FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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 North Michigan Street South Bend, Indiana 46601
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(Address of principal executive offices) (Zip Code)
(219) 235-2702
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares of common stock outstanding as of June 30, 2000 - 19,771,448
shares.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Page
Consolidated statements of financial condition -- 3
June 30, 2000, and December 31, 1999
Consolidated statements of income -- 4
three months and six months ended June 30, 2000 and 1999
Consolidated statements of cash flows -- 5
six months ended June 30, 2000 and 1999
Notes to the Consolidated Financial Statements 6
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<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Dollars in thousands)
June 30, December 31,
2000 1999
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ASSETS
Cash and due from banks .......................... $ 158,424 $ 101,911
Federal funds sold and
interest bearing deposits with other banks ..... 4,509 1,399
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $466,556 and $475,390
at June 30, 2000 and December 31, 1999)....... 461,457 470,040
Securities held-to-maturity, at amortized cost
(fair value of $67,888 and $78,462 at
June 30, 2000 and December 31, 1999) ......... 67,381 77,190
----------- -----------
Total Investment Securities ...................... 528,838 547,230
Loans - net of unearned discount ................. 2,252,739 2,063,189
Reserve for loan losses ........................ (42,205) (40,210)
----------- -----------
Net Loans ........................................ 2,210,534 2,022,979
Equipment owned under operating leases,
net of accumulated depreciation 83,799 65,956
Premises and equipment,
net of accumulated depreciation ............... 33,352 33,745
Other assets ..................................... 104,505 99,725
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Total Assets ..................................... $ 3,123,961 $ 2,872,945
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ............................ $ 300,055 $ 268,825
Interest bearing ............................... 2,157,196 1,858,627
----------- -----------
Total Deposits ................................... 2,457,251 2,127,452
Federal funds purchased and securities
sold under agreements to repurchase ............ 171,224 263,253
Other short-term borrowings ...................... 140,662 146,489
Other liabilities ................................ 45,555 40,007
Long-term debt ................................... 12,272 12,174
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Total Liabilities ................................ 2,826,964 2,589,375
Guaranteed preferred beneficial interests
in 1st Source's subordinated debentures ........ 44,750 44,750
Shareholders' equity:
Common stock-no par value ...................... 6,883 6,883
Capital surplus ................................ 179,905 179,905
Retained earnings .............................. 80,789 68,309
Less cost of common stock in treasury .......... (14,290) (14,382)
Net unrealized depreciation of
securities available-for-sale ................ (1,040) (1,895)
----------- -----------
Total Shareholders' Equity ....................... 252,247 238,820
----------- -----------
Total Liabilities and Shareholders' Equity ....... $ 3,123,961 $ 2,872,945
=========== ===========
The accompanying notes are a part of the consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
1st Source Corporation and Subsidiaries
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees ...................................... $ 50,467 $ 42,594 $ 96,425 $ 83,580
Investment securities:
Taxable ................................................ 5,392 5,033 10,453 9,950
Tax-exempt ............................................. 2,053 1,983 3,994 3,895
Other .................................................. 153 262 242 345
------------ ------------ ------------ ------------
Total Interest Income ....................................... 58,065 49,872 111,114 97,770
Interest Expense:
Deposits ................................................. 26,520 21,797 49,685 42,471
Short-term borrowings .................................... 4,833 3,065 9,297 6,483
Long-term debt ........................................... 224 227 445 454
------------ ------------ ------------ ------------
Total Interest Expense ...................................... 31,577 25,089 59,427 49,408
------------ ------------ ------------ ------------
Net Interest Income ......................................... 26,488 24,783 51,687 48,362
Provision for Loan Losses ................................... 4,678 1,443 8,596 2,736
------------ ------------ ------------ ------------
Net Interest Income After
Provision for Loan Losses ................................ 21,810 23,340 43,091 45,626
Noninterest Income:
Trust fees ............................................... 2,509 2,302 4,830 4,568
Service charges on deposit accounts ...................... 1,915 1,696 3,724 3,236
Loan servicing and sale income ........................... 6,249 3,881 11,827 9,478
Equipment rental income .................................. 4,525 4,090 9,103 7,503
Other income ............................................. 2,860 2,547 5,191 5,048
Investment securities and
other investment gains (losses), net .................. 0 (400) 497 (477)
