) (8.22) (9.80) (11.02)
[FN]
<F*> Book value is not necessarily indicative of the value of
1st Source common stock.
Common Stock Price Range (in Dollars)
[BAR GRAPH]
1995 1996
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- --- --- ---
High 14 15 1/2 18 18 1/4 18 1/4 18 1/2 18 1/2 20 1/2
Low 12 1/2 13 3/4 14 1/2 16 1/2 16 1/2 17 1/4 16 1/2 18
Quarter
ending 13 3/4 14 3/4 17 1/4 18 17 1/4 17 1/2 18 19 1/2
Cash Dividends Per Common Share
[BAR GRAPH]
92 93 94 95 96
(.148) (.175) (.203) (.229) (.264)
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 infiation, 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 infiation is on other expenses,
which tend to rise during periods of general inflation.
15
<PAGE> 11
<TABLE>
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------------------
<CAPTION>
December 31
1996 1995
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 137,588 $ 94,517
- --------------------------------------------------------------------------------------------
Interest bearing deposits with other banks 600 2,946
- --------------------------------------------------------------------------------------------
Investment securities, available-for-sale
(amortized cost of $303,177 and
$270,621 at December 31, 1996 and
1995, respectively) 302,602 270,290
- --------------------------------------------------------------------------------------------
Investment securities, held-to-maturity
(fair value of $125,218 and $132,383
at December 31, 1996 and 1995,
respectively) 120,494 126,085
- --------------------------------------------------------------------------------------------
Loans held for sale 102,362 80,093
- --------------------------------------------------------------------------------------------
Loans, net of unearned discount:
Transportation and equipment 561,042 457,930
- --------------------------------------------------------------------------------------------
Real estate 365,747 327,935
- --------------------------------------------------------------------------------------------
Commercial, financial and agricultural 335,192 314,421
- --------------------------------------------------------------------------------------------
Installment 91,220 79,036
- --------------------------------------------------------------------------------------------
Total Loans 1,455,563 1,259,415
- --------------------------------------------------------------------------------------------
Less, Reserve for loan losses (29,516) (27,470)
- --------------------------------------------------------------------------------------------
Net Loans 1,426,047 1,231,945
- --------------------------------------------------------------------------------------------
Premises and equipment:
Land 4,167 4,132
- --------------------------------------------------------------------------------------------
Buildings and improvements 23,089 19,808
- --------------------------------------------------------------------------------------------
Furniture and equipment 20,307 16,872
- --------------------------------------------------------------------------------------------
Construction in progress 1,074 1,029
- --------------------------------------------------------------------------------------------
Total Premises and Equipment 48,637 41,841
- --------------------------------------------------------------------------------------------
Less, Accumulated depreciation 20,857 18,458
- --------------------------------------------------------------------------------------------
Net Premises and Equipment 27,780 23,383
- --------------------------------------------------------------------------------------------
Other assets 64,656 50,091
- --------------------------------------------------------------------------------------------
Total Assets $2,079,767 $1,799,257
============================================================================================
============================================================================================
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
16
<PAGE> 12
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
1996 1995
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
LIABILITIES
Deposits:
Noninterest bearing $ 207,280 $ 190,045
- --------------------------------------------------------------------------------------------
Interest bearing 1,426,698 1,251,704
- --------------------------------------------------------------------------------------------
Total Deposits 1,633,978 1,441,749
- --------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 112,580 101,166
- --------------------------------------------------------------------------------------------
Other 112,283 51,813
- --------------------------------------------------------------------------------------------
Total Short-Term Borrowings 224,863 152,979
- --------------------------------------------------------------------------------------------
Other liabilities 30,497 30,109
- --------------------------------------------------------------------------------------------
Long-term debt 18,596 21,819
- --------------------------------------------------------------------------------------------
Total Liabilities 1,907,934 1,646,656
============================================================================================
Commitments and contingencies (Notes L, M and P)
SHAREHOLDERS' EQUITY
Common stock; no par value:
Authorized 40,000,000 shares; issued 12,936,120 shares in
1996 and 12,319,238 shares in 1995, less unearned shares 5,700 5,429
- --------------------------------------------------------------------------------------------
Capital surplus 69,947 56,337
- --------------------------------------------------------------------------------------------
Retained earnings 102,399 96,952
- --------------------------------------------------------------------------------------------
Cost of common stock in treasury (1996 -- 345,622
shares and 1995 -- 345,984 shares) (6,670) (6,497)
- --------------------------------------------------------------------------------------------
Net unrealized appreciation
of securities available-for-sale 457 380
- --------------------------------------------------------------------------------------------
Total Shareholders' Equity 171,833 152,601
- --------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,079,767 $1,799,257
============================================================================================
============================================================================================
</TABLE>
17
<PAGE> 13
Consolidated Statement of Income
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $124,553 $110,944 $ 91,297
- --------------------------------------------------------------------------------------------------------------
Investment securities:
Taxable 15,121 15,184 14,667
- --------------------------------------------------------------------------------------------------------------
Tax-exempt 8,152 7,650 6,565
- --------------------------------------------------------------------------------------------------------------
Total Investment securities 23,273 22,834 21,232
- --------------------------------------------------------------------------------------------------------------
Other 994 1,337 413
- --------------------------------------------------------------------------------------------------------------
Total Interest Income 148,820 135,115 112,942
- --------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 64,214 56,185 42,012
- --------------------------------------------------------------------------------------------------------------
Short-term borrowings 7,843 6,938 3,788
- --------------------------------------------------------------------------------------------------------------
Long-term debt 1,372 1,823 1,909
- --------------------------------------------------------------------------------------------------------------
Total Interest Expense 73,429 64,946 47,709
- --------------------------------------------------------------------------------------------------------------
Net Interest Income 75,391 70,169 65,233
- --------------------------------------------------------------------------------------------------------------
Provision for loan losses 4,649 2,757 4,197
- --------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 70,742 67,412 61,036
- --------------------------------------------------------------------------------------------------------------
Other income:
Trust fees 6,732 6,639 6,125
- --------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 4,829 4,934 4,655
- --------------------------------------------------------------------------------------------------------------
Mortgage servicing fees and mortgage loan sale income 4,309 2,163 557
- --------------------------------------------------------------------------------------------------------------
Commission, securitization, rental and other income 9,378 5,586 3,654
- --------------------------------------------------------------------------------------------------------------
Investment securities and other investment gains (losses) 231 170 (117)
- --------------------------------------------------------------------------------------------------------------
Total Other Income 25,479 19,492 14,874
- --------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits 36,058 32,567 28,346
- --------------------------------------------------------------------------------------------------------------
Net occupancy expense 4,696 3,765 3,473
- --------------------------------------------------------------------------------------------------------------
Furniture and equipment expense 5,873 5,114 4,752
- --------------------------------------------------------------------------------------------------------------
Insurance expense 483 2,034 3,202
- --------------------------------------------------------------------------------------------------------------
Business development and marketing expense 2,587 2,338 3,034
- --------------------------------------------------------------------------------------------------------------
Other expense 10,925 9,043 6,770
- --------------------------------------------------------------------------------------------------------------
Total Other Expense 60,622 54,861 49,577
- --------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 35,599 32,043 26,333
- --------------------------------------------------------------------------------------------------------------
Income taxes 12,396 11,001 7,868
- --------------------------------------------------------------------------------------------------------------
Net Income $ 23,203 $ 21,042 $ 18,465
==============================================================================================================
==============================================================================================================
