FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-5907
1st SOURCE CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1068133
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Michigan Street South Bend, Indiana 46601
(Address of principal executive offices) (Zip Code)
(219) 235-2702
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Number of shares of common stock outstanding as of June 30, 1998 -
17,253,450 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Page
Consolidated statements of financial condition -- 3
June 30, 1998, and December 31, 1997
Consolidated statements of income -- 4
three months and six months ended
June 30, 1998 and 1997
Consolidated statements of cash flows -- 5
six months ended June 30, 1998 and 1997
Notes to the Consolidated Financial Statements 6-7
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Dollars in thousands)
June 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 154,690 $ 90,864
Interest bearing deposits with other banks 912 1,677
Federal funds sold -- 10,000
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $299,114 and $298,438
at June 30, 1998 and December 31, 1997) 301,189 299,933
Securities held-to-maturity, at amortized cost
(fair value of $111,247 and $119,369 at
June 30, 1998 and December 31, 1997) 107,559 114,975
Total Investment Securities 408,748 414,908
Loans - net of unearned discount 1,934,580 1,796,781
Reserve for loan losses (39,709) (35,424)
Net Loans 1,894,871 1,761,357
Premises and equipment 30,559 30,782
Other assets 129,146 108,566
Total Assets $2,618,926 $2,418,154
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 242,966 $ 274,906
Interest bearing 1,823,710 1,616,885
Total Deposits 2,066,676 1,891,791
Federal funds purchased and securities
sold under agreements to repurchase 167,379 117,987
Other short-term borrowings 80,863 117,019
Other liabilities 42,674 34,998
Long-term debt 12,674 16,656
Total Liabilities 2,370,266 2,178,451
Guaranteed preferred beneficial interests
in the company's subordinated debentures 44,750 44,750
Shareholders' equity:
Common stock-no par value 6,270 5,700
Capital surplus 121,456 69,947
Retained earnings 84,170 124,394
Less cost of common stock in treasury (10,218) (6,978)
Unrealized appreciation of
investment securities, net 2,232 1,890
Total Shareholders' Equity 203,910 194,953
Total Liabilities and Shareholders' Equity $2,618,926 $2,418,154
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
1st Source Corporation and Subsidiaries
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $ 42,953 $ 36,414 $ 84,725 $ 69,424
Investment Securities:
Taxable 4,130 4,223 8,176 8,245
Tax-exempt 1,982 2,056 3,979 4,090
Other 253 65 330 145
Total Interest Income 49,318 42,758 97,210 81,904
Interest Expense:
Deposits 21,927 17,648 41,911 34,136
Short-term borrowings 3,556 3,154 7,988 5,824
Long-term debt 224 281 456 598
Total Interest Expense 25,707 21,083 50,355 40,558
Net Interest Income 23,611 21,675 46,855 41,346
Provision for Loan Losses 2,689 479 5,090 1,708
Net Interest Income After
Provision for Loan Losses 20,922 21,196 41,765 39,638
Non-Interest Income:
Trust fees 2,094 1,723 4,160 3,492
Service charges on deposit accounts 1,432 1,287 2,838 2,536
Loan servicing and sale income 3,516 1,518 6,036 2,940
Equipment rental income 2,936 1,506 5,283 2,662
Other income 2,382 1,484 4,827 2,868
Investment securities and
other gains (losses) (584) (484) (706) (303)
Total Non-Interest Income 11,776 7,034 22,438 14,195
Non-Interest Expense:
Salaries and employee benefits 11,674 10,051 23,361 19,742
Net occupancy expense 1,227 1,022 2,445 2,194
Furniture and equipment expense 1,697 1,732 3,339 3,276
Depreciation - leased equipment 2,162 1,241 3,982 2,009
Business development and marketing expense 933 1,389 1,520 1,882
Other 2,794 2,571 5,694 5,146
Total Non-Interest Expense 20,487 18,006 40,341 34,249
Income Before Income Taxes & Subsidiary
Trust Distributions 12,211 10,224 23,862 19,584
