UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 0-6233
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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 of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N. Michigan Street, South Bend, Indiana 46601
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 219/235-2000
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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:
9% Cumulative Trust Preferred Securities and related guarantee - $25 par value
- -------------------------------------------------------------------------------
(Title of Class)
Floating Rate Cumulative Trust Preferred Securities and related guarantee -
$25 par value
- --------------------------------------------------------------------------------
(Title of Class)
Common Stock - without par value
--------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 16, 1999.
Common Stock, without par value - $309,154,359.
- ----------------------------------------------------
The number of shares outstanding of each of the registrant's classes of stock as
of February 16, 1999.
Common Stock, without par value - 19,069,575 shares.
- -------------------------------------------------------
9% Cumulative Trust Preferred Securities and related guarantee, $25 par value -
1,100,000 shares.
- --------------------------------------------------------------------------------
Floating Rate Cumulative Trust Preferred Securities and related guarantee, $25
par value - 690,000 shares.
- --------------------------------------------------------------------------------
<PAGE>
1ST SOURCE CORPORATION AND SUBSIDIARIES
FORM 10-K/A
INDEX
PART I PAGE
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ITEM 1. Business ........................................... 3
PART II
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ITEM 6. Selected Financial Data ............................ 21
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations .... 22
ITEM 8. Financial Statements and Supplementary Data ........ 33
PART IV
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ITEM 14. Exhibits, Restated Financial Statement
Schedules, and Reports on Form 8-K ............... 57
SIGNATURES .................................................... 58
<PAGE>
INTRODUCTORY STATEMENT
1st Source is filing this Form 10-K/A for the period ended December 31,
1998 to restate the financial information pertaining to income recognition on
securitized loans in accordance with SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
restatement had the effect of increasing loan servicing and sale income by
$735,000 and net income by $437,000, or $0.02 per diluted common share, for the
period ended December 31, 1998. As of December 31, 1998, this restatement
reduced retained interest assets by $729,000, decreased the reserve for loan
losses by $2,300,000 and increased shareholders' equity by $934,000. See Item 8,
Note R, below.
PART I
ITEM 1. BUSINESS
General
1st Source Corporation is an Indiana corporation and registered bank
holding company headquartered in South Bend, Indiana which commenced operations
as a bank holding company in 1971. As used herein, unless the context otherwise
requires, the term "1st Source" refers to 1st Source Corporation and its
subsidiaries. At December 31, 1998, 1st Source had assets of $2.73 billion,
deposits of $2.18 billion and total shareholders' equity of $216.8 million.
Pages 24 through 46 of 1st Source's Annual Report to Shareholders for the year
ended December 31, 1998 are included in Item 8, below.
1st Source, through its principal subsidiary 1st Source Bank (the
"Bank"), delivers a comprehensive range of consumer and commercial banking
services to individual and business customers through 47 banking locations in
the northern Indiana/southwestern Michigan market area. The Bank also competes
for business nationwide by offering specialized financing services for used
private aircraft, automobiles for leasing and rental agencies, heavy duty trucks
and construction equipment. The Bank, which was chartered as an Indiana state
bank in 1922, is a member of the Federal Reserve System and its deposits are
insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent
provided by law. The Bank is headquartered in South Bend, Indiana, which is in
northern Indiana, approximately 95 miles east of Chicago and 140 miles north of
Indianapolis. Its principal market area consists of nine counties in northern
Indiana and three counties in southwestern lower Michigan. South Bend, in St.
Joseph County, is the largest city in its market area, and is a regional center
for educational institutions, health care, financial, accounting and legal
services and retailing.
1st Source's other subsidiaries include 1st Source Leasing, Inc., an
originator and servicer of personal property leases to businesses nationwide,
1st Source Insurance, Inc., a general property and casualty insurance agency in
South Bend, 1st Source Capital Corporation, a licensed small business investment
company, 1st Source Capital Trust I and II, subsidiaries created to issue $44.75
million of Trust Preferred Securities, Michigan Transportation Finance
Corporation, a company which manages the non-Indiana assets of our national
niche lending businesses, 1st Source Funding Corporation, a qualified special
purpose entity established for purposes of administering securitization
activity, and Trustcorp Mortgage Company, a mortgage banking company with four
offices in Indiana and one in Ohio. 1st Source's inactive subsidiaries include
1st Source Travel, Inc., 1st Source Auto Leasing, Inc., and FBT Capital
Corporation.
The principal executive office of 1st Source is located at 100 North
Michigan Street, South Bend, Indiana 46601 and its telephone number is (219)
235-2000.
BUSINESS STRATEGY AND OBJECTIVES
1st Source, as part of its "Vision 2000" strategic planning process
commenced in 1995, has identified several business objectives and strategies
which focus on growth and customer service. The principal objectives of 1st
Source under Vision 2000 have been to (i) increase financial performance and
market share, (ii) provide exceptional customer service, (iii) enhance credit
quality, and (iv) maintain cost controls.
1st Source has employed the following strategies to further its Vision
2000 objectives:
1. Increase market share in each market served and as a percentage of
each customer's relationship. 1st Source has opened 15 new banking locations
from 1995 through 1998 as part of its banking center expansion program designed
to maintain its position as one of the dominant financial institutions in its
market area -- which includes nine counties in northern Indiana and three
3
<PAGE>
counties in southwestern lower Michigan. Management believes that such a
strategy allows the most effective and efficient use of 1st Source's marketing
resources and assures that 1st Source's banking offices are accessible to a
majority of the people residing in the markets served. 1st Source's goal is to
deliver highly personal and superior customer services through each of its
banking facilities and to meet a higher percentage of each customer's financial
needs through personal relationship management.
2. Expand fee-based businesses. 1st Source currently provides a number
of fee-based services to its clients, the major services being trust, mortgage
banking, and insurance. 1st Source believes that additional sources of fee
income are available from existing relationships and that existing fee-based
product lines can be used effectively in developing new relationships with
customers. 1st Source also believes that customers are more loyal and responsive
to its products and services when a large percentage of a customer's financial
services are provided directly by 1st Source. 1st Source's fee-based businesses
are designed to strengthen the relationship between 1st Source and its
customers.
3. Expand the national niche businesses across the United States taking
advantage of specialized opportunities. 1st Source caters to specialized
national market niches that management believes are not being well served by
either the credit subsidiaries of manufacturers or by other financial
institutions. Asset-based lending and personal relationship management of the
customer base, together with an efficient method of operation, is the focus of
the Bank's Specialty Finance Group, which provides such services. Additional
experienced sales people have been and will be added to ensure better geographic
coverage in areas of opportunity. 1st Source has also pursued a strategy of
securitizing loan receivables so that this Group's business growth is not
totally dependent on deposit funding.
4. Actively managing credit quality. 1st Source has adopted a proactive
credit management process with loan officers maintaining responsibility for the
quality of the credits they originate and manage. The credit management process
is supported by a collective and collaborative review and approval process and
is balanced by a review, evaluation and grading process undertaken by an
objective third party. Senior management is actively involved in the management
of the process and incentive compensation is based on 1st Source's overall
credit experience.
BANKING AND FINANCIAL SERVICES
The organization offers a broad range of consumer and commercial
banking services through its lending operations, retail branches and
fee based businesses.
Loans and Leases
o 1st Source's commercial and agriculture loans at December 31,
1998, were approximately $399 million and were 21.2% of total
loans outstanding. The primary focus of this lending area is
with privately-held or closely-controlled firms in 1st
Source's regional market area of Northern Indiana and
Southwest Michigan.
o Commercial loans secured by transportation and construction
equipment totaled $732 million, or 38.9% of total loans
outstanding, at December 31, 1998. This loan area concentrates
on specialty finance lending for automobile leasing and rental
companies, truck leasing companies, privately-owned aircraft
for businesses and individuals and heavy duty trucks and other
equipment used in the construction business. Currently, 1st
Source has 14 locations nationwide supporting these lending
activities. Loan sale and servicing income resulting from loan
securitizations from these specialty finance lending
4
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activities totaled $8.57 million in 1998. 1st Source also
generates equipment rental income through the leasing of
various automobiles, construction equipment and other
equipment to customers through operating leases, where 1st
Source retains ownership of the property being leased. Total
equipment rental income for 1998 totaled $12.6 million with
depreciation on this equipment amounting to $8.9 million.
o Loans secured by real estate amounted to $631 million, which
was approximately 33.5% of total loans outstanding, at
December 31, 1998. The primary focus of this lending area is
commercial real estate and residential mortgage lending in the
regional market area of Northern Indiana and Southwest
Michigan. Most of the residential mortgages are sold into the
secondary market and serviced by 1st Source's mortgage
subsidiary, Trustcorp Mortgage Company.
o 1st Source's consumer loans at December 31, 1998, amounted to
$119 million and 6.4% of total loans outstanding. Consumer
loans are primarily all other non-real estate loans to
individuals in 1st Source's regional market area.
Deposits
Through its network of 47 branches in 12 counties in Indiana and
Michigan, 1st Source generates deposits to fund its lending activities.
The total deposits at December 31, 1998 were $2.18 billion. Enhancing
customer service, 1st Source offers banking services, in addition to
its traditional branches, through its network of 48 automatic teller
machines, bank by phone services and through the internet. Service
charges on deposit accounts totaled $5.8 million for 1998.
Fee Based Businesses
1st Source maintains various fee based businesses to complement net
interest income.
o Trust fees are generated from employee benefit services,
personal and agency trusts and estate planning. In 1998, trust
fees were approximately $8.3 million.
o Mortgage loan sale and servicing income for 1998 amounted to
$6.55 million. Income from loan sale and servicing is
generated from the mortgage banking operations of Trustcorp
Mortgage Company. Trustcorp serviced approximately $1.87
billion of mortgage loans at December 31, 1998.
o Insurance commissions from 1st Source's property and casualty
insurance agency totaled $1.30 million for 1998.
COMPETITION
The activities in which 1st Source and the Bank engage are highly
competitive. Those activities and the geographic markets served involve
primarily competition with other banks, some of which are affiliated with large
bank holding companies headquartered outside of 1st Source's principal market.
Larger financial institutions competing within 1st Source's principal market,
but headquartered elsewhere, include KeyBank, Norwest Bank, Banc One, Standard
Federal Bank and National City Corporation. Competition among financial
institutions is based upon interest rates offered on deposit accounts, interest
rates charged on loans and other credit and service charges, the quality of
services rendered, the convenience of banking facilities and, in the case of
loans to large commercial borrowers, relative lending limits.
5
<PAGE>
In addition to competing with other banks within its 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 1st Source's
non-bank competitors are not subject to the same extensive federal regulations
that govern bank holding companies and banks. Such non-bank competitors may, as
a result, have certain advantages over 1st Source in providing some services.
1st Source competes against these financial institutions by offering
innovative products and highly personalized services. 1st Source also relies on
a history in the market dating back to 1863, relationships that long-term
employees have with their customers, and the capacity for quick local
decision-making.
EMPLOYEES
1st Source employs approximately 1,036 persons on a full-time
equivalent basis. 1st Source provides a wide range of employee benefits and
considers employee relations to be good.
REGULATION AND SUPERVISION
GENERAL. 1st Source and the Bank are extensively regulated under
federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent that the following information
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of 1st Source. The operations of 1st Source may be affected by
legislative changes and by the policies of various regulatory authorities. 1st
Source is unable to predict the nature or the extent of the effects on its
business and earnings that fiscal or monetary policies, economic controls or new
federal or state legislation may have in the future.
1st Source is a registered bank holding company under the Bank Holding
Company Act of 1956 (the "BHCA") and, as such, is subject to regulation,
supervision and examination by the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). 1st Source is required to file annual reports
with the Federal Reserve and to provide the Federal Reserve such additional
information as it may require.
The Bank, as an Indiana state bank, is supervised by the Indiana
Department of Financial Institutions (the "DFI") and the Federal Reserve. As
such, the Bank is regularly examined by and subject to regulations promulgated
by the DFI and the Federal Reserve. Because the FDIC provides deposit insurance
to the Bank, the Bank is also subject to supervision and regulation by the FDIC
(even though the FDIC is not its primary federal regulator).
BANK AND BANK HOLDING COMPANY REGULATION. As noted above, both 1st
Source and the Bank are subject to extensive regulation and supervision.
Bank Holding Company Act. Under the BHCA, as amended, the activities of
a bank holding company, such as 1st Source, are limited to business so closely
related to banking, managing or controlling banks as to be a proper incident
thereto. 1st Source is also subject to capital requirements applied on a
consolidated basis in a form substantially similar to those required of the
Bank. The BHCA also requires a bank holding company to obtain approval from the
Federal Reserve before (i) acquiring, or holding more than 5% voting interest in
any bank or bank holding company, (ii) acquiring all or substantially all of the
assets of another bank or bank holding company, or (iii) merging or
consolidating with another bank holding company.
The BHCA also restricts non-bank activities to those which, by statute
or by Federal Reserve regulation or order, have been identified as activities
closely related to the business of banking or of managing or controlling banks.
6
<PAGE>
Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") reorganized and reformed the regulatory structure applicable to
financial institutions generally.
The Federal Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
adopted to supervise and regulate a wide variety of banking issues. In general,
FDICIA provides for the recapitalization of the Bank Insurance Fund ("BIF"),
deposit insurance reform, including the implementation of risk-based deposit
insurance premiums, the establishment of five capital levels for financial
institutions ("well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized") that would
impose more scrutiny and restrictions on less capitalized institutions, along
with a number of other supervisory and regulatory issues.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Act") in September 1994. Beginning in September 1995,
bank holding companies have the right to expand, by acquiring existing banks,
into all states, even those which had theretofore restricted entry. The
legislation also provides that, subject to future action by individual states, a
holding company has the right to convert the banks which its owns in different
states to branches of a single bank. The states of Indiana and Michigan have
adopted the interstate branching provisions of the Interstate Act.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "EGRPRA")
was signed into law on September 30, 1996. EGRPRA streamlined the non-banking
activities application process for well-capitalized and well-managed bank
holding companies.
Regulations Governing Capital Adequacy. The federal bank regulatory
agencies use capital adequacy guidelines in their examination and regulation of
bank holding companies and banks. If the capital falls below the minimum levels
established by these guidelines, the bank holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open facilities. The various regulatory capital requirements that 1st Source is
subject to are disclosed on page 42 in Footnote "O" of the annual shareholders
report for year ended December 31, 1998, and is incorporated herein by
reference. Management of 1st Source believes that the risk-weighting of assets
and the risk-based capital guidelines do not have a material adverse impact on
1st Source's operations or on the operations of the Bank.
Community Reinvestment Act. The Community Reinvestment Act of 1977
requires that, in connection with examinations of financial institutions within
their jurisdiction, the federal banking regulators must evaluate the record of
the financial institutions in meeting the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those banks. These factors are also considered
in evaluating mergers, acquisitions and applications to open a branch or
facility.
Regulations Governing Extensions of Credit. The Bank is subject to
certain restrictions imposed by the Federal Reserve Act on extensions of credit
to the bank holding company or its subsidiaries, or investments in their
securities and on the use of their securities as collateral for loans to any
borrowers. These regulations and restrictions may limit the ability of 1st
Source to obtain funds from the Bank for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses.
Further, under the BHCA and certain regulations of the Federal Reserve, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tying arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
7
<PAGE>
The Bank is also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest-rates and
collateral, and following credit underwriting procedures that are not less
stringent than, as those prevailing at the time for comparable transactions with
persons not covered above and who are not employees, and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
The Bank is also subject to certain lending limits and restrictions on
overdrafts to such persons.