Net Income Per Common Share $ 1.45 $ 1.31 $ 1.16
==============================================================================================================
==============================================================================================================
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
18
<PAGE> 14
<TABLE>
Consolidated Statements of Shareholders' Equity
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<CAPTION>
Net
Unrealized
Appreciation
Cost of (Depreciation)
Common of Securities
Common Capital Retained Stock Available-
Total Stock Surplus Earnings in Treasury For-Sale
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $125,539 $4,924 $36,986 $ 82,942 $(1,828) $ 2,515
===============================================================================================================================
Net income 18,465 - - 18,465 - -
- -------------------------------------------------------------------------------------------------------------------------------
Cost of 179,452 shares of com-
mon stock acquired for treasury (4,479) - - - (4,479)
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.20 per share) (3,204) - - (3,204) - -
- -------------------------------------------------------------------------------------------------------------------------------
5% common stock dividend ($12
paid in cash in lieu of fractional
shares) (12) 246 8,802 (9,060) - -
- -------------------------------------------------------------------------------------------------------------------------------
Acquisition of Trustcorp
Mortgage Company 2,352 - - 760 1,592 -
- -------------------------------------------------------------------------------------------------------------------------------
Contribution of common stock
to employee benefit plan 767 - - 406 361 -
- -------------------------------------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation (depreciation) (10,799) - - - - (10,799)
- -------------------------------------------------------------------------------------------------------------------------------
Other 453 - - 135 318 -
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 129,082 5,170 45,788 90,444 (4,036) (8,284)
===============================================================================================================================
Net income 21,042 - - 21,042 - -
- -------------------------------------------------------------------------------------------------------------------------------
Cost of 146,575 shares of com-
mon stock acquired for treasury (3,363) - - - (3,363) -
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.23 per share) (3,594) - - (3,594) - -
- -------------------------------------------------------------------------------------------------------------------------------
5% common stock dividend ($13
paid in cash in lieu of fractional
shares) (13) 259 10,549 (10,821) - -
- -------------------------------------------------------------------------------------------------------------------------------
Three-for-two common stock
split ($5 paid in cash in lieu
of fractional shares) (5) - - (5) - -
- -------------------------------------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation (depreciation) 8,664 - - - - 8,664
- -------------------------------------------------------------------------------------------------------------------------------
Other 788 - - (114) 902 -
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 152,601 5,429 56,337 96,952 (6,497) 380
===============================================================================================================================
Net income 23,203 - - 23,203 - -
- -------------------------------------------------------------------------------------------------------------------------------
Cost of 67,267 shares of com-
mon stock acquired for treasury (1,488) - - - (1,488) -
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.26 per share) (4,123) - - (4,123) - -
- -------------------------------------------------------------------------------------------------------------------------------
5% common stock dividend ($12
paid in cash in lieu of fractional
shares) (11) 271 13,610 (13,892) - -
- -------------------------------------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation (depreciation) 77 - - - - 77
- -------------------------------------------------------------------------------------------------------------------------------
Other 1,574 - - 258 1,316 -
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $171,833 $5,700 $69,947 $102,398 $ (6,669) $ 457
===============================================================================================================================
===============================================================================================================================
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
19
<PAGE> 15
<TABLE>
Consolidated Statement of Cash Flows
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31
----------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Activities:
Net income $ 23,203 $ 21,042 $ 18,465
- -------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 4,649 2,757 4,197
- -------------------------------------------------------------------------------------------------------------------------------
Depreciation of premises and equipment 4,363 2,617 2,070
- -------------------------------------------------------------------------------------------------------------------------------
Amortization of investment security pre-
miums and accretion of discounts, net 739 957 1,219
- -------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes (1,147) (2,661) (616)
- -------------------------------------------------------------------------------------------------------------------------------
Realized investment securities (gains) losses (231) (170) 117
- -------------------------------------------------------------------------------------------------------------------------------
Increase in interest receivable (573) (2,120) (1,585)
- -------------------------------------------------------------------------------------------------------------------------------
Increase in interest payable 120 3,946 1,831
- -------------------------------------------------------------------------------------------------------------------------------
Other (11,053) 1,250 559
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 20,070 27,618 26,257
- -------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales and maturities of investment securities 116,813 111,307 47,482
- -------------------------------------------------------------------------------------------------------------------------------
Purchase of investment securities (144,286) (144,422) (56,076)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in short-term investments 2,346 3,348 (4,004)
- -------------------------------------------------------------------------------------------------------------------------------
Loans sold or participated to others 156,727 49,560 146,243
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in loans made to customers
and principal collections on loans (350,120) (202,620) (211,532)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in leased assets (4,984) (4,392) (2,493)
- -------------------------------------------------------------------------------------------------------------------------------
Purchase of premises and equipment (6,646) (5,271) (4,007)
- -------------------------------------------------------------------------------------------------------------------------------
Cash paid in acquisition - - (2,516)
- -------------------------------------------------------------------------------------------------------------------------------
Other (2,115) 577 404
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (232,265) (191,913) (86,499)
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 57,688 (23,310) 5,624
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in certificates of deposit 134,540 163,722 116,350
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in short-term borrowings 71,884 52,414 (54,377)
- -------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of long-term debt 123 10,000 7,200
- -------------------------------------------------------------------------------------------------------------------------------
Payments on long-term debt (3,346) (16,265) (5,009)
- -------------------------------------------------------------------------------------------------------------------------------
Acquisition of treasury stock (1,488) (3,363) (4,479)
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends (4,123) (3,594) (3,204)
- -------------------------------------------------------------------------------------------------------------------------------
Other (12) (18) (12)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 255,266 179,586 62,093
- -------------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 43,071 15,291 1,851
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 94,517 79,226 77,375
- -------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 137,588 $ 94,517 $ 79,226
===============================================================================================================================
===============================================================================================================================
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
20
<PAGE> 16
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.
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 R, 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. 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. 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.
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Stan-dards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996. The adoption of the Statement will not affect the
accounting for asset securitizations entered into through December 31, 1996.
It is anticipated that for future asset securitizations, the Statement
will require 1st Source to recognize the value of servicing assets and other
retained interests at the date of the securitization.
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 credits where
payments are being received regularly and mortgage loans, which are placed on
non-accrual 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.
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, the evaluation of impaired
loans, plus an amount for such other factors which, in management's judgment,
deserve recognition in estimating possible loan losses. 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.
Effective January 1, 1996, 1st Source adopted the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The adoption of SFAS No. 121 had no impact on
1st Source's consolidated financial position and results of operations.