Income taxes 4,309 3,222 8,235 6,457
Distribution on preferred securities of
subsidiary trusts, net of tax 560 561 1,125 620
Net Income $ 7,342 $ 6,441 $ 14,502 $ 12,507
Other Comprehensive Income, Net of Tax:
Unrealized Gain (Loss) on Securities (53) 814 342 (25)
Comprehensive Income $ 7,289 $ 7,255 $ 14,844 $ 12,482
Per Common Share: <F1>
Basic Net Income Per Common Share $ 0.43 $ 0.38 $ 0.84 $ 0.73
Diluted Net Income Per Common Share $ 0.42 $ 0.36 $ 0.82 $ 0.70
Dividends $ 0.073 $ 0.068 $ 0.146 $ 0.134
Basic Weighted Average Common
Shares Outstanding 17,312,644 17,231,546 17,328,975 17,214,876
Diluted Weighted Average Common
Shares Outstanding 17,659,709 17,777,844 17,685,298 17,742,850
<FN>
<F1> The computation of per share data gives retroactive recognition to a 10% stock
dividend declared on January 20, 1998, and a five-for-four stock split declared on
January 21, 1997.
</FN>
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Dollars in thousands)
Six Months Ended June 30
1998 1997
<S> <C> <C>
Operating Activities:
Net income $ 14,502 $ 12,507
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,090 1,708
Depreciation of premises and equipment 5,797 3,662
Amortization of investment security premiums
and accretion of discounts, net 438 428
Deferred income taxes 1,010 (659)
Realized investment securities (gains) losses 706 303
Increase in interest receivable (1,545) (1,266)
Increase in interest payable 4,222 4,980
Other (8,537) (9,982)
Net Cash Provided by Operating Activities 21,683 11,681
Investing Activities:
Proceeds from sales and maturities
of investment securities 101,485 55,260
Purchases of investment securities (95,886) (61,976)
Net decrease (increase) in short-term investments 10,765 (282)
Loans sold or participated to others 67,983 84,349
Net increase in loans made to customers
and principal collections on loans (206,592) (243,660)
Net increase in leased assets (7,344) (6,748)
Purchases of premises and equipment (19,868) (2,285)
Other 14,293 (2,862)
Net Cash Used in Investing Activities (135,164) (178,204)
Financing Activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 66,590 (2,927)
Net increase in certificates of deposit 108,295 81,237
Net increase in short-term borrowings 13,236 9,855
New long-term debt 67 --
Payments on long-term debt (4,049) (3,091)
New issuance of trust preferred securities -- 44,750
Acquisition of treasury stock (4,302) (1,247)
Cash dividends (2,542) (2,300)
Other 12 (8)
Net Cash Provided by Financing Activities 177,307 126,269
Increase (Decrease) in Cash and Cash Equivalents 63,826 (40,254)
Cash and Cash Equivalents, Beginning of Year 90,864 137,588
Cash and Cash Equivalents, End of Period $154,690 $ 97,334
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
Notes to the Consolidated Financial Statements
1. The unaudited consolidated condensed financial statements have been
prepared in accordance with the instructions for Form 10-Q and
therefore do not include all information and footnotes necessary
for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted
accounting principles. The information furnished herein reflects
all adjustments (all which are normal and recurring in nature)
which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods for which this
report is submitted. The 1997 1st Source Corporation Annual Report
on Form 10-K and quarterly report on Form 10-Q for the quarter
ended March 31, 1998, should be read in conjunction with these
statements.
2. 1st Source has adopted Statement of Financial Accounting Standard
(SFAS) No. 130, "Reporting Comprehensive Income," as of March 31,
1998. SFAS No. 130 establishes standards for the reporting and
disclosure of comprehensive income and its components in a full set
of general purpose financial statements. Presently, the only
component of comprehensive income not included in net income is
unrealized gains or losses on available-for-sale investment
securities.