Reserve Requirements. The Federal Reserve requires all depository
institutions to maintain reserves against their transaction accounts and
non-personal time deposits. Reserves of 3% must be maintained against total
transaction accounts of $47.8 million or less (subject to adjustment by the
Federal Reserve) and 10% must be maintained against that portion of total
transaction accounts in excess of such amount.
Dividends. The ability of the Bank to pay dividends and management fees
is limited by various state and federal laws, by the regulations promulgated by
its primary regulators and by the principles of prudent bank management.
Monetary Policy and Economic Control. The commercial banking business
in which 1st Source engages is affected not only by general economic conditions,
but also by the monetary policies of the Federal Reserve. Changes in the
discount rate on member bank borrowing, availability of borrowing at the
"discount window," open market operations, the imposition of changes in reserve
requirements against member banks deposits and assets of foreign branches, and
the imposition of and changes in reserve requirements against certain borrowings
by banks and their affiliates are some of the instruments of monetary policy
available to the Federal Reserve. These monetary policies are used in varying
combinations to influence overall growth and distributions of bank loans,
investments and deposits, and such use may affect interest rates charged on
loans or paid on deposits. The monetary policies of the Federal Reserve have had
a significant effect on the operating results of commercial banks and are
expected to do so in the future. The monetary policies of the Federal Reserve
are influenced by various factors, including inflation, unemployment, short-term
and long-term changes in the international trade balance and in the fiscal
policies of the U.S. Government. Future monetary policies and the effect of such
policies on the future business and earnings of 1st Source and the Bank cannot
be predicted.
Pending Legislation. Because of concerns relating to competitiveness
and the safety and soundness of the banking industry, Congress often considers a
number of wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. It cannot be
predicted whether or in what form any proposals will be adopted or the extent to
which the business of 1st Source may be affected thereby.
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, the matters
discussed in this document, and other information contained in 1st Source's SEC
filings, may express "forward-looking statements." Those statements may involve
risk and uncertainties, including statements concerning future events,
performance and assumptions and other statements that are other than statements
of historical facts. 1st Source cautions readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made. Readers
are advised that various factors - including, but not limited to, changes in
laws, regulations or generally accepted accounting principles; 1st Source's
competitive position within its markets served; increasing consolidation within
the banking industry; customers' and vendors' critical systems or services
failing to comply with Year 2000 programming issues; unforeseen changes in
interest rates; unforeseen downturns in the local, regional or national
economies - could cause 1st Source's actual results or circumstances for future
periods to differ materially from those anticipated or projected.
8
<PAGE>
ITEM 1. BUSINESS (Continued)
<TABLE>
<CAPTION>
SELECTED STATISTICAL INFORMATION
Distribution of Assets, Liabilities and Shareholders' Equity
Interest Rates and Interest Differential
(Dollars in Thousands)
Year ended December 31, 1998 1997 1996
---------------------------------- -------------------------------- ------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------------------------------- -------------------------------- -------------------------------
ASSETS: (Restated)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Taxable $ 294,632 $ 17,419 5.91% $ 272,400 $ 16,638 6.11% $ 254,033 $ 15,337 6.04%
Tax-exempt (1) 150,678 11,327 7.52% 151,686 11,723 7.73% 146,176 11,787 8.06%
Net loans (2 & 3) 1,853,537 168,664 9.10% 1,610,889 148,061 9.19% 1,348,089 124,467 9.23%
Other investments 45,708 2,348 5.14% 11,662 592 5.09% 18,757 995 5.30%
------------ --------- ----- ---------- -------- ----- ----------- -------- -----
Total Earning Assets 2,344,555 199,758 8.52% 2,046,637 177,014 8.65% 1,767,055 152,586 8.64%
Cash and due from banks 86,452 73,246 75,378
Reserve for loan losses (38,050) (31,966) (28,482)
Other assets 157,968 110,383 81,263
------------ ----------- -------------
Total $2,550,925 $2,198,300 $1,895,214
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,748,759 $ 86,264 4.93% $1,488,287 $73,150 4.92% $1,337,345 $64,214 4.80%
Short-term borrowings 243,431 15,034 6.18% 227,757 13,014 5.71% 156,003 7,843 5.03%
Long-term debt 13,036 929 7.13% 16,527 1,160 7.02% 19,876 1,372 6.90%
------------ --------- ----- ---------- -------- ----- ----------- -------- -----
Total Interest Bearing
Liabilities 2,005,226 102,227 5.10% 1,732,571 87,324 5.04% 1,513,224 73,429 4.85%
------------ --------- ----- ---------- -------- ----- ----------- -------- -----
Noninterest bearing deposits 250,755 210,686 186,804
Other liabilities 89,343 72,500 33,862
Shareholders' equity 205,601 182,543 161,324
------------ ----------- -------------
Total $2,550,925 $2,198,300 $1,895,214
========== ========== ==========
------- ------- -------
Net Interest Income $97,531 $89,690 $79,157
======= ======= =======
Net Yield on Earning Assets on
----- ----- -----
a Taxable Equivalent Basis 4.16% 4.38% 4.48%
===== ===== =====
</TABLE>
(1) Interest income including the effects of taxable equivalent adjustments,
using a 40.525% rate. Tax equivalent adjustments were $3,408 in 1998,
$3,536 in 1997 and $3,635 in 1996.
(2) Loan income includes fees on loans of $4,889 in 1998, $4,097 in 1997 and
$3,136 in 1996. Loan income also includes the effects of taxable
equivalent adjustments, using a 40.525% rate. Tax equivalent adjustments
were $202 in 1998, $162 in 1997 and $131 in 1996.
(3) For purposes of this computation, nonaccruing loans are included in the
daily average loan amounts outstanding.
9
<PAGE>
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 (1)
Volume Rate Net
--------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
1998 compared to 1997
Interest earned on:
Loans $ 22,038 $ (1,435) $ 20,603
Investment securities:
Taxable 1,297 (516) 781
Tax-exempt (80) (317) (397)
Interest-bearing deposits with
other banks (1) 27 26
Federal funds sold and other
money market investments 1,764 (33) 1,731
--------- ---------- ---------
Total Earning Assets $ 25,018 $ (2,274) $ 22,744
Interest paid on:
Savings deposits 2,084 1,113 3,197
Other time deposits 10,463 (546) 9,917
Short-term borrowings 909 1,111 2,020
Long-term debt (249) 18 (231)
--------- ---------- ---------
Total Interest-Bearing Liabilities 13,207 1,696 14,903
--------- ---------- ---------
Net Interest Income $ 11,811 $ (3,970) $ 7,841
========= ========== =========
1997 compared to 1996
Interest earned on:
Loans $ 23,782 $ (405) $ 23,377
Investment securities:
Taxable 1,367 151 1,518
Tax-exempt 607 (671) (64)
Interest-bearing deposits with
other banks (53) (62) (115)
Federal funds sold and other
money market investments (316) 28 (288)
--------- ---------- ---------
Total Earning Assets 25,387 (959) 24,428
Interest paid on:
Savings deposits 91 (419) (328)
Other time deposits 8,688 576 9,264
Short-term borrowings 3,999 1,172 5,171
Long-term debt (232) 20 (212)
--------- ---------- ---------
Total Interest-Bearing Liabilities 12,546 1,349 13,895
--------- ---------- ---------
Net Interest Income $ 12,841 $ (2,308) $ 10,533
========= ========= =========
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
10
<PAGE>
ITEM 1. BUSINESS (Continued)
INVESTMENT PORTFOLIO
The carrying amounts of investment securities at the dates indicated are
summarized as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------------
1998 1997 1996
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
U.S. Treasury and government agencies and corporations $284,327 $228,884 $253,434
States and political subdivisions 154,473 148,228 150,044
Other 100,899 37,796 19,618
--------- ---------- ----------
Total $539,699 $414,908 $423,096
</TABLE>
The following table shows the maturities of investment securities at December
31, 1998, 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.
11
<PAGE>
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 $ 99,487 5.68% $145,608 5.40% $ 3,582 5.95% $35,650 6.01%
States and political
subdivisions 16,628 6.43% 84,249 6.87% 44,411 8.13% 9,185 6.58%
Other 31,464 5.58% 22,538 5.77% 254 7.01% 46,643 6.32%
-------- ----- -------- ----- ------- ----- ------- -----
Total $147,579 5.74% $252,395 5.92% $48,247 7.96% $91,478 6.23%
</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 adjustments.
LOAN PORTFOLIO
The following table shows 1st Source's loan distribution at the end of each of
the last five years for December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Loans:
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $ 399,013 $ 364,391 $ 335,192 $ 314,421 $ 293,171
Commercial loans secured
by transportation and
construction equipment 732,488 752,677 561,042 457,930 358,128
Loans secured by real estate 630,915 568,136 468,109 408,028 377,532
Consumer loans 119,280 111,577 91,220 79,036 71,882
---------- ---------- ---------- ---------- ----------
Total Loans $1,881,696 $1,796,781 $1,455,563 $1,259,415 $1,100,713
========== ========== ========== ========== ==========
</TABLE>
12
<PAGE>
ITEM 1. BUSINESS (Continued)
LOAN PORTFOLIO (Continued)
The following table shows the rate sensitivity of loans (excluding residential
mortgages for 1-4 family residences, consumer loans and lease financing)
outstanding as of December 31, 1998. 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 Year Total
-------- ----------------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial loans secured
by transportation and
construction equipment $397,980 $304,326 $16,530 $ 718,836
Commercial and agricultural 263,268 80,986 5,346 349,600
Loans secured by real estate 207,455 41,625 7,238 256,318
-------- -------- ------- ----------
Total $868,703 $426,937 $29,114 $1,324,754
======== ======== ======= ==========
Rate Sensitivity
---------------------------
Fixed Variable
Rate Rate
-------- --------
Due after one year but within five years $411,325 $15,612
Due after five years 25,559 3,555
-------- -------
Total $436,884 $19,167
======== =======
</TABLE>
The following table summarizes the nonaccrual, past due and restructured loans:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $9,266 $10,030 $6,678 $4,893 $3,314
Accruing loans past
due 90 days or more 275 730 557 274 477
Restructured loans -- -- -- -- 133
-------- -------- -------- -------- --------
Total Nonperforming Loans $9,541 $10,760 $7,235 $5,167 $3,924
======== ======== ======== ======== ========
</TABLE>
13
<PAGE>
ITEM 1. BUSINESS (Continued)
LOAN PORTFOLIO (Concluded)
Information with respect to nonaccrual and restructured loans at December 31,
1998 and 1997 is as follows:
December 31
-----------------------------
1998 1997
-------- --------
(In Thousands)
Nonaccrual loans $9,266 $10,030
Interest income which would have been
recorded under original terms 1,129 1,173
Interest income recorded during the period 410 387
At December 31, 1998, $8,492,000 of the nonaccrual loans are collateralized.
Potential Problem Loans
At December 31, 1998, 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, 1998, 13.9% of total business loans were concentrated with
borrowers in truck and automobile leasing companies. Loans to air transportation
and aircraft dealers accounted for 13.9% of all business loans at December 31,
1998.
14
<PAGE>
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
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Restated) (In Thousands)
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding
at end of period $1,881,696 $1,796,781 $1,455,563 $1,259,415 $1,100,713
========== ========== ========== ========== ==========
Average amount of net loans
outstanding during period $1,853,537 $1,610,889 $1,348,489 $1,172,438 $1,066,752
========== ========== ========== ========== ==========
Balance of reserve for loan
losses at beginning of period $ 35,424 $ 29,516 $ 27,470 $ 23,868 $ 22,350
Charge-offs:
Commercial and agricultural 1,295 293 2,385 985 1,007
Commercial loans secured
by transportation and
construction equipment 1,671 317 347 36 29
Loans secured by real estate 323 157 230 597 816
Consumer loans 1,510 643 324 372 205
---------- ---------- ---------- ---------- ----------
Total charge-offs 4,799 1,410 3,286 1,990 2,057
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial and agricultural 255 101 383 287 166
Commercial loans secured
by transportation and
construction equipment 419 917 593 2,224 225
Loans secured by real estate 47 87 359 122 215
Consumer loans 427 161 172 202 214
---------- ---------- ---------- ---------- ----------
Total recoveries 1,148 1,266 1,507 2,835 820
---------- ---------- ---------- ---------- ----------
Net charge-offs (recoveries) 3,651 144 1,779 (845) 1,237
Additions charged to
operating expense 9,156 6,052 4,649 2,757 4,197
Recaptured reserve due
to loan securitizations (2,300) -- (824) -- (1,442)
---------- ---------- ---------- ---------- ----------
Balance at end of period $ 38,629 $ 35,424 $ 29,516 $ 27,470 $ 23,868
========== ========== ========== ========== ==========
Ratio of net charge-offs (recoveries)
to average net loans outstanding 0.20% 0.01% 0.13% (0.07%) 0.12%
</TABLE>
15
<PAGE>
1st Source's reserve for loan losses is provided for by direct charges to
operations. Losses on loans are charged against the reserve and likewise,
recoveries during the period for prior losses are credited to the reserve. The
loss reserve is maintained at a level considered by management to be adequate to
absorb anticipated losses from loans presently outstanding. The provision made
to this reserve is determined by management based on the risk factors and
general economic conditions affecting the loan portfolio, including changes in
the portfolio mix and past loan loss experience. Management of 1st Source is
constantly reviewing the status of the loan portfolio to identify borrowers that
might develop financial problems, in order to aid borrowers in the handling of
their accounts and to prevent sizable unexpected losses.
In 1998, after management's assessment of loan quality, 1st Source made a charge
of $9.16 million to operations as a provision for loan losses. At December 31,
1998, the reserve for loan losses was $38.63 million, or 2.05% of loans
outstanding net of unearned discount.
16
<PAGE>
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)
1998 1997 1996
--------------------- ---------------------- ---------------------
Percent Percent Percent
Of Loans Of Loans Of Loans
In Each In Each In Each
Category Category Category
Reserve to Total Reserve to Total Reserve to Total
Amount Loans Amount Loans Amount Loans
------- ---------- ------- ---------- -------- ---------
(Restated)
<S> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural $ 7,566 21.2% $ 6,325 20.3% $ 8,011 19.5%
Commercial loans secured
by transportation
and construction
equipment 21,822 38.9% 18,188 41.9% 12,867 38.0%
Loans secured
by real estate 6,460 33.5% 7,177 31.6% 5,535 28.5%
Consumer loans 2,781 6.4% 3,734 6.2% 3,103 14.0%
------- ------ ------- ------ ------- ------
Total $38,629 100.0% $35,424 100.0% $29,516 100.0%
======= ====== ======= ====== ======= ======
<CAPTION>
(Dollars in Thousands)
1995 1994
--------------------- ----------------------
Percent Percent
Of Loans Of Loans
In Each In Each
Category Category
Reserve to Total Reserve to Total
Amount Loans Amount Loans
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Commercial and
agricultural $ 8,250 25.0% $ 5,822 26.6%
Commercial loans secured
by transportation
and construction
equipment 10,258 36.4% 7,998 32.5%
Loans secured
by real estate 6,185 32.4% 6,852 34.4%
Consumer loans 2,777 6.2% 3,196 6.5%
------- ------ ------- ------
Total $27,470 100.0% $23,868 100.0%
======= ====== ======= ======
</TABLE>
Allowance for potential losses not specifically identified is allocated on a pro
rata basis to all loan categories.