Leased Assets -- 1st Source finances various types of equipment and
automobiles under leases principally classified as operating leases. The
assets are grouped with Other assets on the balance sheet and are being
depreciated on a straight-line method over the life of the lease.
Trust Fees -- Trust fees are recognized on the accrual basis.
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 pro
portion 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.
21
<PAGE> 17
Notes to Consolidated Financial Statements -- Continued
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note A -- Accounting Policies -- Continued
Effective January 1, 1996, 1st Source adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights." SFAS No. 122 amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," and requires 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, 1996, $8.5 million of mortgage servicing rights had been
capitalized. As of that date, they had a fair value of $20.2 million.
1st Source's pretax income was increased by approximately $1.4 million, net
of certain adjustments, including amortization, as a result of adopting
SFAS No. 122.
Mortgage servicing rights are being amortized using a method which
approximates the effective yield method and for the year ended December 31,
1996, $2.68 million of amortization expense has been recognized.
SFAS No. 122 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,
the predominant risk characteristics of the underlying loans. There was no
valuation allowance associated with capitalized servicing rights at
December 31, 1996.
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.
Net Income Per Common Share -- Net income per common share is based on
the weighted average number of common and common equivalent shares
outstanding. The average number of common shares used in the computation were
15,997,519 shares, 16,033,579 shares and 15,975,735 shares for the years
ended December 31, 1996, 1995 and 1994, respectively.
The computation of the average number of common shares and all per share
data give retroactive recognition to a five-for-four stock split declared
January 21, 1997, payable to shareholders of record on February 5, 1997.
Funds Held in Trust for Investors and Mortgagors -- As of December 31,
1996 and 1995, serviced loans which were owned by investors aggregated $1.28
billion and $1.19 billion, respectively. Funds held in trust for the payment
of principal, interest, taxes and insurance premiums applicable to mortgage
loans being serviced for others are not included in the consolidated
statements of financial condition as they are on deposit in other banks, and
aggregated approximately $18.0 million at December 31, 1996 and $13.1 million
at December 31, 1995.
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, 1996, 1995 and 1994, for interest and for income taxes was $73.3 million
and $14.9 million, $61.0 million and $12.9 million and $45.9 million and
$9.6 million, respectively.
1st Source assumed approximately $22 million of short-term borrowings
and other liabilities in connection with the acquisition of Trustcorp
Mortgage Company in 1994 (see Note Q), which are noncash investing and
financing activities.
Off-Balance Sheet Financial Investments -- 1st Source Bank and Trustcorp
Mortgage Company enter into interest rate swap agreements as part of their
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.
Reclassifications -- Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform with the 1996
presentation. These reclassifications had no effect on total assets,
shareholders' equity or net income as previously reported.
- -------------------------------------------------------------------------------
Note B -- Fair Values of Financial Instruments
Below is a summary of the fair values of 1st Source's financial
instruments as of December 31, 1996 and 1995.
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 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 and for loans held for sale, 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 (e.g. commercial loans, transportation and equipment
loans,
22
<PAGE> 18
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note B -- Fair Values of Financial Instruments -- Concluded
and installment 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 pu
rchased, 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.
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.
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 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-bal-
ance-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 department net fee income. The trust department 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 unreal
ized 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 benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
<TABLE>
<CAPTION>
Carrying Carrying
or Contract Fair or Contract Fair
Value Value Value Value
-----------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Assets: (Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and due from banks $ 137,588 $ 137,588 $ 94,517 $ 94,517
- -------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits with other banks 600 600 2,946 2,946
- -------------------------------------------------------------------------------------------------------------------------------
Investment securities, available-for-sale 302,602 302,602 270,290 270,290
- -------------------------------------------------------------------------------------------------------------------------------
Investment securities, held-to-maturity 120,494 125,218 126,085 132,383
- -------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve for loan losses 1,426,047 1,444,917 1,231,945 1,250,437
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits 1,633,978 1,640,996 1,441,749 1,452,153
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 224,863 224,863 152,979 152,979
- -------------------------------------------------------------------------------------------------------------------------------
Long-term debt 18,596 18,526 21,819 21,920
- -------------------------------------------------------------------------------------------------------------------------------
Off-Balance-Sheet Instruments<F*> (240) (240) (193) (193)
===============================================================================================================================
<FN>
<F*>Represents estimated cash outflows required to currently settle the
obligations at current market rates.
</TABLE>
23
<PAGE> 19
Notes to Consolidated Financial Statements -- Continued
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note C -- Restrictions on Cash and 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, 1996, was approximately $11.5 million.
Under available line of credit agreements, 1st Source may borrow
up to $3 million. At December 31, 1996, there were no outstanding borrowings
under these lines, which were assigned to support commercial paper
borrowings.
- -------------------------------------------------------------------------------
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, 1996,
are as follows:
<TABLE>
<CAPTION>
Available-For-Sale
------------------
Gross Gross Estimated
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
Equity Securities: (Dollars in thousands)
<S> <C> <C> <C> <C>
Marketable securities $ 1,071 $ 549 $ (132) $ 1,488
- -------------------------------------------------------------------------------------------------------------------------------
Other equity securities 1,335 - - 1,335
- -------------------------------------------------------------------------------------------------------------------------------
Total equity securities 2,406 549 (132) 2,823
- -------------------------------------------------------------------------------------------------------------------------------
Debt Securities:
United States Treasury and agency securities 162,639 272 (313) 162,598
- -------------------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions 36,398 206 (63) 36,541
- -------------------------------------------------------------------------------------------------------------------------------
Debt securities issued by foreign governments 2,115 1,343 - 3,458
- -------------------------------------------------------------------------------------------------------------------------------
Corporate securities 4,613 7 - 4,620
- -------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 95,250 387 (1,566) 94,071
- -------------------------------------------------------------------------------------------------------------------------------
Other debt securities 1,346 78 - 1,424
- -------------------------------------------------------------------------------------------------------------------------------
Total debt securities 302,361 2,293 (1,942) 302,712
- -------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $304,767 $2,842 $(2,074) $305,535
===============================================================================================================================
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Held-To-Maturity
----------------
Gross Gross Estimated
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
Equity Securities: (Dollars in thousands)
<S> <C> <C> <C> <C>
Other equity securities $ 6,992 $ - $ - $ 6,992
- -------------------------------------------------------------------------------------------------------------------------------
Debt Securities:
Obligations of states and political subdivisions 113,502 4,769 (45) 118,226
- -------------------------------------------------------------------------------------------------------------------------------
Commercial paper 21,488 - - 21,488
- -------------------------------------------------------------------------------------------------------------------------------
Total debt securities 134,990 4,769 (45) 139,714
- -------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $141,982 $4,769 $ (45) $146,706
===============================================================================================================================
===============================================================================================================================
</TABLE>
24
<PAGE> 20
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note D -- Investment Securities -- Continued
The amortized cost and estimated aggregate fair value of debt securities
classified as available-for-sale and held-to-maturity at December 31, 1996, by
contractual maturity (except for mortgage-backed securities), are shown
below. 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.