3. In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131 "Disclosure about Segments of an Enterprise and Related
Information." This Statement changes the manner in which public
companies report significant information in annual reports and
requires companies to report selected segment information in
interim financial reports. Companies are now required to report
financial and descriptive information about the company's operating
segments. In the year of adoption, companies are not required to
disclose interim period information. 1st Source will adopt the
Statement in 1998.
4. On June 15, 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999
(January 1, 2000 for 1st Source). SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their
fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction.
1st Source anticipates that, due to its limited use of derivative
instruments, the adoption of SFAS No. 133 will not have a
significant effect on the Company's results of operations or its
financial position.
5. On July 16, 1998, 1st Source completed a securitization financing
of $400 million in loans; $215 million for new funding,
$100 million for future growth, and $85 million for replacement
funding. The purpose of the securitization is to fund the
continued national growth of the 1st Source Bank Specialty Finance
Group.
PART I.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and analysis should be read in conjunction with the
Company's consolidated condensed financial statements and the financial
and statistical data appearing elsewhere in this report and the 1997
1st Source Corporation Annual Report on Form 10-K and the quarterly report
on Form 10-Q for the quarter ended March 31, 1998. The amounts shown in
this analysis have been adjusted to reflect tax-exempt income on a tax
equivalent basis using a 40.525% rate.
Except for historical information contained herein, the matters
discussed in this document, and other information contained in the
Company's SEC filings, may express "forward-looking statements." Those
"forward-looking statements" may involve risk and uncertainties, including
statements concerning future events or performance and assumptions and
other statements concerning future events or performance and assumptions
and other statements that are other than statements of historical facts.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made. Readers
are advised that various factors--including, but not limited to, changes
in laws, regulations or generally accepted accounting principles; the
Company's competitive position within the markets served of increasing
consolidation within the banking industry; certain customers and vendors
of critical systems or services failing to comply with Year 2000
programming issues; unforeseen changes in interest rates; any unforeseen
downturns in the local, regional or national economies--could cause the
Company's actual results or circumstances for future periods to differ
materially from those anticipated or projected.
1st Source does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions that may be
made to any forward-looking statements to reflect the occurrence of
unanticipated events or circumstances after the date of such statements.
COMPARISON OF THREE-MONTH AND SIX-MONTH PERIODS
ENDED JUNE 30, 1998 AND 1997
Net income for the three-month and six-month periods ended June 30,
1998, was $7,342,000 and $14,502,000 respectively, compared to $6,441,000
and $12,507,000 for the equivalent periods in 1997. The primary reasons
for the increase were an increase in net interest income and a significant
increase in non-interest income offset by an increase in non-interest
expense.
Diluted net income per common share increased to $0.42 and $0.82,
respectively, for the three-month and six-month periods ended June 30,
1998, from $0.36 and $0.70 in 1997. Return on average common
shareholders' equity was 14.58% for the six months ended June 30, 1998,
compared to 14.26% in 1997. The return on total average assets was 1.18%
for the six months ended June 30, 1998, compared to 1.21% in 1997.
NET INTEREST INCOME
The taxable equivalent net interest income for the three-month period
ended June 30, 1998, was $24,522,000, an increase of 8.49% over the same
period in 1997, resulting in a net yield of 4.23% compared to 4.50% in
1997. The fully taxable equivalent net interest income for the six-month
period ended June 30, 1998, was $48,675,000, an increase of 12.61% over
1997, resulting in a net yield of 4.28% compared to 4.47% in 1997.
Total average earning assets increased 15.60% and 17.62%, respectively,
for the three-month and six-month periods ended June 30, 1998, over the
comparative periods in 1997. Total average investment securities
increased 0.65% and 0.51%, respectively for the three-month and six-month
periods, while a 18.87% and 22.05% increase for the three-month and
six-month periods for average loans occurred primarily in commercial mortgage,
transportation and equipment loans. The taxable equivalent yields on
total average earning assets were 8.65% and 8.70% for the three-month
periods ended June 30, 1998, and 1997, and 8.70% and 8.66% for the
six-month periods ended June 30, 1998 and 1997.