17
<PAGE>
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
------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing
demand deposits $ 250,755 -- % $ 210,685 -- % $ 186,804 -- %
Interest bearing
demand deposits 123,571 3.27% 75,765 2.30% 135,328 2.21%
Savings deposits 373,495 2.55% 341,777 2.52% 279,608 2.76%
Other time deposits 1,251,693 5.81% 1,070,746 5.86% 922,409 5.80%
---------- ---------- ----------
Total $1,999,514 $1,698,973 $1,524,149
========== ========== ==========
</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, 1998, by time remaining
until maturity is as follows (in thousands):
Under 3 months $120,163
4 - 6 months 47,506
7 - 12 months 67,364
Over 12 months 56,503
----------
Total $291,536
18
<PAGE>
ITEM 1. BUSINESS (Continued)
RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and average total
assets, and certain other ratios, are presented below:
Year Ended December 31
------------------------------
1998 1997 1996
------ ------ ------
(Restated)
Percentage of net income to:
Average shareholders' equity 15.30% 14.51% 14.38%
Average total assets 1.23% 1.21% 1.22%
Percentage of dividends declared
per common share to diluted net income
per common share 17.16% 18.38% 18.16%
Percentage of average shareholders'
equity to average total assets 8.06% 8.30% 8.51%
19
<PAGE>
ITEM 1. BUSINESS (Concluded)
SHORT-TERM BORROWINGS
The following table shows the distribution of 1st Source's short-term borrowings
and the weighted average interest rates thereon at the end of each of the last
three years. Also provided are the maximum amount of borrowings and the average
amount of borrowings in thousands, as well as weighted average interest rates
for the last three years.
<TABLE>
<CAPTION>
Federal Funds
Purchased and
Security Other
Repurchase Commercial Short-Term Total
1998 Agreements Paper Borrowings Borrowings
- ------------------------------- ---------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $159,478 $5,856 $76,825 $242,159
Maximum amount outstanding
at any month-end 181,364 6,556 141,030 328,950
Average amount outstanding 149,794 4,646 88,991 243,431
Weighted average interest
rate during the year 4.84% 5.29% 8.48% 6.18%
Weighted average interest rate
for outstanding amounts at
December 31, 1998 4.34% 4.63% 5.33% 4.66%
1997
- -------------------------------
Balance at December 31, 1997 $117,987 $3,892 $113,127 $235,006
Maximum amount outstanding
at any month-end 217,039 6,641 113,127 336,807
Average amount outstanding 136,208 5,321 86,228 227,757
Weighted average interest
rate during the year 5.12% 5.46% 6.66% 5.71%
Weighted average interest rate
for outstanding amounts at
December 31, 1997 5.00% 5.39% 6.08% 5.53%
1996
- -------------------------------
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%
</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 to 180 days.
20
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Restated)
<S> <C> <C> <C> <C> <C>
Interest income $196,148 $173,316 $148,820 $135,115 $112,942
Interest expense 102,227 87,324 73,429 64,946 47,709
Net interest income 93,921 85,992 75,391 70,169 65,233
Provision for loan losses 9,156 6,052 4,649 2,757 4,197
Net interest income after
provision for loan losses 84,765 79,940 70,742 67,412 61,036
Noninterest income 52,256 35,656 25,479 19,492 14,874
Noninterest expense 85,500 72,977 60,622 54,861 49,577
Income before income taxes 51,521 42,619 35,599 32,043 26,333
Income taxes 17,843 14,392 12,396 11,001 7,868
Distribution on preferred
securities of subsidiary trusts,
net of income tax benefit 2,221 1,738 -- -- --
NET INCOME $31,457 $26,489 $23,203 $21,042 $18,465
Assets $2,733,592 $2,418,154 $2,079,767 $1,799,257 $1,583,027
Long-term debt 13,189 16,656 18,596 21,819 28,084
Shareholders' equity 216,793 194,953 171,833 152,601 129,082
Basic net income per
common share (1) 1.66 1.40 1.23 1.11 0.97
Diluted net income
per common share (1) 1.62 1.36 1.20 1.08 0.96
Cash dividends per
common share (1) .278 .250 .218 .189 .168
Return on average common
equity 15.30% 14.51% 14.38% 14.75% 14.49%
Return on average
total assets 1.23% 1.21% 1.22% 1.25% 1.19%
</TABLE>
(1) The computation of per share data gives retroactive recognition to a 10%
stock dividend declared January 14, 1999; a 10% stock dividend declared January
20, 1998; a five-for-four stock split declared January 21, 1997; a 5% stock
dividend declared January 22, 1996; a three-for-two stock split declared July
18, 1995; and a 5% stock dividend declared January 23, 1995.
21
<PAGE>
ITEM 7. 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 $2.73 billion in total assets, $2.18 billion in total deposits, $1.88
billion in total loans, and $216.8 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.
The bank offers a broad range of commercial banking, personal banking and
trust services. As part of its commercial banking services, 1st Source also
provides highly specialized financing services for automobile fleets in the
rental and leasing industries; privately owned aircraft used by businesses and
individuals; and heavy duty trucks and construction equipment.
This section of the Annual Report provides a narrative discussion and
analysis of 1st Source's financial condition and results of operations for the
last three years. All tables, graphs, financial statements and notes to the
consolidated financial statements should be considered an integral part of this
analysis.
Except for historical information contained herein, the matters discussed in
this document, and other information contained in 1st Source's SEC filings, may
express "forward-looking statements." Those statements may involve risk and
uncertainties, including statements concerning future events, performance and
assumptions and other statements that are other than statements of historical
facts. 1st Source cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made. Readers are
advised that various factors - including, but not limited to, changes in laws,
regulations or generally accepted accounting principles; 1st Source's
competitive position within its markets served; increasing consolidation within
the banking industry; customers and vendors of critical systems or services
failing to comply with Year 2000 programming issues; unforeseen changes in
interest rates; unforeseen downturns in the local, regional or national
economies - could cause 1st Source's actual results or circumstances for future
periods to differ materially from those anticipated or projected.
AVERAGE ASSETS (In Millions)
[GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98
<S> <C> <C> <C> <C>
(1,547) (1,687) (1,895) (2,198) (2,551)
</TABLE>
AVERAGE LOANS (In Millions)
[GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98
<S> <C> <C> <C> <C>
(1,067) (1,172) (1,348) (1,611) (1,854)
</TABLE>
AVERAGE DEPOSITS (In Millions)
[GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98
<S> <C> <C> <C> <C>
(1,256) (1,354) (1,524) (1,699) (2,000)
</TABLE>
AVERAGE SHAREHOLDERS' EQUITY (In Millions)
[GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98
<S> <C> <C> <C> <C>
(127) (143) (161) (183) (206)
</TABLE>
22
<PAGE>
RESULTS OF OPERATIONS
Net income in 1998 was $31.5 million, up from $26.5 million in 1997 and $23.2
million in 1996. Diluted net income per common share was $1.62 in 1998, $1.36 in
1997 and $1.20 in 1996 after giving retroactive recognition to stock splits and
stock dividends.
Return on average total assets was 1.23% in 1998, compared to 1.21% in 1997
and 1.22% in 1996. Return on average common equity was 15.30% in 1998 versus
14.51% in 1997 and 14.38% in 1996.
Net income in 1998 was favorably affected by strong noninterest income
growth. By leveraging internal resources, 1st Source has been successful in
generating additional noninterest income as a way to mitigate the competitive
pressures on the interest margin. Offsetting the increase in noninterest income
were expense increases in salaries, leased equipment depreciation and other
expense.
Dividends declared on common stock in 1998 amounted to $.278 per share,
compared to $.250 in 1997 and $.218 in 1996. 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, 1998 and
1997 are summarized below.
QUARTERLY RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(Restated) (Restated)
<S> <C> <C> <C> <C>
1998
Interest income $ 47,892 $ 49,318 $ 49,355 $ 49,583
Net interest income 23,244 23,611 23,512 23,554
Provision for loan losses 2,401 2,689 2,042 2,024
Investment securities and other
investment gains (losses) (122) (584) -- 94
Income before income taxes and
subsidiary trust distributions 11,651 12,211 13,931 13,728
Net income 7,160 7,342 8,336 8,619
Diluted net income per common share (1) .36 .38 .43 .45
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
1997
Interest income $39,146 $42,758 $44,842 $46,570
Net interest income 19,671 21,675 22,092 22,554
Provision for loan losses 1,229 479 2,130 2,214
Investment securities and other
investment gains (losses) 181 (484) 24 (183)
Income before income taxes and
subsidiary trust distributions 9,360 10,224 11,033 12,002
Net income 6,066 6,441 6,638 7,344
Diluted net income per common share (1) .31 .33 .34 .38
</TABLE>
(1) The computation of per share data gives retroactive recognition to a 10%
stock dividend declared January 14, 1999.
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 non-interest bearing
deposits, excluding brokered certificates of deposit and certain certificates of
deposit of $100,000 and over. In 1998, average core deposits equaled 62.49% of
average total assets, compared to 63.36% in 1997 and 68.32% in 1996. The
effective cost rate of core deposits in 1998 was 3.94%, compared to 3.97% in
1997 and 3.98% in 1996.
23
<PAGE>
Average demand deposits (non-interest bearing core deposits) increased 19.02%
in 1998, compared to an increase of 12.78% in 1997. They represented 15.73% of
total core deposits in 1998 compared to 15.13% in 1997 and 14.43% in 1996.
PURCHASED FUNDS -- 1st Source's purchased funds are used to supplement core
deposits and include certain certificates of deposit of $100,000 and over,
brokered certificates of deposit, federal funds, securities sold under
agreements to repurchase, commercial paper and other short-term borrowings.
Purchased funds are raised from customers seeking short-term investments and are
used to balance the bank's interest rate sensitivity. During 1998, 1st Source's
reliance on purchased funds increased to 25.44% of average total assets from
24.29% in 1997.
LOAN SECURITIZATIONS -- 1st Source sells many of the aircraft and auto loans
it originates through the issuance of securities backed by those loans in
securitization transactions. In a securitization, 1st Source sells and transfers
pools of loans to a qualified special purpose entity. The special purpose entity
simultaneously sells and transfers its total interest in the loans to a trust,
which issues beneficial interests in the loans in the form of securities which
are sold through private placement transactions. The special purpose entity
generally retains the right to receive any excess cash flows of the trust. 1st
Source sold $346 million of loans in 1998 and $63 million of loans in 1997 in
conjunction with aircraft and auto loan securitization transactions, and
revolving agreements related to all current and previous years' securitizations.
SHAREHOLDERS' EQUITY -- Management continues to emphasize profitable asset
growth and retention of equity in the business. Average shareholders' equity
equated to 8.06% of average total assets in 1998 compared to 8.30% in 1997.
Shareholders' equity was 7.93% of total assets at year-end 1998, compared to
8.06% at year-end 1997.
INVESTMENT OF FUNDS
INVESTMENT SECURITIES -- Investment securities at year-end 1998 increased
30.08% from 1997, following a 1.94% decrease from year-end 1996 to year-end
1997. The increase in 1998 is attributed to deposit growth. The decrease in 1997
was attributed to the sale of various securities used to fund a $20 million
bank-owned life insurance program.
LOANS -- Average loans, net of unearned discount, increased 15.06% in 1998,
following a 19.49% increase in 1997. Loans, net of unearned discount, at
December 31, 1998, were $1.88 billion and were 68.84% of total assets, compared
to $1.80 billion or 74.30% of total assets at December 31, 1997.
Commercial and agricultural lending outstandings, excluding those secured by
real estate, increased 9.50% during 1998. 1st Source has experienced success in
its market as customers seek professional personal service with local
decision-making authority.
Commercial loans secured by transportation and construction equipment at
year-end 1998 decreased 2.68% from year-end 1997. The decrease is reflective of
the $346 million of aircraft and auto loans sold through securitizations in
1998. Despite this, there were strong originations in construction equipment,
auto rental franchises, aircraft and truck, and automobile leasing company
financings.
Real estate loans recorded growth of 11.05% during 1998. This increase was
led by residential mortgage loans held for sale with an increase of 44.83%,
followed by an increase of 9.89% in commercial real estate lending. Portfolio
residential mortgage loans decreased 13.34% from 1997.
Consumer loans grew a modest 6.90% in 1998.
MATURITIES OF INVESTMENT SECURITIES AT DECEMBER 31, 1998
(Dollars in thousands)
<TABLE>
<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 $ 99,487 5.68% $ 16,628 6.43% $ 31,464 5.58% $147,579 5.74%
1 - 5 Years 145,608 5.40 84,249 6.87 22,538 5.77 252,395 5.92
5 - 10 Years 3,582 5.95 44,411 8.13 254 7.01 48,247 7.96
Over 10 Years 35,650 6.01 9,185 6.58 46,643 6.32 91,478 6.23
Total $284,327 5.58% $154,473 7.17% $100,899 5.96% $539,699 6.11%
</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.
24
<PAGE>
LIQUIDITY RISK MANAGEMENT -- The Asset/Liability management process
incorporates overall bank liquidity and interest rate sensitivity. The purpose
of liquidity management is to match the sources and use of funds to anticipated
customer deposits, withdrawals and borrowing requirements, as well as to provide
for the cash flow needs of 1st Source. The primary source of liquidity is the
investment portfolio. At December 31, 1998, securities maturing in one year
amounted to $147.6 million which represented 27.34% of the investment portfolio
as compared to 23.59% at year-end 1997. Other alternative sources of funds are
loan repayments and loan securitizations. The liquidity of 1st Source is further
enhanced by a significant concentration of core deposits and $100,000-and-over
certificates of deposit. Both provide a relatively stable funding base.
INTEREST RATE RISK MANAGEMENT -- The Asset/Liability Management Committee of
1st Source monitors and manages the relationship of earning assets to interest
bearing liabilities and the responsiveness of asset yields, interest expense and
interest margins to changes in market interest rates. In the normal course of
business, 1st Source faces ongoing interest rate risks and uncertainties. 1st
Source occasionally utilizes interest rate swaps to partially manage the primary
market exposures associated with the interest rate risk related to underlying
assets, liabilities, and anticipated transactions. Under the current interest
rate swaps, 1st Source entered into agreements with another party to exchange,
at specific intervals, the difference between fixed-rate and floating-rate
interest amounts as calculated by reference to a notional amount as a means to
convert floating rate loans to a fixed rate. The notional amounts total $26.9
million at December 31, 1998. The current positions are not leveraged and are
not held for trading.
A hypothetical change in earnings was modeled by calculating an immediate 100
basis point (1.00%) change in interest rates across all maturities. This
analysis presents the hypothetical change in earnings of those rate sensitive
financial instruments and interest rate swaps held by 1st Source (excluding
Trustcorp Mortgage) at December 31, 1998. The aggregate hypothetical loss in
pre-tax earnings is estimated to be $2,440,690 on an annualized basis on all
rate sensitive financial instruments and the interest rate swaps based on a
hypothetical increase of a 100 basis point change in interest rates. The
aggregate hypothetical increase in pre-tax earnings is estimated to be
$2,386,140 on an annualized basis on all rate sensitive financial instruments
and the interest rate swaps based on a hypothetical decrease of a 100 basis
point change in interest rates. Actual results may differ materially from those
projected. The use of this methodology to quantify the market risk of the
balance sheet should not be construed as an endorsement of its accuracy or the
accuracy of the related assumptions.