<TABLE>
<CAPTION>
Available-For-Sale Held-To-Maturity
------------------ ----------------
Estimated Estimated
Aggregate Aggregate
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 70,585 $ 70,740 $ 26,495 $ 26,530
- -------------------------------------------------------------------------------------------------------------------------------
Due after one year through five years 115,553 115,522 38,907 40,099
- -------------------------------------------------------------------------------------------------------------------------------
Due after five years through ten years 12,173 12,212 57,976 61,071
- -------------------------------------------------------------------------------------------------------------------------------
Due after ten years 8,800 10,167 11,612 12,014
- -------------------------------------------------------------------------------------------------------------------------------
207,111 208,641 134,990 139,714
- -------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 95,250 94,071 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total $302,361 $302,712 $134,990 $139,714
===============================================================================================================================
===============================================================================================================================
</TABLE>
The amortized cost and estimated aggregate fair value of securities
classified as available-for-sale and held-to-maturity at December 31, 1995,
are as follows:
<TABLE>
<CAPTION>
Available-For-Sale
------------------
Gross Gross Estimated
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
Equity Securities: (Dollars in thousands)
<S> <C> <C> <C> <C>
Marketable securities $ 806 $ 192 $ (21) $ 977
- -------------------------------------------------------------------------------------------------------------------------------
Other equity securities 1,383 - - 1,383
- -------------------------------------------------------------------------------------------------------------------------------
Total equity securities 2,189 192 (21) 2,360
- -------------------------------------------------------------------------------------------------------------------------------
Debt Securities:
United States Treasury and agency securities 120,459 544 (122) 120,881
- -------------------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions 20,262 139 (20) 20,381
- -------------------------------------------------------------------------------------------------------------------------------
Debt securities issued by foreign governments 2,060 970 - 3,030
- -------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 125,510 701 (1,848) 124,363
- -------------------------------------------------------------------------------------------------------------------------------
Other debt securities 1,731 104 - 1,835
- -------------------------------------------------------------------------------------------------------------------------------
Total debt securities 270,022 2,458 (1,990) 270,490
- -------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $272,211 $2,650 $(2,011) $272,850
===============================================================================================================================
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Held-To-Maturity
----------------
Gross Gross Estimated
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
Equity Securities: (Dollars in thousands)
<S> <C> <C> <C> <C>
Other equity securities $ 6,147 $ 107 $ (40) $ 6,214
- -------------------------------------------------------------------------------------------------------------------------------
Debt Securities:
Obligations of states and political subdivisions 119,938 6,283 (52) 126,169
- -------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $126,085 $6,390 $ (92) $132,383
===============================================================================================================================
===============================================================================================================================
</TABLE>
25
<PAGE> 21
Notes to Consolidated Financial Statements -- Continued
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note D -- Investment Securities -- Concluded
Other equity securities classified as held-to-maturity at December 31,
1996 and 1995, 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 $2.93 million and $2.56 million at
December 31, 1996 and 1995, respectively, and commercial paper (classified as
held-to-maturity) with an amortized cost and estimated aggregate fair value
of $21.5 million at December 31,1996, are included in the above debt securi
ties, but are classified as loans in the accompanying 1996 and 1995 consol
idated statements of financial condition. 1st Source had no trading
securities as of December 31, 1996 and 1995. The following represents the
segregation of cash flows between securities available-for-sale and
held-to-maturity:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------------------------------------------------------
Available- Held-To- Available- Held-To- Available- Held To-
For-Sale Maturity Total For-Sale Maturity Total For Sale Maturity Total
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchase of
securities $143,146 $1,140 $144,286 $105,175 $39,247 $144,422 $33,936 $22,140 $56,076
- -------------------------------------------------------------------------------------------------------------------------------
Proceeds from
sales of
securities 207 - 207 33,491 591 34,082 19,143 - 19,143
- -------------------------------------------------------------------------------------------------------------------------------
Proceeds from
maturities and
prepayments
of securities 110,233 6,373 116,606 60,879 16,346 77,225 21,935 6,404 28,339
===============================================================================================================================
===============================================================================================================================
</TABLE>
Gross gains of $7 and $514,367 and gross losses of $1 and $396,500, were
realized during 1996 and 1995, respectively, on the sales of securities
available-for-sale. Gross gains of $23,800 and gross losses of $166 were
realized during 1995 on the sales of securities held-to-maturity. These
securities were sold due to a downgrade in their respective ratings.
At December 31, 1996 and 1995, investment securities with carrying
values of $240.5 million and $173.4 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 $14.27 million and $16.08 million
at December 31, 1996 and 1995, respectively. During 1996, $9.19 million of
new loans were made and repayments and other reductions totaled $11.03
million.
- -------------------------------------------------------------------------------
Note F -- Reserve for Loan Losses
Changes in the reserve for loan losses for each of the three years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning
of year $27,470 $23,868 $22,350
- --------------------------------------------------------------------------------------------------------------
Provision for loan
losses 4,649 2,757 4,197
- --------------------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries,
net of recoveries of $1,507
in 1996, and charge-offs
of $1,990 in 1995 and
recoveries of $820 in 1994 (1,779) 845 (1,237)
- --------------------------------------------------------------------------------------------------------------
Recaptured reserve
due to loan
securitization (824) - (1,442)
- --------------------------------------------------------------------------------------------------------------
Balance, end of year $29,516 $27,470 $23,868
==============================================================================================================
==============================================================================================================
</TABLE>
At December 31, 1996 and 1995, loans amounting to $6.68 million and
$4.89 million, respectively, substantially all of which are collateralized,
are considered to be non-accrual or restructured loans. Interest income for
the years ended December 31, 1996, 1995 and 1994, would have increased by
approximately $533,000, $383,000 and $251,000, respectively, if these loans
earned interest at their full contract rate.
As of December 31, 1996 and 1995, impaired loans totaled $8.13
million and $6.38 million, respectively, of which $5.78 and $5.25 million had
corresponding specific reserves for loan losses totaling $1.52 million and
$1.24 million, respectively. The remaining balances of impaired loans had no
specific reserves for loan losses associated with them. The vast majority of
the impaired loans are non-accrual loans; interest is not recognized on
non-accrual loans subsequent to the date the loan is placed in non-accrual
status. While a loan is classified as nonaccrual and the future
collectibility of the recorded
26
<PAGE> 22
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note F -- Reserve for Loan Losses -- Concluded
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 1996 and 1995, the
average recorded investment in impaired loans was $9.41 million and $6.52
million, respectively, and interest income recognized on impaired loans totaled
$464,000 and $284,000, respectively.