Average deposits increased 20.30% and 19.09%, respectively, for the
three-month and six-month periods over the same periods from 1997. The
cost rate on average interest-bearing funds was 5.18% and 5.02% for the
three-months ended June 30, 1998, and 1997, and 5.17% and 4.95% for the
six-month periods ended June 30, 1998 and 1997. The majority of the
growth in deposits from last year has occurred in time deposits of $100
thousand and over and time deposits greater than one year.
The following table sets forth consolidated information regarding
average balances and rates.
<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDER'S EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three Months Ended June 30
1998 1997
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment Securities:
Taxable $ 274,569 $ 4,130 6.03% $ 271,198 $ 4,224 6.25%
Tax exempt (1) 151,367 2,840 7.53% 151,999 2,951 7.79%
Net loans (2 & 3) 1,883,477 43,006 9.16% 1,584,549 36,444 9.23%
Other investments 18,554 253 5.47% 5,983 66 4.42%
Total Earning Assets 2,327,967 50,229 8.65% 2,013,729 43,685 8.70%
Cash and due from banks 84,975 70,953
Reserve for loan losses (38,279) (31,191)
Other assets 154,104 101,330
Total $2,528,767 $2,154,821
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,752,291 $21,927 5.02% $1,450,089 $17,648 4.88%
Short-term borrowings 227,213 3,555 6.28% 218,310 3,154 5.79%
Long-term debt 12,660 225 7.12% 16,195 281 6.95%
Total Interest Bearing
Liabilities 1,992,164 25,707 5.18% 1,684,594 21,083 5.02%
Noninterest bearing deposits 246,131 211,168
Other liabilities 87,672 79,629
Shareholders' equity 202,800 179,430
Total $2,528,767 $2,154,821
Net Interest Income $24,522 $22,602
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.23% 4.50%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Six Months Ended June 30
1998 1997
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expens Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment Securities:
Taxable $ 272,904 $ 8.176 6.04% $ 269,673 $ 8,245 6.17%
Tax exempt <F1> 150,107 5,695 7.65% 151,172 5,900 7.87%
Net loans <F2><F3> 1,860,377 84,829 9.20% 1,524,335 69,491 9.19%
Other investments 12,044 330 5.53% 6,370 146 4.62%
Total Earning Assets 2,295,432 99,030 8.70% 1,951,550 83,782 8.66%
Cash and due from banks 81,751 70,556
Reserve for loan losses (37,202) (30,516)
Other assets 148,636 97,483
Total $2,488,617 $2,089,073
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,690,902 $41,911 5.00% $1,420,196 $34,136 4.85%
Short-term borrowings 259,891 7,998 6.20% 214,578 5,824 5.47%
Long-term debt 12,983 456 7.09% 17,383 598 6.94%
Total Interest Bearing
Liabilities 1,963,776 50,355 5.17% 1,652,157 40,558 4.95%
Noninterest bearing deposits 239,611 200,835
Other liabilities 84,627 59,147
Shareholders' equity 200,603 176,934
Total $2,488,617 $2,089,073
Net Interest Income $48,675 $43,224
Net Yield on Earning Assets on a Taxable
Equivalent Basis 4.28% 4.47%
<FN>
<FN1> Interest income includes the effects of taxable equivalent
adjustments, using a 40.525% rate for 1998 and 1997. Tax equivalent
adjustments for the three-month periods were $858 in 1998 and $895 in
1997 and for the six-month periods were $1,716 in 1998 and $1,811 in
1997.
<FN2> Loan income includes fees on loans for the three-month periods of
$1,221 in 1998 and $718 in 1997 and for the six-month periods of
$2,315 in 1998 and $1,761 in 1997. Loan income also includes the
effects of taxable equivalent adjustments, using a 40.525% rate for
1998 and 1997. The tax equivalent adjustments for the three-month
periods were $53 in 1998 and $31 in 1997 and for the six-month periods
were $104 in 1998 and $67 in 1997.