Due to the nature of the mortgage banking business, 1st Source manages the
earning assets and interest-bearing liabilities of Trustcorp Mortgage Company on
a separate basis. The predominant assets on Trustcorp's balance sheet are
mortgage loans held for sale, which are funded by short-term borrowings
(normally less than 30 days) from non-affiliated banks. These borrowings are
managed on a daily basis. Trustcorp's other borrowings for working capital and
purchases of servicing assets are funded by 1st Source Corporation and
non-affiliated banks.
Trustcorp manages the interest rate risk related to loan commitments by
entering into contracts for future delivery of loans. (See Note M of Notes to
Consolidated Financial Statements.)
25
<PAGE>
COMPOSITION OF AVERAGE ASSETS (In millions)
[GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98
(Restated)
<S> <C> <C> <C> <C> <C>
Loans (net of unearned
discount and loss reserve) 1,043.1 1,146.3 1,323.6 1,578.9 1,815.5
Investments 368.2 396.2 411.9 434.1 489.3
Other earning assets 1.0 1.4 12.3 25.0 47.4
Other assets 134.7 142.7 147.4 160.3 198.7
Total 1,547.0 1,686.6 1,895.2 2,198.3 2,550.9
</TABLE>
COMPOSITION OF AVERAGE LIABILITIES
AND SHAREHOLDERS' EQUITY (In millions)
[GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98
(Restated)
<S> <C> <C> <C> <C> <C>
Noninterest bearing deposits 162.2 173.2 186.8 210.7 250.8
Interest bearing core deposits 967.1 1,034.3 1,108.0 1,182.2 1,343.3
Purchased funds & long-term debt 264.2 305.7 405.2 585.3 706.6
Other liabilities 26.0 30.7 33.9 37.6 44.6
Shareholders' equity 127.5 142.7 161.3 182.5 205.6
Total 1,547.0 1,686.6 1,895.2 2,198.3 2,550.9
</TABLE>
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
8.74% in 1998, following a 13.31% increase in 1997.
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 4.16% in 1998 compared to 4.38% in 1997
and 4.48% in 1996. The interest margin has decreased the last two years due to
competitive pricing pressures. In addition, 1st Source has relied more on
purchased funds to meet loan demand.
The yield on earning assets in 1998 was 8.52%, compared to 8.65% in 1997 and
8.64% in 1996. Average earning assets in 1998 increased 14.56%, following a
15.82% increase in 1997. The effective rate on interest bearing liabilities was
5.10% in 1998, compared to 5.04% for 1997 and 4.85% for 1996.
NONINTEREST INCOME -- Supplementing the growth in net interest income was an
increase in noninterest income of 46.56% over 1997. The factors influencing the
growth were increased aircraft and auto loan securitization and servicing
income, revenues generated from operating leases, and the origination and sale
of mortgage loans and servicing. Noninterest income in 1997 increased 39.94%
over 1996 primarily for the same reasons as in the current year.
Trust fees in 1998 were $8.26 million, compared to $7.31 million in 1997 and
$6.73 million in 1996. Trust fees increased 12.92% in 1998, following an 8.62%
increase in 1997.
Service charges on deposit accounts increased by 8.64% resulting in $5.84
million of income for 1998. The $5.38 million recorded in 1997 was an increase
of 11.41% from the $4.83 million of service charges on deposit accounts
generated in 1996.
26
<PAGE>
Loan servicing and sale income generated from 1st Source's aircraft and auto
loan securitization and mortgage banking activities increased 64.51% to $15.85
million in 1998. The $9.64 million recorded in 1997 represented a 78.28%
increase over 1996.
1st Source recognized loan securitization gains of $1.98 million during 1998,
compared to $800,000 during 1997. Other aircraft and auto loan securitization
income, including servicing income, in 1998 was $7.32 million, compared to $3.76
million in 1997. Servicing income has increased as the result of additional loan
sales. The outstanding servicing portfolio grew to $321 million at year-end
1998, compared to $111 million at the end of 1997.
Gains of $4.86 million were recognized on the origination and sale of
mortgage loans and servicing in 1998, compared to gains of $3.38 million in
1997. In addition, net servicing fees on mortgages remained steady at $1.69
million for both 1998 and 1997. As of year-end 1998, Trustcorp Mortgage
Company's mortgage servicing portfolio aggregates $1.87 billion, as compared to
$1.30 billion one year ago.
Equipment rental income generated from operating leases increased to $12.56
million in 1998, nearly an 81% increase over 1997. The $6.95 million recorded in
1997 was nearly a 154% increase over 1996. Revenues from operating leases for
construction equipment, automobiles and other equipment, and the related
depreciation on the equipment, have increased significantly in the past three
years as 1st Source has focused on increasing this line of business.
Other income increased 51.42% during 1998, following an increase of 23.44% in
1997. This growth in 1998 was generated primarily by an increase in mortgage
loan fees as homeowners took advantage of lower interest rates to refinance
their mortgages. In addition, increases were realized in insurance commissions,
standby letter of credit fees and appreciation in cash surrender value of
bank-owned life insurance (BOLI). The growth in 1997 was fueled by increases in
cash surrender value of BOLI, mortgage underwriting fees and standby letter of
credit fees.
The 1998 and 1997 net losses recorded for investment securities and other
represent, primarily, the write-offs of venture capital investments.
NONINTEREST EXPENSE -- During 1998, 1st Source experienced an increase in
noninterest expense of 17.16% primarily attributed to costs to attract and
retain quality people. In addition, the depreciation on our growing operating
lease portfolio and professional consulting expenses contributed to the overall
increase in operating expenses. Cost control across all business units and
better utilization of resources continues to be a major focus at 1st Source. The
increase in noninterest expense during 1997 of 20.38% was primarily due to the
branch expansion, salaries, operating lease depreciation and additional
provisions needed for our stock incentive reserves.
Salaries and employee benefits comprised approximately 55% of total
noninterest expense in 1998 compared to 57% in 1997. Salaries and employee
benefits increased 13.20% in 1998, following a 15.80% increase in 1997. Salaries
and wages increased 15.61% in 1998 and 12.73% in 1997. The number of full-time
equivalent employees stood at 1,036 at the end of 1998, compared to 966 and 895
at the end of 1997 and 1996, respectively. Employee benefits increased 5.34% in
1998, following a 27.07% increase in 1997. The smaller increase in employee
benefits was primarily the result of additional provisions made during 1997 to
fund the stock incentive reserves due to the significant 63% increase in the
market price of 1st Source common stock during that period. Group insurance
expense increased 20.01% in 1998, following a 9.86% decrease in 1997.
Occupancy expense in 1998 increased 9.26% from 1997, following a 3.22%
decrease in 1997. The increase in occupancy expense in 1998 is primarily due to
the full year impact of the previous year's branch expansion. The reduction in
occupancy expense in 1997 is attributed to greater tenant occupancy of our
head-quarters building.
27
<PAGE>
SELECTED STATISTICAL INFORMATION
Distribution of Assets, Liabilities and Shareholders' Equity
Interest Rates and Interest Differential
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1998
Interest
Average Income/ Yield/
ASSETS Balance Expense Rate
------- ------- ------
(Restated)
<S> <C> <C> <C>
Investment securities:
Taxable $ 294,632 $17,419 5.91%
Tax exempt (1) 150,678 11,327 7.52
Net loans (2 & 3) 1,853,537 168,664 9.10
Other investments 45,708 2,348 5.14
Total earning assets 2,344,555 199,758 8.52
Cash and due from banks 86,452
Reserve for loan losses (38,050)
Other assets 157,968
Total $2,550,925
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits $1,748,759 86,264 4.93
Short-term borrowings 243,431 15,034 6.18
Long-term debt 13,036 929 7.13
Total interest bearing liabilities 2,005,226 102,227 5.10
Noninterest bearing deposits 250,755
Other liabilities 89,343
Shareholders' equity 205,601
Total $2,550,925
Net interest income $ 97,531
Net yield on earning assets
on a taxable equivalent basis 4.16%
</TABLE>
(1) Interest income includes the effects of taxable equivalent adjustments,
using a 40.525% rate. Tax equivalent adjustments were $3,408 in 1998, $3,536 in
1997 and $3,635 in 1996.
(2) Loan income includes fees on loans of $4,889 in 1998, $4,097 in 1997 and
$3,136 in 1996. Loan income also includes the effects of taxable equivalent
adjustments, using a 40.525% rate. Tax equivalent adjustments were $202 in 1998,
$162 in 1997 and $131 in 1996.
(3) For purposes of this computation, nonaccruing loans are included in the
daily average loan balance outstanding.
<TABLE>
<CAPTION>
1997 1996
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
$ 272,400 $ 16,638 6.11% $ 254,033 $ 15,337 6.04%
151,686 11,723 7.73 146,176 11,787 8.06
1,610,889 148,061 9.19 1,348,089 124,467 9.23
11,662 592 5.09 18,757 995 5.30
2,046,637 177,014 8.65 1,767,055 152,586 8.64
73,246 75,378
(31,966) (28,482)
110,383 81,263
$2,198,300 $1,895,214
$1,488,287 73,150 4.92 $1,337,345 64,214 4.80
227,757 13,014 5.71 156,003 7,843 5.03
16,527 1,160 7.02 19,876 1,372 6.90
1,732,571 87,324 5.04 1,513,224 73,429 4.85
210,686 186,804
72,500 33,862
182,543 161,324
$2,198,300 $1,895,214
$ 89,690 $ 79,157
4.38% 4.48%
</TABLE>
28
<PAGE>
EARNING RESULTS -- CONTINUED
Furniture and equipment expense increased in 1998 by 7.15%, following a
15.07% increase in 1997. The increase in 1997 is attributed to depreciation on
new furniture and equipment.
Depreciation on operating leases increased 80% in 1998, following a 176%
increase in 1997 due to the increased volume of operating leases.
Business development and marketing expense increased 2.98% in 1998,
following an increase of 33.78% in 1997. Contributions to the 1st Source
Foundation declined in 1998 compared to 1997.
An increase of 17.72% occurred in other expenses during 1998, compared to a
19.56% increase in 1997. During 1998, the majority of the increase in other
expenses was in professional consulting. The increase in professional consulting
expenses was attributed to loan securitization activity and costs in upgrading
various computer systems for Year 2000 (Y2K) compliance. During 1997, 1st Source
experienced increases in employee acquisition and training, communications,
professional consulting and collection and repossession expenses.
YEAR 2000 -- The Y2K issue is the result of potential problems with computer
systems or any equipment with computer chips that store the year portion of the
date as just two digits (e.g., 98 for 1998). Systems using this two-digit
approach may not be able to determine whether "00" represents the Year 2000 or
1900. The problem, if not corrected, may make those systems fail altogether or,
even worse, allow them to generate incorrect calculations causing a disruption
of normal operations.
In 1997, a comprehensive project plan to address the Y2K issue as it relates
to 1st Source's operations was developed, approved by the Board of Directors and
implemented. The scope of the plan has five phases comprising Awareness,
Assessment, Renovation, Validation and Implementation as defined by federal
banking regulatory agencies. Two project teams were assigned. The first
consisted of key members of the technology staff, representatives of functional
business units and senior management. The second primarily consisted of lenders
and credit personnel. The first team assessed our systems and equipment and
vendors to ascertain their readiness and to develop the overall plan to bring
our systems into compliance. The second team assessed the readiness of our
customers and determined what risk, if any, our key customers pose to the bank
with regards to their Y2K readiness. Additionally, the duties of the Senior Vice
President of Operations were realigned to allow him to serve as the Year 2000
Project Manager.
The scope of the project also includes other operational and environmental
systems since they may be impacted if embedded computer chips control the
functionality of those systems. From the assessment, 1st Source has identified
and prioritized those systems deemed to be mission critical or those that have a
significant impact on normal operations.
1st Source relies on third-party vendors and service providers for much of
its data processing capabilities and to maintain its computer systems. Formal
communications with these providers and other external counterparties were
initiated in 1997 to assess the Y2K readiness of their products and services.
Their progress in meeting their targeted schedules is being monitored
continually for any indication that they may not be able to address the problems
in time. Thus far, responses indicate that all of the significant providers
currently have compliant versions available or are well into the renovation and
testing phases. However, 1st Source can give no guarantee that the systems of
these service providers and vendors on which 1st Source's systems rely will be
timely renovated.
29
<PAGE>
Additionally, 1st Source has implemented a plan to manage the potential risk
posed by the impact of the Y2K issue on its major borrowing customers. Formal
communications have been initiated, and the assessment was substantially
complete on December 31, 1998. Loan losses attributed to the Y2K issue are not
anticipated to be material to 1st Source. However, there can be no guarantee
that any loss incurred will be immaterial.
1st Source's total cost for the Y2K project is estimated to be between
$900,000 and $1,700,000. The total amount expended on the project through
December 31, 1998, was $630,000 of which approximately $610,000 related to the
cost to repair or replace software. Approximately $9,000 was related to the cost
of replacing equipment and approximately $11,000 was related to miscellaneous
items such as training for employees and communications with customers.
Funds have been provided from our normal operating budget and costs are
expensed as they are incurred.
The total cost to 1st Source of these Year 2000 readiness activities has not
been, and is not anticipated to be, material to its financial position or
results of operations in any given year.
The project teams feels that 1st Source's Y2K readiness project is on
schedule. The following table provides a summary of the current status of the
five phases involved and a projected timetable for completion.
TARGET DATES FOR MISSION CRITICAL SYSTEMS
Project Phase %Completed Date Projected Completion
- ------------- --------------- --------------------
Awareness 100% --
Assessment 100% --
Renovation 97% March 31, 1999
Validation 79% March 31, 1999
Implementation 70% June 30, 1999
No specific other projects have been deferred due to this project. Much of
the work done within this project is an acceleration of work that would have
been done in the normal course of business.
The costs and timetable in which 1st Source plans to complete the Year 2000
readiness activities are based on management's best estimates, which were
derived using numerous assumptions of future events including the continued
availability of certain resources, third-party plans and other factors. 1st
Source can make no guarantee that these estimates will be achieved and actual
results could differ from such plans.
Based upon current information related to the progress of its major vendors
and service providers, management has determined that the Y2K issue will not
pose significant operational problems for its computer systems. This
determination is based on the ability of those vendors and service providers to
renovate, in a timely manner, the products and services on which 1st Source's
systems rely. However, 1st Source can give no guarantee that the systems of
these suppliers will be renovated in a timely manner.
Realizing that some disruption may occur despite its best efforts, 1st Source
is in the process of developing contingency plans for each critical system in
the event that one or more of those systems fail. While this is an ongoing
process, 1st Source expects to have the plans substantially documented by June
30, 1999.
INCOME TAXES -- Federal income taxes were $13.50 million and $10.79 million,
prior to the tax benefit of $1,196,000 and $936,000 relating to the distribution
on preferred securities of subsidiary trusts for 1998 and 1997, respectively.
After this benefit, 1998 federal income taxes were $12.30 million, or 28.11% of
income after state taxes, compared to $9.86 million or 27.12% in 1997 and $9.13
million or 28.24% in 1996. The higher percentage of federal income taxes in 1998
is the result of less tax-exempt income. A settlement with the Internal Revenue
Service was reached during 1997 over a dispute arising from the 1983 purchase of
the First National Bank of Mishawaka relating to deduction of core deposit
intangibles. Interest of $955,000 related to the settlement was paid to the IRS
in 1998. State income taxes were $4.34 million and $3.60 million in 1998 and
1997, respectively, prior to the tax benefit of $318,000 and $248,000 relating
to the distribution on preferred securities of subsidiary trusts for 1998 and
1997, respectively. After this benefit, 1998 state income taxes were $4.02
million, compared to $3.35 million in 1997 and $3.27 million in 1996.