- -------------------------------------------------------------------------------
Note G -- Long-Term Debt
Details of long-term debt are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
- --------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Term loan (7.4%) $10,000 $10,000
- --------------------------------------------------------------------------
Subordinated capital
notes (5.35% - 6.21%) 5,345 5,345
- --------------------------------------------------------------------------
Term loan (6.225%) 2,800 5,700
- --------------------------------------------------------------------------
Federal Home Loan Bank
borrowings (5.45% - 6.98%) 390 267
- --------------------------------------------------------------------------
Other 61 507
- --------------------------------------------------------------------------
Total Long-Term Debt $18,596 $21,819
==========================================================================
==========================================================================
<CAPTION>
Annual maturities of long-term debt at December 31, 1996 are as follows
(dollars in thousands):
<S> <C>
1997 $ 2,821
- --------------------------------------------------------------------------
1998 291
- --------------------------------------------------------------------------
1999 1,999
- --------------------------------------------------------------------------
2000 -
- --------------------------------------------------------------------------
2001 -
- --------------------------------------------------------------------------
Thereafter 13,485
- --------------------------------------------------------------------------
Total $18,596
==========================================================================
==========================================================================
</TABLE>
Proceeds from the $10.0 million term loan were used in 1995 to redeem 9%
subordinated capital debentures, payable October 1, 1999, at a redemption
price percentage of 102% of the principal amount. Interest at a fixed rate of
7.4%, is 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.
The subordinated capital notes were issued in conjunction with a 1992
acquisition and include $1.98 million due June 18, 1999, and $3.095 million
due June 18, 2002. During 1995 these notes were refinanced at the Applicable
Federal Rate. The interest rate on these notes is adjusted monthly and was
6.21% at December 31, 1996. The balance of the subordinated capital notes
consists of a $270,000, 5.35% note due June 18, 1997. The notes are callable
in whole or in part by 1st Source at par value. The notes are unsecured and
are subordinated to the claims of depositors and other creditors of
1st Source Bank.
Proceeds from the original $7.2 million term loan were used to finance
the acquisition of Trustcorp Mortgage Company (see Note Q). The term loan,
with a balance of $2.8 million at December 31, 1996, is payable in periodic
principal installments with final payment expected June 1, 1998. The interest
rate varies based on certain provisions contained in the Standby Term Loan
Agreement dated September 28, 1994. At December 31, 1996, the interest rate
was 6.225% and interest is payable monthly.
At December 31, 1996, the Federal Home Loan Bank borrowings
aggregating $390,000 represent a source of funding for certain residential
mortgage activities and consist of three fixed rate notes of $165,000 with an
interest rate of 5.54% due October 8, 2003, $50,000 with an interest rate of
6.98% due July 18, 2006, and $175,000 with an interest rate of 6.54% due
November 15, 2016. The notes are collateralized by various federal agency
securities.
- --------------------------------------------------------------------------
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 proforma effect on net income and earnings
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 Special Long-Term Incentive Award Plan, the Restricted Stock Award Plan
and the Executive Incentive 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
$1.52 million, $1.93 million and $1.17 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
27
<PAGE> 23
Notes to Consolidated Financial Statements -- Continued
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
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 certain stock option agreements which became
effective March 1, 1988, and January 1, 1992. As of December 31, 1996, an
aggregate of 1,978,972 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 1996: dividend yield of 1.54%;
expected volatility of 24.25%; risk-free interest rate of 6.60%; and expected
life of 8.43 years.
The following is a summary of the activity with respect to
1st Source's stock option plans for the years ended December 31, 1996 and 1995:
Weighted-
Average
Number of Exercise
Shares Price
- --------------------------------------------------------------------------
Options outstanding,
January 1, 1995 697,079 $ 8.42
- --------------------------------------------------------------------------
Options granted - -
- --------------------------------------------------------------------------
Options exercised (2,501) 10.94
- --------------------------------------------------------------------------
Options outstanding,
December 31, 1995 694,578 8.42
==========================================================================
==========================================================================
Options exercisable,
December 31, 1995 608,760 8.29
==========================================================================
Options granted 146,633 16.60
- --------------------------------------------------------------------------
Options exercised (7,232) 10.94
- --------------------------------------------------------------------------
Options outstanding,
December 31, 1996 833,979 9.83
==========================================================================
==========================================================================
Options exercisable,
December 31, 1996 675,330 8.34
==========================================================================
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding
-------------------
Weighted-
Average Weighted-
Range of Number Remaining Average
Exercise Outstanding Contractual Exercise
Prices at 12/31/96 Life (Years) Price
------ ----------- ------------ -----
$ 3.00 to $ 9.99 360,794 5.54 $ 5.86
10.00 to 14.99 326,552 7.09 11.17
15.00 to 16.60 146,633 9.58 16.60
Options Exercisable
-------------------
Weighted-
Range of Number Average
Exercise Exercisable Exercise
Prices at 12/31/96 Price
------ ----------- -----
$ 3.00 to $9.99 357,538 $ 5.83
10.00 to 14.99 317,792 11.15
15.00 to 16.60 - -
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 to take the funds out of the
program. The most recent offering began June 1, 1995, and runs through
May 31, 1997, with $415,817 in stock value to be purchased at $15.11 per
share. The fair value of the employees' purchase rights for the 1995
offerings was estimated using the Black-Scholes model with the following
assumptions: dividend yield of 1.48%; expected volatility of 18.03%;
risk-free interest rate of 5.80%; and, expected life of two years.
Proforma net income and earnings per 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:
1996 1995
---- ----
Net income (000s):
As reported $23,203 $21,042
Pro forma $23,049 $20,984
Earnings per share:
As reported $1.45 $1.31
Pro forma $1.44 $1.31
28
<PAGE> 24
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note H -- Common Stock -- Concluded
Executive Incentive Plan
1st Source has an Executive Inventive 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 1996 and
1995 are summarized below:
1996 1995
---- ----
Number of shares 39,873 43,401
Weighted-average
grant-date fair value $ 9.78 $ 8.75
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 plan.
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. Grants under the plan for 1996 are
summarized below:
1996
----
Number of Shares 23,205
Weighted-average grant-date
fair value $17.90
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 1996 and 1995 ar summarized below:
1996 1995
---- ----
Number of Shares 1,828 1,889
Weighted-average
grant-date fair value $17.90 $12.82
- -------------------------------------------------------------------------------
Note I -- Preferred Stock
As of December 31, 1996, 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.
- -------------------------------------------------------------------------------
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, 1996, 1995 and 1994, total pension expense for this plan amounted to
$422,000, $359,000, and $358,000, 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 profit
ability. Contribution expense for this plan for the years ended December 31,
1996, 1995 and 1994, amounted to $1.21 million, $1.07 million, and $982,000,
respectively.
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 $40,000 in 1996
and $37,000 in 1995. In addition, Trustcorp Mortgage Company made
discretionary contributions of $100,000 in 1996 and $80,000 in 1995.
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.