<FN3> For purposes of this computation, non-accruing loans are included in
the daily average loan amounts outstanding.
</FN>
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three-month period ended
June 30, 1998, and 1997, was $2,689,000 and $479,000, respectively, and
was $5,090,000 and $1,708,000 for the six-month periods ended June 30,
1998 and 1997. Net Charge-offs of $654,000 have been recorded for the
three-month period ended June 30, 1998, compared to $406,000 of Net
Recoveries for the same period in 1997. Year-to-date Net Charge-offs of
$805,000 have been recorded in 1998, compared to Net Recoveries of
$665,000 through June 1997. The reserve for loan losses was $39,709,000
or 2.05% of net loans at June 30, 1998, compared to $35,424,000 or 1.97%
of net loans at December 31, 1997.
Non-performing assets at June 30, 1998, were $9,879,000 compared to
$11,436,000 at December 31, 1997, a decrease of 13.6%. At June 30, 1998,
non-performing assets were .51% of net loans compared to .64% at
December 31, 1997. It is management's opinion that the reserve for loan
losses is adequate to absorb anticipated losses in the loan portfolio as
of June 30, 1998.
NON-INTEREST INCOME
Non-Interest income for the three-month periods ended June 30, 1998,
and 1997 was $11,776,000 and $7,034,000, respectively, and for the six-month
periods was $22,438,000 in 1998 and $14,195,000 in 1997. For the
six-month period, trust fees increased 19.13%, service charges on deposit
accounts increased 11.91%, loan servicing and sale income increased
105.31%, equipment rental income increased 98.46% and other income
increased 68.31%. The increase in servicing and sale income is due to
income recognition required by SFAS No. 125. The significant increase in
equipment rental income was primarily due to substantial growth in
operating leases. Bank Owned Life Insurance income was primarily the
reason for the increase in the Other Income category. Investment Security
losses and other losses for the six-month period ended June 30, 1998, were
$706,000 compared to net losses of $303,000 in 1997. The net losses in
1998 and 1997 were primarily attributed to certain partnership and venture
capital investments.
NON-INTEREST EXPENSE
Non-Interest expense for the three-month period ended June 30, 1998,
was $20,487,000, an increase of 13.78% over the same period in 1997 and
was $40,341,000 for the six-month period ended June 30, 1998, an increase
of 17.79% over 1997. For the six-month period ended June 30, 1998,
salaries and employee benefits increased 18.33%, net occupancy expense
increased 11.44%, furniture and equipment expense increased 1.92%,
depreciation on leased equipment increased 98.20%, business development
and marketing expense decreased 19.23%, and miscellaneous other expenses
increased 10.65% over the same period in 1997. The increase in salaries
and employee benefits is primarily attributed to the additional expense
provisions being made to fund our stock incentive reserves. As a result
of the increase in market price of 1st Source stock. Business development
and marketing expense decreased due to a $590,000 decrease in charitable
contributions. The increase in depreciation of leased equipment is due to
a significant volume increase of operating leases from the prior year as
mentioned above.
INCOME TAXES
The provision for income taxes for the three-month and six-month
periods ended June 30, 1998, was $4,309,000 and $8,235,000, respectively,
compared to $3,222,000 and $6,457,000 for the comparable periods in 1997.
The provision for income taxes for the six months ended June 30, 1998, and
1997, is at a rate which management believes approximates the effective
rate for the year. The increase in the effective tax rate was due to
increased taxable income in 1998 and larger charitable contributions in
1997 compared to 1998.
CAPITAL RESOURCES
The banking regulators have established guidelines for leverage
capital requirements, expressed in terms of Tier 1 or core capital as a
percentage of average assets, to measure the soundness of a financial
institution. These guidelines require all banks to maintain a minimum
leverage capital ratio of 4.00% for adequately capitalized banks and 5.00%
for well-capitalized banks. 1st Source's leverage capital ratio was 9.64%
at June 30, 1998.