30
<PAGE>
CREDIT EXPERIENCE
PROVISION FOR LOAN LOSSES -- The ability of a bank to identify and assess the
risk factors affecting its loan portfolio is crucial for profitability.
Management follows a credit policy that balances the risk and return on loans
and monitors potential credit problems to ensure that they are adequately
managed and reserved.
The provision made to the reserve for loan losses is determined by management
based on the risk factors and general economic conditions affecting the loan
portfolio, including changes to the portfolio mix and past loan loss experience.
The provision for loan losses for 1998 was $9.16 million, compared to $6.05
million in 1997 and $4.65 million in 1996. Net charge-offs of $3.65 million,
$144,000, and $1.78 million were recorded in 1998, 1997 and 1996, respectively.
The reserve for loan losses at December 31, 1998 totaled $38.63 million and
was 2.05% of loans, compared to $35.42 million or 1.97% of loans at December 31,
1997, and $29.52 million or 2.03% of loans at December 31, 1996. 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, 1998.
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. Nonperforming assets amounted to $10.57 million at December 31,
1998, compared to $11.44 million at December 31, 1997 and $7.77 million at
December 31, 1996. Impaired loans totaled $13.30 million, $9.39 million and
$8.13 million at December 31, 1998, 1997 and 1996, respectively.
NONPERFORMING ASSETS AT DECEMBER 31
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans past due over 90 days $ 275 $ 730 $ 557 $ 274 $ 477
Nonaccrual loans 9,266 10,030 6,678 4,893 3,314
Restructured loans - - - - 133
TOTAL NONPERFORMING LOANS 9,541 10,760 7,235 5,167 3,924
Other real estate 424 335 445 1,359 763
Other assets 606 341 93 58 13
TOTAL NONPERFORMING ASSETS $10,571 $11,436 $7,773 $6,584 $4,700
Nonperforming assets to loans,
net of unearned discount .56% .64% .54% .52% .43%
</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, 1998, there were 1,137 holders of record of 1st Source common
stock.
1st Source's leverage capital ratio decreased from 9.98% at December 31,
1997, to 9.51% at December 31, 1998.
31
<PAGE>
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:
<TABLE>
<CAPTION>
1998 Sales Price Cash 1997 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 $33 3/4 $25 1/4 $.066 $20 1/4 $15 3/4 $.060
June 30 36 3/4 30 3/4 .066 22 3/4 17 3/4 .062
September 30 36 27 1/2 .073 23 1/2 21 1/4 .062
December 31 32 25 3/4 .073 27 1/2 22 1/4 .066
</TABLE>
The above information gives retroactive recognition to a 10% stock dividend
declared January 14, 1999; and a 10% stock dividend declared January 20, 1998.
At December 31, 1998, the total market capitalization of 1st Source was
approximately $575 million.
Leverage Capital Ratio (As a Percent)
[GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98
<S> <C> <C> <C> <C>
(8.33) (8.44) (8.48) (9.98) (9.51)
</TABLE>
Common Stock Price Range (In Dollars)
[GRAPH]
<TABLE>
<CAPTION>
1997 1998
1st 2nd 3rd 4th 1st 2nd 3rd 4th
----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 20 1/4 22 3/4 23 1/2 27 1/2 33 3/4 36 3/4 36 32
Low 15 3/4 17 3/4 21 1/4 22 1/4 25 1/4 30 3/4 27 1/2 25 3/4
Quarter Ending 19 22 23 26 1/4 33 32 1/2 29 1/4 30 1/2
</TABLE>
Book Value Per Common Share *
[GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98
<S> <C> <C> <C> <C>
(6.80) (8.10) (9.11) (10.24) (11.48)
</TABLE>
* Book value is not necessarily indicative of the value of 1st Source common
stock.
Cash Dividends Per Common Share
[GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98
<S> <C> <C> <C> <C>
(.168) (.189) (.218) (.250) (.278)
</TABLE>
EFFECTS OF INFLATION -- The results of operations can also be affected by
inflation, although it is difficult to measure the precise impact on the various
types of income and expense. Interest rates, in particular, are significantly
affected by inflation, but neither the timing nor the magnitude of the changes
coincide with changes in the consumer price index nor other measures of
inflation. Additionally, increases in interest rates, such as those on consumer
deposits, lag behind increases in overall rates. This, in turn, affects the
composition of sources of funds by reducing core deposit growth and increasing
the need for purchased funds. Another significant effect of inflation is on
noninterest expenses, which tend to rise during periods of general inflation.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31
-----------
1998 1997
(Restated)
---------- ----
(Dollars in thousands)
ASSETS
Cash and due from banks .............................. $ 132,514 $ 90,864
Federal funds sold and
interest bearing deposits with other banks ...... 41,951 11,677
Investment securities, available-for-sale
(amortized cost of $440,147 and
$298,439 at December 31, 1998 and
1997, respectively) ............................. 443,691 299,933
Investment securities, held-to-maturity
(fair value of $99,734 and $119,369
at December 31, 1998 and 1997,
respectively) ................................... 96,008 114,975
Loans, net of unearned discount:
Commercial and agricultural loans ............... 399,013 364,391
Commercial loans secured by transportation
and construction equipment .................. 732,488 752,677
Loans secured by real estate .................... 630,915 568,136
Consumer loans .................................. 119,280 111,577
Total Loans .......................................... 1,881,696 1,796,781
Less, Reserve for loan losses ................... 38,629 35,424
Net Loans ............................................ 1,843,067 1,761,357
Equipment owned under operating leases, net of
accumulated depreciation of $12,997 and $7,260
at December 31, 1998 and 1997, respectively ..... 54,170 32,046
Premises and equipment:
Land ............................................ 4,130 4,123
Buildings and improvements ...................... 28,948 25,868
Furniture and equipment ......................... 21,996 23,750
Construction in progress ........................ 1,322 555
Total Premises and Equipment ......................... 56,396 54,296
Less, Accumulated depreciation .................. 25,169 23,514
Net Premises and Equipment ........................... 31,227 30,782
Other assets ......................................... 90,964 76,520
Total Assets ......................................... $2,733,592 $2,418,154
LIABILITIES
Deposits:
Noninterest bearing .......................... $ 294,810 $ 274,906
Interest bearing ............................. 1,882,297 1,616,885
Total Deposits .................................... 2,177,107 1,891,791
Short-term borrowings:
Federal funds purchased and securities
sold under agreements to repurchase .......... 159,478 117,987
Other ........................................ 82,681 117,019
Total Short-Term Borrowings ....................... 242,159 235,006
Other liabilities ................................. 39,594 34,998
Long-term debt .................................... 13,189 16,656
Total Liabilities ................................. 2,472,049 2,178,451
Commitments and contingencies (Notes L, M and P)
Guaranteed preferred beneficial interests
in the Company's subordinated debentures .......... 44,750 44,750
SHAREHOLDERS' EQUITY Common stock; no par value:
Authorized 40,000,000 shares; issued 17,756,636
shares in 1998 and 16,147,791 shares in 1997,
less unearned shares .......................... 6,270 5,700
Capital surplus ................................... 121,456 69,947
Retained earnings ................................. 98,300 124,394
Cost of common stock in treasury (1998 -- 465,405
shares and 1997 -- 289,627 shares) ................ (12,723) (6,978)
Net unrealized appreciation
of securities available-for-sale .................. 3,490 1,890
Total Shareholders' Equity ........................ 216,793 194,953
Total Liabilities and Shareholders' Equity ........ $2,733,592 $2,418,154
The accompanying notes are a part of the consolidated financial statements.
33
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
1st Source Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996
(Restated)
---------- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans .......................................... $168,462 $147,899 $124,553
Investment securities, taxable ................. 17,419 16,638 15,121
Investment securities, tax-exempt .............. 7,919 8,187 8,152
Total Investment Securities .................. 25,338 24,825 23,273
Other .......................................... 2,348 592 994
Total Interest Income ............................... 196,148 173,316 148,820
Interest expense:
Deposits ....................................... 86,264 73,150 64,214
Short-term borrowings .......................... 15,034 13,014 7,843
Long-term debt ................................. 929 1,160 1,372
Total Interest Expense .............................. 102,227 87,324 73,429
Net Interest Income ................................. 93,921 85,992 75,391
Provision for loan losses ........................... 9,156 6,052 4,649
Net Interest Income After Provision for Loan Losses . 84,765 79,940 70,742
Noninterest income:
Trust fees ..................................... 8,257 7,312 6,732
Service charges on deposit accounts ............ 5,845 5,380 4,829
Loan servicing and sale income ................. 15,852 9,636 5,405
Equipment rental income ........................ 12,557 6,950 2,741
Other income ................................... 10,357 6,840 5,541
Investment securities and other investment
gains (losses) ................................. (612) (462) 231
Total Noninterest Income ............................ 52,256 35,656 25,479
Noninterest expense:
Salaries and employee benefits ................. 47,265 41,755 36,058
Net occupancy expense .......................... 4,966 4,545 4,696
Furniture and equipment expense ................ 7,241 6,758 5,873
Depreciation - leased equipment ................ 8,941 4,971 1,800
Business development and marketing expense ..... 3,564 3,461 2,587
Other expense .................................. 13,523 11,487 9,608
Total Noninterest Expense ........................... 85,500 72,977 60,622
Income Before Income Taxes and Subsidiary
Trust Distributions ............................ 51,521 42,619 35,599
Income taxes ........................................ 17,843 14,392 12,396
Distribution on preferred securities of subsidiary trusts,
net of income tax benefit of $1,514 in 1998 and
$1,184 in 1997 ...................................... 2,221 1,738 -
Net Income .......................................... $31,457 $26,489 $23,203
Basic Net Income Per Common Share ................... $ 1.66 $1.40 $1.23
Diluted Net Income Per Common Share ................. $1.62 $1.36 $1.20
</TABLE>
The accompanying notes are a part of the consolidated financial statements.
34
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
1st Source Corporation and Subsidiaries
<TABLE>
<CAPTION>
Net
Unrealized
Cost of Appreciation
Common of Securities
Common Capital Retained Stock Available-
Total Stock Surplus Earnings in Treasury For-Sale
----- ----- ------- -------- ----------- ------------
(Restated) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ........... $ 152,601 $ 5,429 $ 56,337 $ 96,952 $ (6,497) $ 380
Comprehensive income,
net of tax:
Net income ...................... 23,203 -- -- 23,203 -- --
Change in unrealized
appreciation of
available-for-sale securities
(net of $52 income tax) ..... 77 -- -- -- -- 77
Total comprehensive income ........... 23,280
Cost of 67,267 shares of com-
mon stock acquired for treasury ...... (1,488) -- -- -- (1,488) --
Cash dividends ($.218
per share) ...................... (4,123) -- -- (4,123) -- --
5% common stock dividend
($11 cash paid in lieu of
fractional shares) ................... (11) 271 13,610 (13,892) -- --
Other ................................ 1,574 -- -- 259 1,315 --
Balance at
December 31, 1996 .................... 171,833 5,700 69,947 102,399 (6,670) 457
Comprehensive income, net of tax:
Net income ...................... 26,489 -- -- 26,489 -- --
Change in unrealized
appreciation of
available-for-sale securities
(net of $977
income tax) ................. 1,433 -- -- -- -- 1,433
Total comprehensive income ........... 27,922
Cost of 179,025 shares of com-
mon stock acquired for
treasury ............................. (5,023) -- -- -- (5,023) --
Cash dividends
($.250 per share) .................... (4,723) -- -- (4,723) -- --
Five-for-four common stock split
($8 cash paid in lieu of
fractional shares) ................... (8) -- -- (8) -- --
Other ................................ 4,952 -- -- 237 4,715 --
Balance at
December 31, 1997 .................... 194,953 5,700 69,947 124,394 (6,978) 1,890
Comprehensive income, net of tax:
Net income ...................... 31,457 -- -- 31,457 -- --
Change in unrealized
appreciation of
available-for-sale
securities (net of
$751 income tax) ............ 1,600 -- -- -- -- 1,600
Total comprehensive income ........... 33,057
Cost of 231,440 shares of com-
mon stock acquired
for treasury ......................... (7,116) -- -- -- (7,116) --
Cash dividends
($.278 per share) .................... (5,296) -- -- (5,296) -- --
10% common stock dividend
($13 cash paid in lieu
of fractional shares) ................ (13) 570 51,509 (52,092) -- --
Other ................................ 1,208 -- -- (163) 1,371 --
Balance at
December 31, 1998 .................... $ 216,793 $ 6,270 $ 121,456 $ 98,300 $ (12,723) $ 3,490
</TABLE>
The accompanying notes are a part of the consolidated financial statements.
35
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
(Restated)
---------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Operating Activities:
Net income $31,457 $26,489 $23,203
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 9,156 6,052 4,649
Depreciation of premises and equipment 12,638 8,372 4,363
Amortization of investment security pre-
miums and accretion of discounts, net 1,039 817 739
Deferred income taxes 8,133 4,839 (1,147)
Realized investment securities (gains) losses 612 462 (231)
Realized (gains) on securitized loans (1,984) (800) -
Increase in interest receivable (787) (1,836) (573)
Increase in interest payable 2,023 3,660 120
Other 348 (3,303) (5,818)
Net Cash Provided by Operating Activities 62,635 44,752 25,305
Investing Activities:
Proceeds from sales and maturities of investment
securities 249,012 159,564 116,813
Purchase of investment securities (373,404) (144,491) (144,286)
Net (increase) decrease in short-term investments (30,274) (11,077) 2,346
Loans sold or participated to others 377,608 154,609 156,727
Net increase in loans made to customers
and principal collections on loans (468,670) (495,632) (355,104)
Net increase in leased assets (23,069) (16,585) (4,984)
Funding of bank-owned life insurance policies - (20,000) -
Purchase of premises and equipment (3,795) (4,455) (6,646)
Increase in servicing assets (15,708) (1,408) (251)
Other (9,288) (13,014) (2,115)
Net Cash Used in Investing Activities (297,588) (392,489) (237,500)
Financing Activities:
Net increase in demand deposits,
NOW accounts and savings accounts 311,160 46,384 57,688
Net increase (decrease) in certificates of deposit (25,844) 211,429 134,540
Net increase in short-term borrowings 7,153 10,143 71,884
Proceeds from issuance of long-term debt 747 1,559 123
Payments on long-term debt (4,214) (3,499) (3,346)
Proceeds from issuance of cumulative trust
preferred securities - 44,750 -
Acquisition of treasury stock (7,116) (5,023) (1,488)
Cash dividends (5,296) (4,723) (4,123)
Other 13 (7) (12)
Net Cash Provided by Financing Activities 276,603 301,013 255,266
Increase (Decrease) in Cash and Cash Equivalents 41,650 (46,724) 43,071
Cash and cash equivalents, beginning of year 90,864 137,588 94,517
Cash and Cash Equivalents, End of Year $132,514 $90,864 $137,588
</TABLE>
The accompanying notes are a part of the consolidated financial statements.
36
<PAGE>
Notes to Consolidated Financial Statements
1st Source Corporation and Subsidiaries
NOTE A -- ACCOUNTING POLICIES
The principal line of business of 1st Source Corporation ("1st Source") and
subsidiaries is banking and closely related activities. The following is a
summary of significant accounting policies followed in the preparation of the
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION -- The financial statements consolidate 1st
Source and its subsidiaries (principally 1st Source Bank and Trustcorp Mortgage
Company). All significant intercompany balances and transactions have been
eliminated. For purposes of the parent company only financial information
presented in Note Q, investments in subsidiaries are carried at 1st Source's
equity in the underlying net assets.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
INVESTMENT SECURITIES -- Securities that may be sold as part of 1st Source's
asset/liability or liquidity management or in response to or in anticipation of
changes in interest rates and resulting prepayment risk, or for other similar
factors, are classified as available-for-sale and carried at fair market value.