The following table sets forth 1st Source's accumulated postretirement
benefit obligation, which is unfunded, reconciled to the accrued
postretirement benefit cost recognized in the consolidated statements of
financial condition at December 31, 1996 and 1995:
29
<PAGE> 25
Notes to Consolidated Financial Statements -- Continued
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note J -- Employee Benefit Plan -- Concluded
1996 1995
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 451,700 $ 534,100
- -------------------------------------------------------------------------------
Fully eligible active
plan participants 188,600 183,600
- -------------------------------------------------------------------------------
Other active participants 542,600 507,100
- -------------------------------------------------------------------------------
1,182,900 1,224,800
Unrecognized net gain 68,400 18,900
- -------------------------------------------------------------------------------
Accrued postretirement
benefit cost $1,251,300 $1,243,700
===============================================================================
===============================================================================
The components of net periodic postretirement benefit cost for 1996, 1995
and 1994 were as follows:
1996 1995 1994
- -----------------------------------------------------------------------------
Service cost of
benefits earned $ 35,300 $ 26,700 $ 29,500
- -----------------------------------------------------------------------------
Interest cost on
accumulated post-
retirement benefit
obligation 81,900 86,800 82,400
- -----------------------------------------------------------------------------
Net periodic post-
retirement benefit
cost $117,200 $113,500 $111,900
=============================================================================
=============================================================================
For measuring the expected postretirement benefit obligation, a 8.4%
annual rate of increase for participants under age 65 and a 7.4% annual rate
of increase for participants over age 65 in the per capita claims cost was
assumed for 1996 (9.1% and 7.6%, respectively, were assumed for 1995). This
rate was assumed to decrease each year to 5.6% for both participants under
age 65 and participants over age 65 in 2021 and remain at that level
thereafter. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% and 7.0% at December 31,
1996 and 1995, respectively.
If the health care cost trend rate were increased 1%, the accumulated
postretirement benefit obligation as of December 31, 1996, would have
increased by 5.8%. The effect of this change on the aggregate of service and
interest cost for 1996 would be an increase of 6.3%.
- -------------------------------------------------------------------------------
Note K -- Income Taxes
Income tax expense is comprised of the following:
1996 1995 1994
- -------------------------------------------------------------------------------
Current: (Dollars in thousands)
Federal $10,036 $10,173 $5,927
- -------------------------------------------------------------------------------
State 3,507 3,489 2,557
- -------------------------------------------------------------------------------
Total Current 13,543 13,662 8,484
- -------------------------------------------------------------------------------
Deferred:
Federal (906) (2,105) (485)
- -------------------------------------------------------------------------------
State (241) (556) (131)
- -------------------------------------------------------------------------------
Total Deferred (1,147) (2,661) (616)
- -------------------------------------------------------------------------------
Total Provision $12,396 $11,001 $7,868
===============================================================================
===============================================================================
Deferred tax assets and liabilities as of December 31, 1996 and 1995
consisted of the following:
1996 1995
- -------------------------------------------------------------------------------
Deferred tax assets: (Dollars in thousands)
Reserve for loan losses $12,577 $11,763
- -------------------------------------------------------------------------------
Asset securitization 2,399 1,394
- -------------------------------------------------------------------------------
Accruals for employee benefits 2,273 2,350
- -------------------------------------------------------------------------------
Purchased and excess servicing 1,021 274
- -------------------------------------------------------------------------------
Deferred mortgage loan fees 251 288
- -------------------------------------------------------------------------------
Mortgage loans - Section 475 86 467
- -------------------------------------------------------------------------------
Other 878 752
- -------------------------------------------------------------------------------
Total $19,485 $17,288
===============================================================================
===============================================================================
1996 1995
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Differing depreciable
bases in premises and
leased equipment $1,495 $ 901
- -------------------------------------------------------------------------------
Differing bases in assets
related to acquisitions 1,695 2,062
- -------------------------------------------------------------------------------
Originated mortgage
servicing rights 567 -
- -------------------------------------------------------------------------------
Net unrealized appre-
ciation of securities
available-for-sale 311 259
- -------------------------------------------------------------------------------
Discounts accreted on
investment securities 118 98
- -------------------------------------------------------------------------------
Other 385 201
- -------------------------------------------------------------------------------
Total $4,571 $3,521
===============================================================================
===============================================================================
30
<PAGE> 26
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note K -- Income Taxes -- Continued
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:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1996 1995 1994
----------------------------------------------------------------------------
Percent of Percent of Percent of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax $12,460 35.0% $11,215 35.0% $ 9,217 35.0%
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in income
taxes resulting from:
Tax-exempt interest income (2,922) (8.2) (2,790) (8.7) (2,427) (9.2)
- ---------------------------------------------------------------------------------------------------------------------------------
State taxes, net of federal
income tax benefit 2,123 5.9 1,906 5.9 1,577 6.0
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense incurred to
carry tax-exempt securities 376 1.1 325 1.0 205 .8
- ---------------------------------------------------------------------------------------------------------------------------------
Contribution of appreciated
investment securities - - - - (466) (1.8)
- ---------------------------------------------------------------------------------------------------------------------------------
Other 359 1.0 345 1.1 (238) (.9)
- ---------------------------------------------------------------------------------------------------------------------------------
Total $12,396 34.8% $11,001 34.3% $ 7,868 29.9%
=================================================================================================================================
=================================================================================================================================
</TABLE>
- ------------------------------------------------------------------------------
Note L -- Leases
1st Source and its subsidiaries lease certain office premises and
equipment under operating leases. The headquarters building is leased for a
remaining term of 15 years with options to renew for up to 15 additional
years. Approximately 30% of the facility is subleased to other tenants.
At December 31, 1996, future minimum rental commitments for all
noncancellable operating leases, reduced by future minimum rentals from
subleases of $3.8 million, aggregate $18.2 million. Annual rental commitments
and sublease rentals for noncancellable operating leases for the five years
succeeding December 31, 1996, are as follows:
Rental Sublease
Commitments Rentals
- -----------------------------------------------------------------------------
(Dollars in thousands)
1997 $1,804 $837
- -----------------------------------------------------------------------------
1998 1,524 692
- -----------------------------------------------------------------------------
1999 1,466 486
- -----------------------------------------------------------------------------
2000 1,376 485
- -----------------------------------------------------------------------------
2001 1,187 424
- -----------------------------------------------------------------------------
Thereafter 12,502 259
- -----------------------------------------------------------------------------
Rental expense of office premises and equipment and related sublease
income were as follows:
Year Ended December 31
----------------------
1996 1995 1994
- -----------------------------------------------------------------------------
(Dollars in thousands)
Gross rental expense $2,203 $ 2,314 $ 2,276
- -----------------------------------------------------------------------------
Sublease rental income (677) (1,841) (1,840)
- -----------------------------------------------------------------------------
Net Rental Expense $1,526 $ 473 $ 436
=============================================================================
=============================================================================
31
<PAGE> 27
Notes to Consolidated Financial Statements -- Continued
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
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 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 1996 and 1995, 1st Source and its subsidiaries had
commitments outstanding to originate and purchase loans aggregating $276
million and $187 million, respectively. Outstanding commitments to sell loans
aggregated $71 million at December 31, 1996, and $56 million at December 31,
1995. Commercial and standby letters of credit totaled $51 million and $15
million at December 31, 1996 and 1995, 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.