------------ ------------ ------------ ------------
Total Noninterest Income .................................... 18,058 14,116 35,172 29,356
------------ ------------ ------------ ------------
Noninterest Expense:
Salaries and employee benefits ........................... 14,041 13,082 27,302 26,054
Net occupancy expense .................................... 1,325 1,310 2,707 2,568
Furniture and equipment expense .......................... 2,133 1,960 4,255 3,971
Depreciation - leased equipment .......................... 4,182 3,097 7,824 6,077
Supplies and communications .............................. 1,223 1,282 2,511 2,607
Business development and marketing expense ............... 1,086 1,053 1,829 1,784
Other expense ............................................ 2,153 2,917 4,001 5,240
------------ ------------ ------------ ------------
Total Noninterest Expense ................................... 26,143 24,701 50,429 48,301
------------ ------------ ------------ ------------
Income Before Income Taxes and Subsidiary Trust Distributions 13,725 12,755 27,834 26,681
Income taxes ................................................ 4,212 4,330 9,057 9,174
Distribution on preferred securities of
subsidiary trusts, net of income tax benefit .............. 607 551 1,186 1,105
------------ ------------ ------------ ------------
Net Income .................................................. $ 8,906 $ 7,874 $ 17,591 $ 16,402
============ ============ ============ ============
Other Comprehensive Income, Net of Tax:
Change in unrealized appreciation (depreciation) of
available-for-sale securities ........................... 381 (2,358) 855 (3,137)
------------ ------------ ------------ ------------
Total Comprehensive Income .................................. $ 9,287 $ 5,516 $ 18,446 $ 13,265
============ ============ ============ ============
Per Common Share: (1)
Basic Net Income Per Common Share ......................... $ 0.45 $ 0.39 $ 0.89 $ 0.82
============ ============ ============ ============
Diluted Net Income Per Common Share ....................... $ 0.45 $ 0.39 $ 0.88 $ 0.81
============ ============ ============ ============
Dividends ................................................. $ 0.086 $ 0.076 $ 0.171 $ 0.145
============ ============ ============ ============
Basic Weighted Average Common Shares Outstanding ............ 19,818,643 19,920,080 19,828,972 19,909,577
============ ============ ============ ============
Diluted Weighted Average Common Shares Outstanding .......... 20,038,468 20,250,306 20,058,127 20,246,753
============ ============ ============ ============
(1) The computation of per share data gives retroactive recognition to a 5% stock dividend declared on July 18, 2000.
The accompanying notes are a part of the consolidated financial statements.
</TABLE>
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Dollars in thousands)
Six Months Ended June 30
2000 1999
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Operating Activities:
Net income .................................... $ 17,591 $ 16,402
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ..................... 8,596 2,736
Depreciation of premises and equipment ........ 9,967 8,006
Amortization of investment security premiums
and accretion of discounts, net ............. 553 855
Amortization of mortgage servicing rights ..... 2,864 2,795
Deferred income taxes ......................... 379 (706)
Realized investment securities (gains) losses . (497) 477
Realized (gains) on securitized loans ......... (5,123) (3,253)
Increase in interest receivable ............... (1,650) (1,027)
Increase in interest payable .................. 7,241 2,406
Other ......................................... (4,837) 9,921
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Net Cash Provided by Operating Activities ....... 35,084 38,612
Investing Activities:
Proceeds from sales and maturities
of investment securities .................... 107,060 155,022
Purchases of investment securities ............ (88,473) (138,428)
Net (increase)decrease in short-term investments (3,110) 29,035
Loans sold or participated to others .......... 154,092 157,846
Increase in loans net of principal collections. (355,885) (275,314)
Net increase in equipment owned
under operating leases ...................... (16,097) (7,915)
Purchases of premises and equipment ........... (1,246) (1,646)
Decrease (increase) in other assets ........... 813 (5,304)
Other ......................................... (643) (6,432)
--------- ---------
Net Cash Used in Investing Activities ........... (203,489) (93,136)
Financing Activities:
Net increase in demand deposits, NOW
accounts and savings accounts ............... 150,323 42,424
Net increase in certificates of deposit ....... 179,477 5,240
Net (decrease) increase in short-term borrowings (97,856) 13,948
Proceeds from issuance of long-term debt ...... 250 579
Payments of long-term debt .................... (152) (1,860)
Acquisition of treasury stock ................. (3,721) (4,134)
Cash dividends ................................ (3,403) (2,912)
--------- ---------
Net Cash Provided by Financing Activities ....... 224,918 53,285
Increase (Decrease) in Cash and Cash Equivalents 56,513 (1,239)
Cash and Cash Equivalents, Beginning of Year .... 101,911 132,514
--------- ---------
Cash and Cash Equivalents, End of Period ........ $ 158,424 $ 131,275
========= =========
The accompanying notes are a part of the consolidated financial statements.