Unrealized holding gains and losses on securities available- for-sale are
reported net of related deferred income taxes as a separate component of
shareholders' equity and the change in such items is a component of
comprehensive income. Securities that 1st Source has the ability and positive
intent to hold to maturity are classified as held-to-maturity and carried at
amortized cost. Trading securities are carried at fair market value with
unrealized holding gains and losses included in earnings. There were no trading
securities at December 31, 1998 or 1997. Realized gains and losses on the sales
of all securities are reported in earnings and computed using the specific
identification cost basis.
LOANS -- Loans are reported at the principal amount outstanding, net of
unearned income. Loans identified as held-for-sale are carried at the lower of
cost or market determined on an aggregate basis. Included in real estate loans
are loans held for sale totaling $188.2 million and $130.0 million at December
31, 1998 and 1997, respectively.
SECURITIZED ASSETS -- The guidelines set forth in Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," are followed when
accounting for securitizations. When 1st Source sells loans in securitizations,
it retains servicing rights and interest-only strips. The interest-only strips
are capitalized as retained interests in the securitized assets. Gain or loss on
sale of the loans depends in part on the previous carrying amount of all
retained interests, allocated in proportion to their fair value. 1st Source
generally estimates fair value based on the present value of future cash flows
expected under management's best estimates of the key assumptions - credit
losses, prepayment speeds, forward yield curves and discount rates commensurate
with the risks involved and regularly reviews all assets for impairment. In
conjunction with its securitization activities, 1st Source sold $346 million of
aircraft and auto loans in 1998 resulting in a restated gain of $1.98 million.
See Note R for further discussion on securitized loans.
37
<PAGE>
Approximately $83,000 of cash and $9.1 million of other assets shown on the
December 31, 1998 consolidated statement of financial condition are assets of
1st Source Funding Corporation ("Funding"), a special-purpose entity of 1st
Source Bank, and represent Funding's beneficial (i.e. residual) interests in
certain assets of the 1st Source Master Trust in accordance with 1st Source's
loan securitization transactions. Funding was established in 1998 as a qualified
special-purpose entity for purposes of SFAS No. 125 and has been structured to
be bankruptcy-remote from 1st Source and its other affiliates.
MORTGAGE SERVICING RIGHTS -- The costs of purchasing the rights to service
mortgage loans originated by others are deferred and amortized as reductions of
mortgage servicing fee income over the estimated servicing period in proportion
to the estimated servicing income to be received. Gains and losses on the sale
of mortgage servicing rights are recognized as non-interest income in the period
in which such rights are sold on a servicing released basis.
SFAS No. 125 also 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, 1998, and 1997, $20.3 million
and $11.0 million, respectively, of mortgage servicing rights have been
capitalized. As of these dates, the servicing rights had a fair value of $35.7
million and $21.0 million respectively.
Mortgage servicing rights are being amortized using a method which
approximates the effective yield method and for the years ended December 31,
1998, 1997 and 1996, $4.09 million, $2.72 million and $2.68 million of
amortization expense has been recognized.
SFAS No. 125 also requires 1st Source to assess its capitalized servicing
rights for impairment based on their current fair value. 1st Source
disaggregates its servicing portfolio based on loan type and interest rate, the
predominant risk characteristics of the underlying loans. There were no
valuation allowances associated with capitalized mortgage servicing rights at
December 31, 1998 and 1997.
REVENUE RECOGNITION -- Interest on loans is included in interest income on
the accrual method over the terms of the loans based upon principal balances
outstanding.
The accrual of interest on loans is discontinued when a loan becomes
contractually delinquent for 90 days, except for installment loans where
payments are being received regularly and mortgage loans, which are placed on
nonaccrual at the time the loan is placed in foreclosure. When interest accruals
are discontinued, interest credited to income in the current year is reversed,
and interest accrued in the prior year is charged to the reserve for loan
losses. Management may elect to continue the accrual of interest when the net
realizable value of collateral is sufficient to cover the principal and accrued
interest.
Certain loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized to interest income
generally over the contractual life of the related loan or commitment.
RESERVE FOR LOAN LOSSES -- A loan is considered impaired, based on current
information and events, if it is probable that 1st Source will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
is generally based on the present value of expected future cash flows discounted
at the historical effective interest rate, except that all collateral-dependent
loans are measured for impairment based on the fair value of the collateral.
The provision for loan losses charged to expense is based upon the actual net
loan losses incurred as determined by credit loss experience, the evaluation of
potential losses in the portfolio and the evaluation of impaired loans. Loans
are charged against the reserve for loan losses when deemed uncollectible.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed generally
by the straight-line method, primarily with useful lives of 5, 7, 15 and 31H
years.
LEASED ASSETS -- 1st Source finances various types of equipment and
automobiles under leases principally classified as operating leases. These
assets are being depreciated on a straight-line method over the life of the
lease.
TRUST FEES -- Trust fees are recognized on the accrual basis.
INCOME TAXES -- Deferred income taxes are determined under the liability
method. The net deferred tax assets are comprised of the tax effect of net
temporary differences related principally to differing methods of accounting for
loan losses
38
<PAGE>
offset by differing methods of accounting for depreciation on premises and
leased equipment and amortization of purchased mortgage servicing rights.
NET INCOME PER COMMON SHARE -- Net income per common share is computed in
accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is
computed by dividing net income by the weighted average number of shares of
common stock outstanding which were as follows (in thousands): 1998, 18,995;
1997, 18,935; and 1996, 18,893. Diluted earnings per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding plus the dilutive effect of outstanding stock options. The weighted
average number of common shares, increased for the dilutive effect of stock
options, used in the computation of diluted earnings per share were as follows
(in thousands): 1998, 19,371; 1997, 19,543; and 1996, 19,357.
The computations of the weighted average number of common shares used for the
determination of both basic and diluted earnings per share give retroactive
recognition to a 10% stock dividend declared January 14, 1999, payable February
12, 1999, to shareholders of record on February 4, 1999.
FUNDS HELD IN TRUST FOR INVESTORS AND MORTGAGORS -- As of December 31, 1998
and 1997, serviced loans which were owned by investors aggregated $1.87 billion
and $1.30 billion, respectively. Funds held in trust at 1st Source for the
payment of principal, interest, taxes and insurance premiums applicable to
mortgage loans being serviced for others, aggregated approximately $50.8 million
and $23.0 million at December 31, 1998 and December 31, 1997, respectively.
CASH FLOW INFORMATION -- For purposes of the consolidated and parent company
only statements of cash flows, 1st Source considers cash and due from banks as
cash and cash equivalents. Cash paid during the years ended December 31, 1998,
1997 and 1996, for interest and for income taxes was $100.2 million and $7.8
million, $83.7 million and $10.7 million, and $73.3 million and $14.9 million,
respectively.
OFF-BALANCE SHEET FINANCIAL INVESTMENTS -- 1st Source enters into interest
rate swap agreements as part of its interest rate risk management strategies.
These instruments are accounted for under the accrual basis of accounting,
whereby the income or expense is recorded as a component of interest income. If
a swap is terminated, the resulting gain or loss is deferred and amortized over
the remaining life of the off-balance sheet investment product.
RECENT ACCOUNTING PRONOUNCEMENTS -- 1st Source has adopted SFAS No. 130,
"Reporting Comprehensive Income," as of January 1, 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. The
only component of comprehensive income not included in 1st Source's net income
is unrealized gains or losses on available-for-sale investment securities, net
of related income taxes. Prior year financial statements have been restated in
order to conform to the requirements of SFAS No. 130.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131,"Disclosure about Segments of an Enterprise and Related Information." This
Statement changes the manner in which public companies report segment
information in annual reports and requires companies to report selected segment
information in interim financial reports. Companies are now required to report
financial and descriptive information about the company's operating segments.
1st Source's principal business is banking, and management has not separately
organized the business beyond commercial banking and mortgage banking. Its
wholly owned mortgage subsidiary, Trustcorp Mortgage Company, constitutes a
segment by definition of SFAS No. 131, however, it does not meet the
quantitative thresholds for separate disclosure as set forth by this Statement.
Trustcorp Mortgage Company's revenue is less than 10 percent of consolidated
revenue, the absolute amount of its reported income is less than 10 percent of
the absolute amount of the consolidated net income of 1st Source, and, finally,
its assets are less than 10 percent of consolidated assets.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 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 the intended use of the derivative and its resulting
designation. 1st Source anticipates that due to its limited use of derivative
instruments, the adoption of SFAS No. 133 will not have a significant effect on
1st Source's results of operations or its financial position.
RECLASSIFICATIONS -- Certain amounts in the 1996 and 1997 consolidated
financial statements have been reclassified to conform with the 1998
presentation. These reclassifications had no effect on total assets,
shareholders' equity or net income as previously reported.
39
<PAGE>
NOTE B -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of 1st Source's financial instruments as of December 31, 1998
and 1997, are summarized in the following table.
The following methods and assumptions were used by 1st Source in estimating
the fair value of its financial instruments:
CASH AND CASH EQUIVALENTS -- The carrying values reported in the consolidated
statements of financial condition for cash and due from banks, federal funds
sold and interest bearing deposits with other banks approximate their fair
values.
INVESTMENT SECURITIES -- Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated based on quoted market prices of comparable
investments.
LOANS -- For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for certain real estate loans (e.g., one-to-four single family
residential mortgage loans) are based on quoted market prices of similar loans
sold in conjunction with securitization transactions, adjusted for differences
in loan characteristics. The fair values of all other loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
DEPOSITS -- The fair values for all deposits other than time deposits are
equal to the amounts payable on demand (the carrying value). Fair values of
variable rate time deposits are equal to their carrying values. Fair values for
fixed rate time deposits are estimated using discounted cash flow analyses using
interest rates currently being offered for deposits with similar remaining
maturities.
SHORT-TERM BORROWINGs -- The carrying values of federal funds purchased,
securities sold under repurchase agreements and other short-term borrowings
approximate their fair values.
LONG-TERM DEBT -- The fair values of 1st Source's long-term debt are
estimated using discounted cash flow analyses, based on 1st Source's current
estimated incremental borrowing rates for similar types of borrowing
arrangements.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S SUBORDINATED
DEBENTURES (CUMULATIVE TRUST PREFERRED SECURITIES) -- Fair values are based on
quoted market prices.
GUARANTEES AND LOAN COMMITMENTS -- Contract and fair values for certain of
1st Source's off-balance-sheet financial instruments (guarantees and loan
commitments) are estimated based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
INTEREST RATE SWAPS -- Fair values for interest rate swaps are based on the
net amount necessary to currently settle the transaction.
LIMITATIONS -- Fair value estimates are made at a discrete point in time
based on relevant market information and information about the financial
instruments. Because no market exists for a significant portion of 1st Source's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other such factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, the fair value estimates are based on existing on and
off-balance-sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. For example, 1st Source has a substantial
annual trust net fee income. The trust business is not considered a financial
instrument and its value has not been incorporated into the fair value
estimates.
Other significant assets and liabilities that are not considered financial
instruments include the mortgage banking operation, premises and equipment and
other assets. In addition, for investment and mortgage-backed securities, the
income tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in many of the estimates. Also, the fair value estimates for deposits
do not include the benefit that results from the low-cost funding provided by
the deposit liabilities compared to the cost of borrowing funds in the market.
40
<PAGE>
<TABLE>
<CAPTION>
Carrying Carrying
or Contract Fair or Contract Fair
Value Value Value Value
----- ----- ----- -----
1998 1997
(Dollars in thousands)
Assets: (Restated)
<S> <C> <C> <C> <C>
Cash and due from banks $ 132,514 $ 132,514 $ 90,864 $ 90,864
Federal funds sold and
interest bearing deposits with other banks 41,951 41,951 11,677 11,677
Investment securities, available-for-sale 443,691 443,691 299,933 299,933
Investment securities, held-to-maturity 96,008 99,734 114,975 119,369
Loans, net of reserve for loan losses 1,843,067 1,905,335 1,761,357 1,788,005
Liabilities:
Deposits 2,177,107 2,189,910 1,891,791 1,896,130
Short-term borrowings 242,159 242,159 235,006 235,006
Long-term debt 13,189 13,755 16,656 16,807
Guaranteed preferred beneficial
interests in the Company's
subordinated debentures 44,750 47,036 44,750 46,726
Off-Balance-Sheet Instruments* - (351) - (392)
</TABLE>
* Represents estimated cash outflows required to currently settle the
obligations at current market rates.
NOTE C -- RESTRICTIONS ON CASH DUE FROM BANKS
1st Source Bank is required to maintain reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances for the year ended
December 31, 1998 was approximately $13.0 million.
Under available line of credit agreements, 1st Source may borrow up to $3
million. At December 31, 1998, 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, 1998, are
as follows:
<TABLE>
<CAPTION>
Available-For-Sale
------------------
Gross Gross Estimated
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
EQUITY SECURITIES:
Marketable securities $ 14,315 $1,304 $ (91) $ 15,528
Other equity securities 3,465 17 - 3,482
Total equity securities 17,780 1,321 (91) 19,010
DEBT SECURITIES:
United States Treasury and agency securities 243,003 1,019 (85) 243,937
Obligations of states and political subdivisions 69,115 1,007 (24) 70,098
Debt securities issued by foreign governments 2,205 1,492 - 3,697
Corporate securities 20,276 394 (31) 20,639
Mortgage-backed securities 40,681 172 (211) 40,642
Other debt securities 20,549 105 (36) 20,618
Commercial paper 28,128 - - 28,128
Total debt securities 423,957 4,189 (387) 427,759
TOTAL INVESTMENT SECURITIES $441,737 $5,510 $(478) $446,769
Held-To-Maturity
----------------
Gross Gross Estimated
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ------- ------- ---------
(Dollars in thousands)
EQUITY SECURITIES:
Other equity securities $ 11,633 $ - $ - $ 11,633
DEBT SECURITIES:
Obligations of states and political subdivisions 84,375 3,726 - 88,101
TOTAL INVESTMENT SECURITIES $ 96,008 $3,726 $ - $ 99,734
</TABLE>
41
<PAGE>
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, 1998, 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 $138,823 $139,273 $ 8,200 $ 8,309
Due after one year through five years 214,826 216,067 35,243 36,622
Due after five years through ten years 8,203 8,405 36,296 38,429
Due after ten years 21,424 23,372 4,636 4,741
Mortgage-backed securities 40,681 40,642 - -
TOTAL $423,957 $427,759 $84,375 $88,101
</TABLE>
The amortized cost and estimated aggregate fair value of securities classified
as available-for-sale and held-to-maturity at December 31, 1997, were as
follows:
<TABLE>
<CAPTION>
Available-For-Sale
------------------
Gross Gross Estimated
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
EQUITY SECURITIES:
Marketable securities $ 14,317 $1,540 $ - $ 15,677
Other equity securities 2,165 - - 2,165
Total equity securities 16,302 1,540 - 17,842
DEBT SECURITIES:
United States Treasury and agency securities 158,045 354 (77) 158,322
Obligations of states and political subdivisions 44,483 438 (20) 44,901
Debt securities issued by foreign governments 2,175 1,686 (1) 3,860
Corporate securities 4,275 7 (1) 4,281
Mortgage-backed securities 73,433 253 (1,086) 72,600
Other debt securities 1,319 84 - 1,400
Total debt securities 283,727 2,822 (1,185) 285,364
TOTAL INVESTMENT SECURITIES $300,029 $4,362 $(1,185) $303,206
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Held-To-Maturity
----------------
Gross Gross Estimated
Unrealized Unrealized Aggregate
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
EQUITY SECURITIES:
Other equity securities $ 11,648 $ - $ - $ 11,648
DEBT SECURITIES:
Obligations of states and political subdivisions 103,327 4,395 (1) 107,721
TOTAL INVESTMENT SECURITIES $114,975 $4,395 $ (1) $119,369
</TABLE>
Other equity securities classified as held-to-maturity at December 31, 1998
and 1997 include securities such as Federal Reserve Bank and Federal Home Loan
Bank stock, which are not traded on established exchanges and have only
redemption capabilities. Fair values for such equity securities are considered
to approximate cost. Debt securities issued by foreign governments (classified
as available-for-sale) with an amortized cost of $1.59 million and estimated
aggregate fair values of $3.08 million and $3.27 million at December 31, 1998
and 1997, respectively, are included in the above debt securities, but are
classified as loans in the accompanying 1998 and 1997 consolidated statements of
financial condition. 1st Source had no trading securities as of December 31,
1998 and 1997. The following represents the segregation of cash flows between
securities available-for-sale and held-to-maturity:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
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
securities $372,883 $ 521 $373,404 $139,534 $4,957 $144,491 $143,146 $1,140 $144,286
Proceeds from
sales of securities 13,437 - 13,437 16,684 - 16,684 207 - 207
Proceeds from maturities
and prepayments of
securities 216,752 18,823 235,575 133,051 9,829 142,880 110,233 6,373 116,606
</TABLE>
Gross losses of $199,135 were realized during 1998 on the sale of securities
available-for-sale. There were no gains or losses for 1997 or 1996 on the sale
of securities available-for-sale. During 1998 and 1997, gross losses of $300,000
and $324,037, respectively, were realized on the sales of securities
held-to-maturity. These gross losses were due to the write-off of venture
capital investments. There were no gains or losses on the sale of securities
held-to-maturity in 1996.