The Federal Reserve Board has established risk-based capital
guidelines for U.S. banking organizations. The guidelines established a
conceptual framework calling for risk weights to be assigned to on and
off-balance sheet items in arriving at risk-adjusted total assets, with
the resulting ratio compared to a minimum standard to determine whether a
bank has adequate capital. The minimum standard risk-based capital ratios
effective in 1998 are 4.00% for adequately capitalized banks and 6.00% for
well-capitalized banks for Tier 1 risk-based capital and 8.00% and 10.00%,
respectively, for total risk-based capital. 1st Source's Tier 1 risk-based
capital ratio on June 30, 1998, was 11.70% and the total risk based
capital ratio was 12.97%.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Asset and liability management includes the management of interest
rate sensitivity and the maintenance of an adequate liquidity position.
The purpose of liquidity management is to match the sources and uses of
funds to anticipated customers' deposits and withdrawals, to anticipate
borrowing requirements and to provide for the cash flow needs of
1st Source. The purpose of interest rate sensitivity management is to
stabilize net interest income during periods of changing interest rates.
Close attention is given to various interest rate sensitivity gaps
and interest rate spreads. Maturities of rate sensitive assets are carefully
maintained relative to the maturities of rate sensitive liabilities and
interest rate forecasts. At June 30, 1998, the consolidated statement of
financial condition was rate sensitive by $88,169,000 more assets than
liabilities scheduled to reprice within one year or 106.69%.
Management adjusts the composition of its assets and liabilities to
manage the interest rate sensitivity gap based upon its expectations of
interest rate fluctuations.
1st Source has two off-balance sheet interest rate swaps as part of
its interest rate risk management strategy. The swaps are being used to
hedge against the Company's Prime floating rate loans. The notional
amount of the first swap as of June 30, 1998, is $20.5 million. It has a
maturity date of January, 2002, and has a current fair value of $2,101.
The second swap has a notional amount of $20.2 million as of June 30,
1998. It has a maturity date of March, 2001, and has a current fair value
of $31,944.
The Company pays a variable interest rate (one-month LIBOR) on each
swap and receives a fixed rate. The interest rate swaps are the most
efficient means of protecting the bank's net interest rate margin in a
declining interest rate environment. Conversely, if interest rates
increase, the increased contribution to net interest income from on-balance
sheet assets will substantially offset any negative impact on net
interest income from these swap transactions.
YEAR 2000
During 1997, management formed a task force to analyze the business
and operational risks associated with whether systems, software, and other
date-specific applications are Year 2000 compliant. This study was
completed at the end of 1997. Plans were developed to have all "mission
critical" systems revised and tested by the end of 1998 and all other
systems completed by June 1999. At this time, management feels we are on
schedule to meet these goals and does not anticipate any material impact
to 1st Source.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
None
ITEM 2. Changes in Securities.
None
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders
During the second quarter of 1998, 1st Source Corporation's
shareholders elected Wellington D. Jones, III, and re-elected Philip J.
Faccenda, Daniel B. Fitzpatrick, and Dane A. Miller, Ph.D., as directors
at the April 16, 1998, annual meeting. They were elected for terms ending
in April, 2001. The election showed that 15,809,918 votes were cast
(representing 90.6% of all eligible shares) with all directors receiving
a majority of the votes cast.
1st Source Corporation's shareholders also elected to approve the
1998 Performance Compensation Plan, a performance compensation plan for
executive officers and other key employees of 1st Source and its
subsidiaries under which the Executive Compensation Committee could make
cash awards each year. The election tally showed that 15,361,534 votes
were cast (representing 90.6% of all eligible shares) with the proposal
receiving a majority of the votes cast.
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1st Source Corporation
DATE 8/14/98 /s/ Christopher J. Murphy III
(Signature)
Christopher J. Murphy III
Chairman of the Board and CEO
DATE 8/14/98 /s/ Larry E. Lentych
(Signature)
Larry E. Lentych, Treasurer (Chief
Accounting and Financial Officer)
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