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<PAGE>
Notes to the Consolidated Financial Statements
1. The unaudited consolidated condensed financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do
not include all information and footnotes necessary for a fair presentation
of financial position, results of operations and cash flows in conformity
with generally accepted accounting principles. The information furnished
herein reflects all adjustments (all of which are normal and recurring in
nature) which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods for which this report
is submitted. The 1999 1st Source Corporation Annual Report on Form 10-K
and quarterly report on Form 10-Q for the quarter ended March 31, 2000,
should be read in conjunction with these statements.
2. In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments and for hedging activities. 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. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," which amends SFAS 133, deferring its effective date to fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133," which amends certain
provisions of SFAS No. 133. 1st Source will adopt SFAS 138, concurrently
with SFAS 133, on January 1, 2001. Management is currently in the process
of assessing the impact that the adoption of SFAS No. 133 will have on 1st
Source's results of operations and its financial position.
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<PAGE>
PART I.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis should be read in conjunction with 1st
Source's consolidated condensed financial statements and the financial and
statistical data appearing elsewhere in this report and the 1999 1st Source
Corporation Annual Report on Form 10-K and the quarterly report on Form 10-Q for
the quarter ended March 31, 2000.
Except for historical information contained herein, the matters discussed
in this document, and other information contained in 1st Source's SEC filings,
may express "forward-looking statements." Those "forward-looking statements" may
involve risk and uncertainties, including statements concerning future events,
performance and assumptions and other statements that are other than statements
of historical facts. 1st Source wishes to caution readers not to place undue
reliance on any forward-looking statements, which speak only as of the date
made. Readers are advised that various factors--including, but not limited to,
changes in laws, regulations or generally accepted accounting principles; 1st
Source's competitive position within the markets served; increasing
consolidation within the banking industry; unforeseen changes in interest rates;
any unforeseen downturns in the local, regional or national economies--could
cause 1st Source's actual results or circumstances for future periods to differ
materially from those anticipated or projected.
1st Source does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions that may be made to any
forward-looking statements to reflect the occurrence of unanticipated events or
circumstances after the date of such statements.
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<PAGE>
COMPARISON OF THREE-MONTH AND SIX-MONTH PERIODS
ENDED JUNE 30, 2000 AND 1999
-----------------------------------------------
Net income for the three-month and six-month periods ended June 30, 2000,
was $8,906,000 and $17,591,000 respectively, compared to $7,874,000 and
$16,402,000 for the equivalent periods in 1999. The primary reasons for the
increase were an increase in net interest income and noninterest income. This
was offset by increases in the provision for loan losses and noninterest
expense.
Diluted net income per common share increased to $0.45 and $0.88,
respectively, for the three-month and six- month periods ended June 30, 2000,
from $0.39 and $0.81 in 1999. Return on average common shareholders' equity was
14.45% for the six months ended June 30, 2000, compared to 14.84% in 1999. The
return on total average assets was 1.20% for the six months ended June 30, 2000,
compared to 1.23% in 1999.
NET INTEREST INCOME
The taxable equivalent net interest income for the three-month period ended
June 30, 2000, was $27,300,000, an increase of 6.27% over the same period in
1999, resulting in a net yield of 4.00% compared to 4.16% in 1999. The fully
taxable equivalent net interest income for the six-month period ended June 30,
2000, was $53,318,000, an increase of 6.27% over 1999, resulting in a net yield
of 4.01% compared to 4.15% in 1999.