At December 31, 1998 and 1997, investment securities with carrying values of
$237.9 million and $210.1 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 $15.74 million and $12.92 million at December 31, 1998
and 1997, respectively. During 1998, $12.26 million of new loans were made and
repayments and other reductions totaled $9.44 million.
43
<PAGE>
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:
1998 1997 1996
---- ---- ----
(Restated)
(Dollars in thousands)
Balance, beginning of year $35,424 $29,516 $27,470
Provision for loan losses 9,156 6,052 4,649
Charge-offs, net of recoveries
of $1,148 in 1998, $1,266 in 1997
and $1,507 in 1996 (3,651) (144) (1,779)
Recaptured reserve due to
loan securitizations (2,300) - (824)
Balance, end of year $38,629 $35,424 $29,516
At December 31, 1998 and 1997, loans amounting to $9.27 million and $10.03
million, respectively, substantially all of which are collateralized, are
considered to be nonaccrual or restructured loans. Interest income for the years
ended December 31, 1998, 1997 and 1996 would have increased by approximately
$719,000, $786,000, and $533,000, respectively, if these loans earned interest
at their full contract rate.
As of December 31, 1998 and 1997, impaired loans totaled $13.30 million and
$9.39 million, respectively, of which $3.73 million and $1.14 million had
corresponding specific reserves for loan losses totaling $1.18 million and $0.61
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 nonaccrual loans; interest is not recognized on nonaccrual loans
subsequent to the date the loan is placed in nonaccrual status. While a loan is
classified as nonaccrual and the future collectibility of the recorded loan
balance is doubtful, collections on interest and principal are generally applied
as a reduction to principal outstanding. Interest on the remainder of the
impaired loans is recognized on the accrual basis. For 1998 and 1997, the
average recorded investment in impaired loans was $13.28 million and $9.46
million, respectively, and interest income recognized on impaired loans totaled
$1.23 million and $508,000, respectively.
44
<PAGE>
NOTE G -- LONG-TERM DEBT DETAILS OF LONG-TERM DEBT ARE AS FOLLOWS:
December 31
1998 1997
---- ----
(Dollars in thousands)
Term loan (7.4%) $10,000 $10,000
Subordinated capital notes (4.47%) 1,145 5,075
Federal Home Loan Bank
borrowings (5.54% - 6.98%) 1,037 956
Other 1,007 625
TOTAL LONG-TERM DEBT $13,189 $16,656
Annual maturities of long-term debt at December 31, 1998 are as follows (in
thousands): 1999, $886; 2000, $237; 2001, $136; 2002, $10,659; and, 2003, $353.
The $10.0 million term loan has a fixed interest rate of 7.4% 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 include $572,000 due June 18, 1999 and
$573,000 due June 18, 2002. The interest rate on these notes is adjusted monthly
and was 4.47% at December 31, 1998. 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.
At December 31, 1998, the Federal Home Loan Bank borrowings represent a
source of funding for certain residential mortgage activities and consist of
five fixed rate notes with maturities ranging from 2003 to 2018. These notes are
collateralized by $1.66 million of certain real estate loans.
NOTE H -- COMMON STOCK
Effective January 1, 1996, 1st Source adopted SFAS No. 123, "Accounting for
Stock-Based Com-pensation," on a disclosure basis only. The disclosure
requirements include reporting the pro forma effect on net income and net income
per share of compensation expense that is attributable to the fair value of
stock options and other stock-based compensation that have been issued to
employees under the Stock Option Plans and the Employee Stock Purchase Plan. 1st
Source will continue to apply APB No. 25 in accounting for these plans. The
Executive Incentive Plan, the Special Long-Term Incentive Award Plan and the
Restricted Stock Award Plan are already being accounted for as compensatory
plans in accordance with the provisions of SFAS No. 123. Compensation cost that
has been charged against income for these plans was $3.05 million, $1.83
million, and $1.52 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
STOCK OPTION PLANS
1st Source's incentive stock option plans include the 1992 Stock Option Plan
(the "1992 Plan") and a certain other stock option agreement which became
effective January 1, 1992. As of December 31, 1998, an aggregate of 2,090,619
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 1998: dividend yield of .74%; expected volatility
of 19.60%; risk-free interest rate of 5.50%; and expected life of 6.47 years.
45
<PAGE>
The following is a summary of the activity with respect to 1st Source's stock
option plans for the years ended December 31, 1996, 1997 and 1998:
Weighted-
Average
Number of Exercise
Shares Price
Options outstanding,
January 1, 1996 840,442 $6.95
Options granted 177,435 13.72
Options exercised (8,751) 9.05
Options outstanding,
December 31, 1996 1,009,126 8.13
Options granted 12,100 17.98
Options exercised (259,649) 4.82
Options forfeited (8,701) 9.86
Options outstanding,
December 31, 1997 752,876 9.36
Options granted 332,750 34.25
Options exercised (44,287) 9.88
Options forfeited (378) 13.72
Options outstanding,
December 31, 1998 1,040,961 17.29
Options exercisable,
December 31, 1998 622,965 $8.66
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------
Weighted-
Average Weighted-
Range of Number Remaining Average
Exercise Outstanding Contractual Exercise
Prices at 12/31/98 Life (Years) Price
------ ----------- ------------ -----
<S> <C> <C> <C>
$ 6.00 to $12.99 530,742 5.11 $ 7.76
13.00 to 29.99 177,469 7.63 14.01
30.00 to 35.99 332,750 9.55 34.25
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
-------------------
Weighted-
Range of Number Average
Exercise Exercisable Exercise
Prices at 12/31/98 Price
------ ----------- -----
<S> <C> <C>
$ 6.00 to $12.99 530,742 $ 7.76
13.00 to 29.99 92,223 13.83
30.00 to 35.99 _ _
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
1st Source also has an employee stock purchase plan for substantially all
employees with at least two years of service on the effective date of an
offering under the plan. Eligible employees may elect to purchase any dollar
amount of stock so long as such amount does not exceed 25% of their base rate of
pay and the aggregate stock accrual rate for all offerings does not exceed
$25,000 in any calendar year. Payment for the stock is made through payroll
deductions over the offering period, and employees may discontinue the
deductions at any time and exercise the option or take the funds out of the
program. The
46
<PAGE>
most recent offering began June 1, 1998, and runs through May 31, 2000, with
$386,216 in stock value to be purchased at $32.05 per share. The fair value of
the employees' purchase rights for the 1998 offering was estimated using the
Black- Scholes model with the following assumptions: dividend yield of .74%;
expected volatility of 17.53%; risk-free interest rate of 5.52%; and expected
life of two years.
Pro forma net income and diluted net income per common share, reported as if
compensation expense had been recognized under the fair value provisions of SFAS
No. 123 for the stock option and employee stock purchase plans, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Restated)
<S> <C> <C> <C>
Net income (000s):
As reported $31,457 $26,489 $23,203
Pro forma 30,345 26,146 23,049
Diluted net income per common share:
As reported $1.62 $1.36 $1.20
Pro forma 1.58 1.35 1.20
</TABLE>
EXECUTIVE INCENTIVE PLAN
1st Source has an Executive Incentive Plan which is administered by the
Committee. Awards under the plan include "Book Value" shares of common stock.
These shares are awarded annually based on weighted performance criteria and
vest over a period of five years. The plan shares may only be sold to 1st
Source, and such sale is mandatory in the event of death, retirement, disability
or termination of employment. Grants under the plan for 1998, 1997 and 1996 are
summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Number of shares 47,996 39,491 48,246
Weighted-average
grant-date fair value $10.14 $9.07 $8.08
</TABLE>
SPECIAL LONG-TERM INCENTIVE AWARD
During February 1996 and March 1991, 1st Source granted special long-term
incentive awards, including 1st Source common stock, to participants in the
Executive Incentive Plan. Shares granted under the plan vest over a period of
ten years. The first 10% was vested at the time of the grants. Subsequent
vesting requires (i) the participant to remain an employee of 1st Source and
(ii) that 1st Source be profitable on an annual basis based on the determination
of the Committee. Grants under the plan for 1996 are summarized below:
1996
----
Number of shares 28,079
Weighted-average
grant-date fair value $14.79
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 1998, 1997 and
1996 are summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Number of shares 4,805 1,915 2,212
Weighted-average
grant-date fair value $32.04 $19.01 $14.79
</TABLE>
47
<PAGE>
NOTE I -- PREFERRED STOCK AND CUMULATIVE PREFERRED SECURITIES
As of December 31, 1998, 1st Source has 10 million shares of authorized but
unissued preferred stock. The Board of Directors of 1st Source is authorized to
determine the terms, preferences, limitations, voting rights and number of
shares of each series it elects to issue.
In 1997, 1st Source raised $44.75 million through the issuance of Cumulative
Trust Preferred Securities. 1st Source Capital Trust I issued $27.5 million of
9.00% Cumulative Trust Preferred Securities. 1st Source Capital Trust II issued
$17.25 million of floating rate Cumulative Trust Preferred Securities. 1st
Source Capital Trust I and 1st Source Capital Trust II are wholly owned,
consolidated subsidiaries of 1st Source.
The holders of the fixed rate Cumulative Trust Preferred Securities are
entitled to receive preferential cumulative cash distributions from 1st Source
Capital Trust I, at the annual rate of 9.00% of the liquidation amount of $25
per Preferred Security, accruing from the date of original issuance and payable
quarterly in arrears on the last day of March, June, September and December of
each year. Holders of the floating rate Cumulative Trust Preferred Securities
are entitled to receive preferential cumulative cash distributions from 1st
Source Capital Trust II, at an annual rate equal to the sum of the three-month
Treasury adjusted to a constant maturity, plus 2.25%, applied to the liquidation
amount of $25 per Floating Rate Preferred Security accruing from the date of
original issuance and payable quarterly in arrears on the last day of March,
June, September and December of each year.
NOTE J -- EMPLOYEE BENEFIT PLANS
1st Source maintains a defined contribution money purchase pension plan
covering the majority of its employees. Contributions to the plan are based on
2% of participants' eligible compensation. For the years ended December 31,
1998, 1997 and 1996, total pension expense for this plan amounted to $422,000,
$433,000 and $422,000, respectively.
1st Source also maintains a defined contribution profit sharing and savings
plan covering the majority of its employees. The plan allows eligible employees
to make contributions by salary reduction pursuant to Section 401(k) of the
Internal Revenue Code. 1st Source is required under the plan to match 100% of
participant contributions up to 4% of compensation and one-half of any
additional participant contributions up to 6% of compensation provided that 1st
Source is profitable for the respective plan year. 1st Source may also make
discretionary contributions to the plan, depending on its profitability.
Contribution expense for this plan for the years ended December 31, 1998, 1997
and 1996, amounted to $1.34 million, $1.29 million, and $1.21 million,
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 $78,000 in 1998, $54,000 in 1997 and $40,000
in 1996. In addition, Trustcorp Mortgage Company made discretionary
contributions of $145,000 in 1998, $103,000 in 1997, and $100,000 in 1996.
In addition to the pension and profit sharing plans, 1st Source provides
certain health care and life insurance benefits for substantially all of their
retired employees. All of 1st Source's full-time employees become eligible for
these retiree benefits upon reaching age 55 with 20 years of credited service.
Generally, the medical plan pays a stated percentage of eligible medical
expenses reduced for any deductibles and payments made by government programs
and other group coverage. The lifetime maximum benefit payable under the medical
plan is $15,000 and $3,000 for life insurance.
1st Source's accrued postretirement benefit cost and net periodic
postretirement benefit cost recognized in the consolidated financial statements
for the years ended December 31, 1998, 1997 and 1996 were not material.
48
<PAGE>
NOTE K -- INCOME TAXES
Income tax expense is comprised of the following:
1998 1997 1996
---- ---- ----
(Restated)
Current: (Dollars in thousands)
Federal $7,171 $ 6,969 $10,036
State 2,539 2,584 3,507
Total Current 9,710 9,553 13,543
Deferred:
Federal 6,328 3,824 (906)
State 1,805 1,015 (241)
Total Deferred 8,133 4,839 (1,147)
Total Provision $17,843 $14,392 $12,396
Deferred tax assets and liabilities as of December 31, 1998 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses ............................. $17,303 $14,991
Accruals for employee benefits ...................... 3,323 2,554
Asset securitization ................................ 1,627 2,309
Mortgage loans - Section 475 ........................ 416 441
Deferred income ..................................... 376 427
Excess servicing .................................... 249 119
Other ............................................... 792 511
Total ............................................... $24,086 $21,352
Deferred tax liabilities:
Differing depreciable bases in premises and
leased equipment .................................... $10,597 $ 5,373
Purchased servicing ................................. 5,259 1,728
Originated mortgage servicing rights ................ 2,456 1,017
Net unrealized appreciation
of securities available-for-sale .................... 2,039 1,288
Differing bases in assets related to acquisitions ... 1,000 1,235
Discounts accreted on investment securities ......... 157 210
Other ............................................... 636 426
Total .................................................... $22,144 $11,277
</TABLE>
There was no valuation allowance at December 31, 1998 and 1997.