Trustcorp Mortgage Company is involved as a counterparty to interest
rate swap agreements which involve the exchange of fixed and variable rate
interest payments between Trustcorp and its warehouse lender ("counterparty")
based on the level of funds held in trust by the warehouse lender.
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 pay and receive 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.
Trustcorp Mortgage Company's swap agreements range in notional amounts
from $12 million to $124 million, with average maturities of 3 to 14 days.
Trustcorp Mortgage Company had no interest rate swap agreements outstanding
at December 31, 1996.
At December 31, 1996, 1st Source Bank had two outstanding amortizing
interest rate swap agreements with an aggregate notional value of $55.6
million. The agreements have maturities of January 25, 2002 and March 25,
2001, respectively. 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 losses based on
fair value approximated $750,000 at December 31, 1996.
- -----------------------------------------------------------------------------
Note N -- Concentrations of Credit Risk
Most of 1st Source's commercial, real estate and installment loan
activity is with customers located in north-central Indiana and southwest
lower Michigan. 1st Source's transportation and equipment loan activity is
with customers located throughout the United States. Included in loans as of
December 31, 1996 and 1995, are business loans to companies in the following
industries:
32
<PAGE> 28
1st Source Corporation and Subsidiaries
- -----------------------------------------------------------------------------
Note N -- Concentrations of Credit Risk -- Concluded
<TABLE>
<CAPTION>
Percentage
of Total
Amount Business Loans
------ --------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Truck and automobile leasing $186,702 $109,939 16.8% 12.1%
- --------------------------------------------------------------------------------------------------------------------------------
Air transportation and aircraft dealers 132,973 137,664 12.0 15.1
- --------------------------------------------------------------------------------------------------------------------------------
Construction equipment and contractors 73,857 53,403 6.6 5.9
- --------------------------------------------------------------------------------------------------------------------------------
Real estate operators, managers and developers 65,243 46,993 5.9 5.2
- --------------------------------------------------------------------------------------------------------------------------------
Van conversion, manufactured housing
and recreational vehicle industries 40,634 37,197 3.7 4.1
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1996,
that 1st Source meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996, the most recent notification from the Federal
Reserve Bank of Chicago 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:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Adequacy Action Provisions
------ -------- -----------------
$ Amount Ratio $ Amount Ratio $ Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
Consolidated $190,895 12.45% $122,712 8.00% $153,390 10.00%
1st Source Bank 182,614 12.28 118,938 8.00 148,673 10.00
Tier I Capital (to Risk Weighted Assets):
Consolidated 167,662 10.93 61,365 4.00 92,034 6.00
1st Source Bank 160,008 10.76 59,569 4.00 89,204 6.00
Tier I Capital (to Average Assets):
Consolidated 167,662 8.48 79,067 4.00 98,834 5.00
1st Source Bank 160,008 8.45 75,734 4.00 94,668 5.00
</TABLE>
33
<PAGE> 29
Notes to Consolidated Financial Statements -- Continued
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Note Q -- Acquisitions
On September 30, 1994, 1st Source Corporation purchased the remaining
shares of the issued and outstanding common stock of Mortgage Acquisition
Company, the parent company of Trustcorp Mortgage Company, a South Bend based
full service mortgage banker (collectively "Trustcorp Mortgage Company" or
"Trustcorp"). 1st Source Corporation previously owned 30% of the issued and
outstanding common stock of Trustcorp. Trustcorp maintains mortgage
origination offices in South Bend, Elkhart and Indianapolis, Indiana;
Columbus, Ohio; St. Louis, Missouri; and Chicago, Illinois. At the date of
acquisition Trustcorp had a mortgage loan servicing portfolio in excess of $1
billion. As a result of this acquisition, Trustcorp Mortgage Company became a
wholly-owned subsidiary of 1st Source Corporation.
The total purchase price aggregated $5.5 million. The shareholders of
Trustcorp Mortgage Company received approximately $2.6 million in cash,
$500,000 in guaranteed notes maturing in one to two years and 91,504 shares
of 1st Source Corporation common stock with a market value of approximately
$2.4 million.
The acquisition was accounted for as a purchase and, accordingly, the
net assets acquired and operations of Trustcorp are included in 1st Source's
consolidated financial statements since the date of acquisition. The acquired
net assets of Trustcorp Mortgage Company consisted of $17 million of mortgage
loans held for sale, $5.2 million of mortgage servicing rights and $1.9
million of other assets. Liabilities assumed consisted of $20.5 million of
borrowings and $1.1 million of other liabilities. A premium in excess of book
value of $3.6 million was paid in the transaction and allocated to purchased
mortgage servicing rights ($2.2 million) and goodwill ($1.4 million). The
effect of this transaction was not material to 1st Source's 1994 consolidated
results of operations.