Total average earning assets increased 10.80% and 9.54%, respectively, for
the three-month and six-month periods ended June 30, 2000, over the comparative
periods in 1999. Total average investment securities increased 6.81% and 4.81%,
respectively for the three-month and six-month periods over one year ago
primarily due to an increase in U.S. Government Securities. Average loans
increased by 12.61% and 11.21% for the three-month and six-month periods,
compared to the same periods in 1999, due to growth in loan volume in
commercial, consumer and commercial loans secured by transportation and
construction equipment. The taxable equivalent yields on total average earning
assets were 8.62% and 8.22% for the three-month periods ended June 30, 2000, and
1999, and 8.49% and 8.24% for the six-month periods ended June 30, 2000, and
1999, respectively.
Average deposits increased 7.18% and 6.63%, respectively, for the
three-month and six-month periods over the same periods from 1999. The cost rate
on average interest-bearing funds was 5.32% and 4.70% for the three-months ended
June 30, 2000, and 1999, and 5.15% and 4.74% for the six-month periods ended
June 30, 2000 and 1999. The majority of the growth in deposits from last year
has occurred in money management savings accounts.
The following table sets forth consolidated information regarding average
balances and rates.
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<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three Months Ended June 30
------------------------------------
2000 1999
--------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Taxable ................. $ 368,426 $ 5,393 5.89% $ 343,196 $ 5,033 5.88%
Tax exempt (1)........... 172,163 2,845 6.65% 162,915 2,843 7.00%
Net loans (2)(3)........... 2,195,220 50,486 9.25% 1,949,409 42,639 8.77%
Other investments ......... 10,432 153 5.90% 23,067 263 4.57%
---------- -------- ----- ---------- -------- -----
Total Earning Assets 2,746,241 58,877 8.62% 2,478,587 50,778 8.22%
Cash and due from banks ... 95,137 114,612
Reserve for loan losses ... (40,314) (38,811)
Other assets .............. 215,694 186,735
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Total ..................... $3,016,758 $2,741,123
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $2,049,886 $26,520 5.20% $1,898,133 $21,797 4.61%
Short-term borrowings ... 326,144 4,833 5.96% 230,487 3,064 5.33%
Long-term debt .......... 12,319 224 7.31% 12,939 228 7.07%
---------- ------- ----- ---------- ------- -----
Total Interest Bearing
Liabilities ............. 2,388,349 31,577 5.32% 2,141,559 25,089 4.70%
Noninterest bearing deposits 289,428 284,432
Other liabilities ....... 91,036 89,578
Shareholders' equity .... 247,945 225,554
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Total ..................... $3,016,758 $2,741,123
========== ==========
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Net Interest Income ....... $27,300 $25,689
======= =======
Net Yield on Earning Assets on a Taxable ----- -----
Equivalent Basis ........ 4.00% 4.16%
===== =====
Six Months Ended June 30
-------------------------------------
2000 1999
--------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
ASSETS:
Investment securities:
Taxable ................. $ 361,733 $10,453 5.81% $ 345,904 $ 9,950 5.80%
Tax exempt (1)........... 167,771 5,575 6.68% 159,322 5,610 7.10%
Net loans (2)(3)........... 2,132,554 96,475 9.10% 1,917,540 83,673 8.80%
Other investments ......... 8,803 242 5.53% 15,383 346 4.53%
---------- ------- ----- ---------- ------- -----
Total Earning Assets ...... 2,670,861 112,745 8.49% 2,438,149 99,579 8.24%
Cash and due from banks ... 98,803 109,961
Reserve for loan losses ... (40,171) (38,662)
Other assets .............. 210,336 181,624
---------- ----------
Total ..................... $2,939,829 $2,691,072
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,983,184 $49,685 5.04% $1,847,461 $42,471 4.64%
Short-term borrowings ... 326,337 9,297 5.73% 243,374 6,483 5.37%
Long-term debt .......... 12,254 445 7.30% 13,045 455 7.03%
---------- ------- ----- ---------- ------- -----
Total Interest Bearing
Liabilities ............. 2,321,775 59,427 5.15% 2,103,880 49,409 4.74%
Noninterest bearing deposits 281,658 276,524
Other liabilities ....... 91,620 87,720
Shareholders' equity .... 244,776 222,948
---------- ----------
Total ..................... $2,939,829 $2,691,072
========== ==========
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Net Interest Income ....... $53,318 $50,170
======= =======
Net Yield on Earning Assets on a Taxable ----- -----
Equivalent Basis ........ 4.01% 4.15%
===== =====
(1) Interest income includes the effects of taxable equivalent adjustments,
using a 40.525% rate for 2000 and 1999. Tax equivalent adjustments for the
three-month periods were $791 in 2000 and $860 in 1999 and for the
six-month periods were $1,581 in 2000 and $1,715 in 1999.