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
----------------------
1998 1997 1996
---- ---- ----
Percent of Percent of Percent of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
(Restated)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax $18,032 35.0% $14,917 35.0% $12,460 35.0%
Increase (decrease) in income
taxes resulting from:
Tax-exempt interest income (2,894) (5.6) (2,968) (7.0) (2,922) (8.2)
State taxes, net of federal
income tax benefit 2,823 5.4 2,339 5.5 2,123 5.9
Interest expense incurred to
carry tax-exempt securities 403 0.8 417 1.0 376 1.1
Contribution of appreciated
stock (150) (0.3) (358) (0.8) - -
Other (371) (0.7) 45 0.1 359 1.0
Total $17,843 34.6% $14,392 33.8% $12,396 34.8%
</TABLE>
49
<PAGE>
NOTE L -- LEASES
1st Source and its subsidiaries are obligated under operating leases for
certain office premises and equipment. The headquarters building is leased for a
remaining term of 13 years with options to renew for up to 15 additional years.
Approximately 30% of the facility is subleased to other tenants.
At December 31, 1998, future minimum rental commitments for all
noncancellable operating leases, reduced by future minimum rentals from
subleases of $1.91 million, aggregate $17.41 million. Annual rental commitments
and sublease rentals for noncancellable operating leases (excluding operating
costs) for the five years succeeding December 31, 1998, are as follows:
Rental Sublease
Commitments Rentals
----------- -------
(Dollars in thousands)
1999 $2,105 $ 389
2000 1,845 388
2001 1,648 386
2002 1,395 382
2003 1,327 76
Thereafter $10,999 $ 291
Rental expense of office premises and equipment and related sublease income
were as follows:
Years Ended December 31
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Gross rental expense $2,243 $2,190 $2,203
Sublease rental income (672) (677) (677)
Net Rental Expense $1,571 $1,513 $1,526
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 1998 and 1997, 1st Source and its subsidiaries had commitments
outstanding to originate and purchase loans aggregating $362 million and $410
million, respectively. Outstanding commitments to sell loans aggregated $198
million at December 31, 1998 and $120 million at December 31, 1997. Commercial
and standby letters of credit totaled $82 million and $57 million at December
31, 1998 and 1997, respectively.
50
<PAGE>
1st Source Bank participates in interest rate swap agreements as part of its
program to manage the impact of fluctuating interest rates, namely with respect
to floating rate loans.
Interest rate swaps generally involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying notional amount.
Notional amounts represent agreed upon amounts on which calculations of interest
payments to be exchanged are based. Notional amounts do not represent direct
credit exposures. The actual market or credit exposure of this type of financial
instrument is significantly less than the notional amount. 1st Source's direct
credit exposure is limited to the net difference between the calculated "to be
paid" and "to be received" amounts on each transaction, which is generally
netted and paid or received monthly, and the inability of the counterparty to
meet the terms of the contract. This risk is normally a small percentage of the
notional amount and fluctuates as interest rates move up and down. Market risk
to 1st Source is more directly measured by the fair values of the interest rate
swap agreements.
At December 31, 1998, 1st Source had two outstanding amortizing interest rate
swap agreements with an aggregate notional value of $26.9 million. The
agreements have maturities of January 25, 2002 and March 25, 2001. The notional
amounts and lives of amortizing swaps change based on certain interest rate
indices. Generally, as rates fall, the notional amounts of amortizing swaps
decline more rapidly and as rates increase notional amounts decline more slowly.
Unrealized gains/(losses) based on fair value approximated $70,000 at December
31, 1998 and ($137,000) at December 31, 1997.
NOTE N -- CONCENTRATIONS OF CREDIT RISK
Most of 1st Source's commercial and agricultural, real estate and consumer
loan activity is with customers located in north-central Indiana and southwest
lower Michigan. 1st Source's commercial loans secured by transportation and
construction equipment are with customers located throughout the United States.
Included in loans as of December 31, 1998 and 1997, are business loans to
companies in the following industries:
<TABLE>
<CAPTION>
Pecentage of Total
Amount Business Loans
------ --------------
1998 1997 1998 1997
(Dollars in thousands)
<S> <C> <C> <C> <C>
Truck and automobile leasing $200,005 $267,596 13.9% 18.9%
Air transportation and aircraft dealers 199,459 179,653 13.9 12.7
Construction equipment and contractors 149,288 124,148 10.4 8.8
Real estate operators, managers and developers 64,381 74,542 4.5 5.3
Van conversion, manufactured housing
and recreational vehicle industries 61,405 52,870 4.3 3.7
</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, 1998, that
1st Source meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the federal bank
regulators categorized 1st Source Bank, the largest of 1st Source's
subsidiaries, as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" 1st Source must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in
51
<PAGE>
NOTE O -- CAPITAL ADEQUACY -- CONCLUDED
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, 1998: (Dollars in thousands)
(Restated)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-
Weighted Assets):
Consolidated $282,032 13.38% $168,569 8.00% $210,711 10.00%
1st Source Bank 253,807 12.43 163,328 8.00 204,159 10.00
Tier I Capital (to Risk-
Weighted Assets):
Consolidated 255,197 12.11 84,284 4.00 126,426 6.00
1st Source Bank 227,781 11.16 81,664 4.00 122,496 6.00
Tier I Capital (to Average Assets):
Consolidated 255,197 9.51 107,289 4.00 134,111 5.00
1st Source Bank 227,781 8.86 102,870 4.00 128,587 5.00
</TABLE>
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 -- 1ST SOURCE CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31
1998 1997
(Restated)
---- ----
ASSETS (Dollars in thousands)
<S> <C> <C>
Cash ................................................. $ 1 $ 30
Short-term investments with bank subsidiary .......... 3,402 2,244
Investment securities, available-for-sale
(amortized cost of $20,341 and $17,889
at December 31, 1998 and 1997, respectively) ......... 20,999 18,873
Investments in:
Bank subsidiaries ............................... 230,647 182,919
Non-bank subsidiaries ........................... 11,687 11,098
Loan receivables:
Bank subsidiary ................................. _ 30,000
Non-bank subsidiary ............................. 7,755 4,000
Premises and equipment, net .......................... 3,150 3,398
Other assets ......................................... 4,568 4,174
Total Assets ......................................... $282,209 $256,736
LIABILITIES AND
SHAREHOLDERS' EQUITY
Commercial paper borrowings .......................... $ 6,171 $ 4,198
Other liabilities .................................... 2,689 1,356
Long-term debt ....................................... 56,556 56,229
Total Liabilities .................................... 65,416 61,783
Shareholders' Equity ................................. 216,793 194,953
Total Liabilities and Shareholders' Equity ........... $282,209 $256,736
</TABLE>
52
<PAGE>
NOTE Q -- 1ST SOURCE CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION -- CONTINUED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996
(Restated)
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Income:
Dividends from bank subsidiaries $6,596 $5,725 $5,029
Rental income from subsidiaries 2,363 2,273 2,071
Other 2,883 3,447 679
Total Income 11,842 11,445 7,779
Expenses:
Interest on long-term debt 4,612 3,810 1,015
Interest on commercial paper and
other short-term borrowings 264 309 274
Rent expense 1,076 1,076 1,074
Other 2,501 2,681 1,775
Total Expenses 8,453 7,876 4,138
Income Before Income Tax Credits and
Equity in Undistributed Income of Subsidiaries 3,389 3,569 3,641
Income tax credits 1,556 925 639
Income Before Equity in Undistributed
Income of Subsidiaries 4,945 4,494 4,280
Equity in undistributed income of subsidiaries:
Bank subsidiaries 23,631 19,736 18,257
Non-bank subsidiaries 2,881 2,259 666
Net Income $31,457 $26,489 $23,203
</TABLE>
53
<PAGE>
NOTE Q -- 1ST SOURCE CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION -- CONCLUDED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
(Restated)
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Operating Activities:
Net income $31,457 $ 26,489 $23,203
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of subsidiaries (26,512) (21,995) (18,923)
Depreciation of premises and equipment 225 201 175
Realized and unrealized investment
securities gains (losses) 99 176 (52)
Other 2,284 3,054 2,854
Net Cash Provided by Operating Activities 7,553 7,925 7,257
Investing Activities:
Proceeds from sales and maturities
of investment securities 3,603 8,759 3,804
Purchase of investment securities (6,195) (15,788) (2,955)
Sale (purchase) of premises and equipment, net 23 (422) (471)
Contributed capital for new non-bank subsidiary - (1,384) -
Decrease (increase) in short-term investments
with bank subsidiary (1,158) 3,593 (582)
Decrease (increase) in loans made to
subsidiaries, net 6,245 (34,000) 300
Net Cash Provided by (Used in) Investing Activities 2,518 (39,242) 96
Financing Activities:
Net increase (decrease) in commercial
paper and other short-term borrowings 1,973 (2,269) 1,616
Proceeds from issuance of cumulative trust
preferred securities - 44,750 -
Proceeds from issuance of long-term debt 434 1,45 -
Payments on long-term debt (107) (2,834) (3,346)
Acquisition of treasury stock (7,116) (5,023) (1,488)
Cash dividends (5,296) (4,723) (4,123)
Other 12 (7) (12)
Net Cash Provided by (Used in) Financing Activities (10,100) 31,346 (7,353)
Increase (Decrease) in Cash and Cash Equivalents (29) 29 -
Cash and cash equivalents, beginning of year 30 1 1
Cash and Cash Equivalents, End of Year $ 1 $ 30 $ 1
</TABLE>
54
<PAGE>
NOTE R -- RESTATEMENT SUMMARY
The financial information for the year ended December 31, 1998 has been
restated for adjustments to revise the income recognition on securitized loans
in accordance with SFAS No. 125. Since July 1, 1998, 1st Source has sold capital
equipment loans into a securitization facility. As a result of a review of its
accounting policies and procedures relating to securitized loans, 1st Source
refined its method of estimating the timing of cash flows and the underlying key
assumptions of the securitized loans and the value of its retained interests in
the loans. These changes resulted only in a difference in timing of the revenue
recognition from its securitized loans and has no effect on the total cash flows
of the securitized transactions. The changes were applied retroactively to the
commencement of this securitization program in the third quarter of 1998, and
resulted in an increase in net income in 1998. The following summarizes the
impact of these adjustments on the assets and liabilities as of December 31,
1998 and to the results of operations for the year ended December 31, 1998:
BALANCE SHEET December 31, 1998
- ------------- -------------------
As reported As restated
----------- -----------
Reserve for Loan Losses $ 40,929 $ 38,629
Net Loans 1,840,767 1,843,067
Retained Interest Assets 9,100 8,371
Total Assets 2,732,021 2,733,592
Total Liabilities 2,471,412 2,472,049
Shareholders' Equity 215,859 216,793
Total Liabilities and
Shareholders' Equity 2,732,021 2,733,592
Year Ended
INCOME STATEMENT December 31, 1998
- ---------------- -------------------
As reported As restated
----------- -----------
Total Noninterest Income $51,521 $52,256
Income Before Taxes 50,786 51,521
Income Taxes 17,545 17,843
Net Income 31,020 31,457
Comprehensive Income 32,123 33,057
Basic EPS 1.63 1.66
Diluted EPS 1.60 1.62
55
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of 1st Source Corporation:
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, shareholders'
equity and of cash flows present fairly, in all material respects, the financial
position of 1st Source Corporation and its subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note R, the accompanying consolidated financial statements as
of and for the year ended December 31, 1998 have been restated.
/s/ PricewaterhouseCoopers LLP
South Bend, Indiana
January 14, 1999, except for Note R
which is as of February 11, 2000
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(c) Exhibits and (d) Financial Statement Schedules
23 -- Consent of Independent Accountants, attached hereto.
27 -- Financial Data Schedule, attached hereto.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
1st SOURCE CORPORATION
Registrant
By: /s/ CHRISTOPHER J. MURPHY III
--------------------------------
Christopher J. Murphy III
Chairman of the Board, President and Chief Executive Officer
Date: February 17, 2000
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ CHRISTOPHER J. MURPHY III
- ------------------------------------
Christopher J. Murphy III, Chairman of the Board, President and
Chief Executive Officer
Date: February 17, 2000
------------------------------
/s/ WELLINGTON D JONES III
- ------------------------------------
Wellington D. Jones III, Executive Vice President and a Director
Date: February 17, 2000
------------------------------
/s/ VINCENT A . TAMBURO
- ------------------------------------
Vincent A. Tamburo, Secretary and General Counsel
Date: March 7, 2000
------------------------------
/s/ LARRY E. LENTYCH
- ------------------------------------
Larry E. Lentych, Treasurer and Chief Financial Officer
Date: February 17, 2000
------------------------------
/s/ E. WILLIAM BEAUCHAMP, c.s.c.
- ------------------------------------
Reverend E. William Beauchamp, Director
Date: February 17, 2000
------------------------------
/s/ PAUL R. BOWLES
- ------------------------------------
Paul R. Bowles, Director
Date: February 17, 2000
------------------------------
58
<PAGE>
/s / PHILIP J. FACCENDA
- ------------------------------------
Philip J. Faccenda, Director
Date: February 18, 2000
------------------------------
/s/ DANIEL B. FITZPATRICK
- ------------------------------------
Daniel B. Fitzpatrick, Director
Date: February 18, 2000
------------------------------
/s/ LAWRENCE E. HILER
- ------------------------------------
Lawrence E. Hiler, Director
Date: February 17, 2000
------------------------------
/s/ WILLIAM P. JOHNSON
- ------------------------------------
William P. Johnson, Director
Date: February 17, 2000
------------------------------
/s/ REX MARTIN
- ------------------------------------
Rex Martin, Director
Date: February 17, 2000
------------------------------
/s/ DANE A. MILLER
- ------------------------------------
Dane A. Miller, Director
Date: February 17, 2000
------------------------------
/s/ RICHARD J. PFEIL
- ------------------------------------
Richard J. Pfeil, Director
Date: February 17, 2000
------------------------------
59
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements of 1st Source Corporation on Forms S-8 of our report dated January
14, 1999, except for Note R which is as of February 11, 2000, on our audits of
the consolidated financial statements of 1st Source Corporation and subsidiaries
as of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, which report is included in this Annual Report on Form
10-K/A of 1st Source Corporation for the year ended December 31, 1998.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
South Bend, Indiana
March 13, 2000
E-1
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 132,514
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 41,951
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 443,691
<INVESTMENTS-CARRYING> 96,008
<INVESTMENTS-MARKET> 99,734
<LOANS> 1,881,696
<ALLOWANCE> 38,629
<TOTAL-ASSETS> 2,733,592
<DEPOSITS> 2,177,107
<SHORT-TERM> 242,159
<LIABILITIES-OTHER> 39,594
<LONG-TERM> 57,939
6,270
0
<COMMON> 0
<OTHER-SE> 210,523
<TOTAL-LIABILITIES-AND-EQUITY> 2,733,592
<INTEREST-LOAN> 168,462
<INTEREST-INVEST> 25,338
<INTEREST-OTHER> 2,348
<INTEREST-TOTAL> 196,148
<INTEREST-DEPOSIT> 86,264
<INTEREST-EXPENSE> 102,227
<INTEREST-INCOME-NET> 93,921
<LOAN-LOSSES> 9,156
<SECURITIES-GAINS> (612)
<EXPENSE-OTHER> 85,500
<INCOME-PRETAX> 51,521
<INCOME-PRE-EXTRAORDINARY> 31,457
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,457
<EPS-BASIC> 1.66
<EPS-DILUTED> 1.62
<YIELD-ACTUAL> 4.16
<LOANS-NON> 9,266
<LOANS-PAST> 275
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 33,124
<CHARGE-OFFS> 4,799
<RECOVERIES> (1,148)
<ALLOWANCE-CLOSE> 38,629
<ALLOWANCE-DOMESTIC> 18,513
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 20,116
</TABLE>