34
<PAGE> 30
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note R -- 1st Source Corporation (Parent Company Only) Financial Information
<TABLE>
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
December 31
1996 1995
- --------------------------------------------------------------------------------------------
ASSETS (Dollars in thousands)
<S> <C> <C>
Cash $ 1 $ 1
- --------------------------------------------------------------------------------------------
Short-term investments with bank subsidiary 5,837 5,255
- --------------------------------------------------------------------------------------------
Investment securities, available-for-sale
(amortized cost of $11,084 and $11,923
at December 31, 1996 and 1995, respectively) 11,491 12,152
- --------------------------------------------------------------------------------------------
Investments in:
Bank subsidiaries 160,316 142,168
- --------------------------------------------------------------------------------------------
Non-bank subsidiaries 9,235 8,488
- --------------------------------------------------------------------------------------------
Loan receivable, non-bank subsidiary - 300
- --------------------------------------------------------------------------------------------
Premises and equipment, net 3,177 2,880
- --------------------------------------------------------------------------------------------
Other assets 3,320 4,796
- --------------------------------------------------------------------------------------------
Total Assets $193,377 $176,040
============================================================================================
============================================================================================
LIABILITIES
Commercial paper borrowings $ 6,467 $ 4,850
- --------------------------------------------------------------------------------------------
Other liabilities 2,216 2,382
- --------------------------------------------------------------------------------------------
Long-term debt 12,861 16,207
- --------------------------------------------------------------------------------------------
Total Liabilities 21,544 23,439
- --------------------------------------------------------------------------------------------
Shareholders' Equity 171,833 152,601
- --------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $193,377 $176,040
============================================================================================
============================================================================================
</TABLE>
35
<PAGE> 31
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note R -- 1st Source Corporation (Parent Company Only)
Financial Information -- Continued
<TABLE>
STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31
----------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Income:
Dividends from bank subsidiaries $ 5,029 $ 4,851 $ 4,948
- --------------------------------------------------------------------------------------------------------------
Rental income from subsidiaries 2,071 2,199 2,140
- --------------------------------------------------------------------------------------------------------------
Other 679 1,497 2,136
- --------------------------------------------------------------------------------------------------------------
Total Income 7,779 8,547 9,224
- --------------------------------------------------------------------------------------------------------------
Expenses:
Interest on long-term debt 1,015 1,379 1,044
- --------------------------------------------------------------------------------------------------------------
Interest on commercial paper and
other short-term borrowings 274 261 52
- --------------------------------------------------------------------------------------------------------------
Rent expense 1,074 1,076 1,109
- --------------------------------------------------------------------------------------------------------------
Other 1,775 2,493 1,878
- --------------------------------------------------------------------------------------------------------------
Total Expenses 4,138 5,209 4,083
- --------------------------------------------------------------------------------------------------------------
Income Before Income Tax Credits and
Equity in Undistributed Income of Subsidiaries 3,641 3,338 5,141
- --------------------------------------------------------------------------------------------------------------
Income tax credits 639 709 120
- --------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed
Income of Subsidiaries 4,280 4,047 5,261
- --------------------------------------------------------------------------------------------------------------
Equity in undistributed income of subsidiaries:
Bank subsidiaries 18,257 16,540 13,168
- --------------------------------------------------------------------------------------------------------------
Non-bank subsidiaries 666 455 36
- --------------------------------------------------------------------------------------------------------------
Net Income $23,203 $21,042 $18,465
==============================================================================================================
==============================================================================================================
</TABLE>
36
<PAGE> 32
1st Source Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Note R -- 1st Source Corporation (Parent Company Only)
Financial Information -- Concluded
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
----------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Activities:
Net income $ 23,203 $ 21,042 $ 18,465
- --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of subsidiaries (18,923) (16,995) (13,204)
- --------------------------------------------------------------------------------------------------------------
Depreciation of premises and equipment 175 174 131
- --------------------------------------------------------------------------------------------------------------
Realized and unrealized investment
securities gains (52) (418) (180)
- --------------------------------------------------------------------------------------------------------------
Other 2,854 2,737 (182)
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 7,257 6,540 5,030
- --------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales and maturities
of investment securities 3,804 3,601 1,935
- --------------------------------------------------------------------------------------------------------------
Purchase of investment securities (2,955) (2,930) (2,725)
- --------------------------------------------------------------------------------------------------------------
Decrease (increase) in loan to non-bank subsidiary 300 370 (670)
- --------------------------------------------------------------------------------------------------------------
Purchase of preferred stock of non-bank subsidiary - (2,700) -
- --------------------------------------------------------------------------------------------------------------
Purchase of premises and equipment, net (471) (49) 173
- --------------------------------------------------------------------------------------------------------------
Cash paid in acquisition - - (2,603)
- --------------------------------------------------------------------------------------------------------------
Decrease (increase) in short-term investments
with bank subsidiary (582) (175) 724
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 96 (1,883) (3,166)
- --------------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase (decrease) in commercial
paper and other short-term borrowings 1,616 3,581 (1,360)
- --------------------------------------------------------------------------------------------------------------
Proceeds from issuance of long-term debt - 10,000 7,200
- --------------------------------------------------------------------------------------------------------------
Payments on long-term debt (3,346) (11,265) (9)
- --------------------------------------------------------------------------------------------------------------
Acquisition of treasury stock (1,488) (3,363) (4,479)
- --------------------------------------------------------------------------------------------------------------
Cash dividends (4,123) (3,594) (3,204)
- --------------------------------------------------------------------------------------------------------------
Other (12) (18) (12)
- --------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (7,353) (4,659) (1,864)
- --------------------------------------------------------------------------------------------------------------
Change in Cash and Cash Equivalents - (2) -
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 1 3 3
- --------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 1 $ 1 $ 3
==============================================================================================================
==============================================================================================================
</TABLE>
37
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
Coopers & Lybrand L.L.P.
To the Shareholders and Board of Directors of
1st Source Corporation:
We have audited the accompanying consolidated statements of financial
condition of 1st Source Corporation and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
1st Source Corporation and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
South Bend, Indiana
January 13, 1997
(except for Note A,
for which the date is
January 21, 1997)
38
<PAGE> 34
APPENDIX
The printed Annual Report contains bar graphs on pages 6, 10 and 15.
The plot points on each graph are presented in a tabular format that
may be processed by EDGAR.
<PAGE> 1
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.
<TABLE>
<CAPTION>
NAME DATE OF INCORPORATION JURISDICTION
- ------------------------------- ---------------------- ------------
<S> <C> <C>
1st Source Bank April 19, 1922 Indiana
1st Source Auto Leasing, Inc.<F*> October 29, 1973 Indiana
(Inactive)
1st Source Insurance, Inc.<F*> July 12, 1978 Indiana
1st Source Travel, Inc.<F*> 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<F*> November 16, 1983 Indiana
Trustcorp Mortgage Company December 5, 1973 Indiana
<FN>
<F*> Wholly-owned subsidiaries of 1st Source Bank
</TABLE>
E-5
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of 1st Source Corporation on Forms S-8 of our report dated January 13, 1997
(except for Note A, for which the date is January 21, 1997), on our audits of
the consolidated financial statements of 1st Source Corporation and
subsidiaries as of December 31, 1996 and 1995, and for each of the three
years in the period ended December 31, 1996, which report is incorporated by
reference in this Annual Report on Form 10-K of 1st Source Corporation for
the year ended December 31, 1996.
/s/ Coopers & Lybrand L.L.P.
South Bend, Indiana
February 24, 1997
E-5
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 137,588
<INT-BEARING-DEPOSITS> 600
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 302,602
<INVESTMENTS-CARRYING> 120,494
<INVESTMENTS-MARKET> 125,218
<LOANS> 1,455,563
<ALLOWANCE> 29,516
<TOTAL-ASSETS> 2,079,767
<DEPOSITS> 1,633,978
<SHORT-TERM> 224,863
<LIABILITIES-OTHER> 30,497
<LONG-TERM> 18,596
5,700
0
<COMMON> 0
<OTHER-SE> 166,133
<TOTAL-LIABILITIES-AND-EQUITY> 2,079,767
<INTEREST-LOAN> 124,553
<INTEREST-INVEST> 24,267
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 148,820
<INTEREST-DEPOSIT> 64,214
<INTEREST-EXPENSE> 73,429
<INTEREST-INCOME-NET> 75,391
<LOAN-LOSSES> 4,649
<SECURITIES-GAINS> 231
<EXPENSE-OTHER> 60,622
<INCOME-PRETAX> 35,599
<INCOME-PRE-EXTRAORDINARY> 23,203
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,203
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.45
<YIELD-ACTUAL> 4.48
<LOANS-NON> 6,678
<LOANS-PAST> 557
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 27,470
<CHARGE-OFFS> 4,110
<RECOVERIES> 1,507
<ALLOWANCE-CLOSE> 29,516
<ALLOWANCE-DOMESTIC> 10,655
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 18,861
</TABLE>