(2) Loan income includes fees on loans for the three-month periods of $1,726 in
2000 and $1,391 in 1999 and for the six-month periods of $3,205 in 2000 and
$2,800 in 1999. Loan income also includes the effects of taxable equivalent
adjustments, using a 40.525% rate for 2000 and 1999. The tax equivalent
adjustments for the three-month periods were $20 in 2000 and $50 in 1999
and for the six-month periods were $50 in 1999 and $93 in 1999.
(3) For purposes of this computation, non-accruing loans are included in the
daily average loan amounts outstanding.
</TABLE>
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<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three-month period ended June 30,
2000, and 1999, was $4,678,000 and $1,443,000, respectively, and was $8,596,000
and $2,736,000 for the six-month periods ended June 30, 2000 and 1999. Net
Charge-offs of $1,603,000 have been recorded for the three-month period ended
June 30, 2000, compared to $223,000 of Net Charge-offs for the same period in
1999. Year-to-date Net Charge-offs of $4,951,000 have been recorded in 2000,
compared to Net Charge-offs of $365,000 through June 1999. The reserve for loan
losses was $42,205,000 or 1.87% of net loans at June 30, 2000, compared to
$40,210,000 or 1.95% of net loans at December 31, 1999.
Non-performing assets at June 30, 2000, were $17,583,000 compared to
$15,355,000 at December 31, 1999, an increase of 14.51%. At June 30, 2000,
non-performing assets were 0.78% of net loans compared to 0.74% at December 31,
1999. It is management's opinion that the reserve for loan losses is adequate to
absorb losses inherent in the loan portfolio as of June 30, 2000.
NONINTEREST INCOME
Noninterest income for the three-month periods ended June 30, 2000, and
1999 was $18,058,000 and $14,116,000, respectively, and for the six-month
periods was $35,172,000 in 2000 and $29,356,000 in 1999. For the six-month
period, trust fees increased 5.74%, service charges on deposit accounts
increased 15.08%, loan servicing and sale income increased 24.78%, equipment
rental income increased 21.32% and other income increased 2.83%. The increase in
servicing and sale income is due to increased loan securitization activity and
an increase in the sale and servicing of mortgage loans. The increase in
equipment rental income was primarily due to growth in operating leases.
Investment Security and other net gains for the six-month period ended June 30,
2000, were $497,000 compared to net losses of $477,000 in 1999. The net gains
and losses for both years were primarily attributed to certain partnership and
venture capital investments.
NONINTEREST EXPENSE
Noninterest expense for the three-month period ended June 30, 2000, was
$26,143,000, an increase of 5.84% over the same period in 1999 and was
$50,429,000 for the six-month period ended June 30, 2000, an increase of 4.41%
over 1999. For the six-month period ended June 30, 2000, salaries and employee
benefits increased 4.79%, net occupancy expense increased 5.41%, furniture and
equipment expense increased 7.15%, depreciation on leased equipment increased
28.75%, supplies and communications expense decreased 3.68%, business
development and marketing expense increased 2.52%, and miscellaneous other
expenses decreased 23.65% over the same period in 1999. The increase in
depreciation of leased equipment is due to a significant volume increase from
the prior year. The miscellaneous other expense decrease from one year ago is
attributed primarily to Year 2000 consulting expenses incurred in 1999.
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<PAGE>
INCOME TAXES
The provision for income taxes for the three-month and six-month periods
ended June 30, 2000, was $4,212,000 and $9,057,000, respectively, compared to
$4,330,000 and $9,174,000 for the comparable periods in 1999. The provision for
income taxes for the six months ended June 30, 2000, and 1999, is at a rate
which management believes approximates the effective rate for the year.
CAPITAL RESOURCES
The banking regulators have established guidelines for leverage capital
requirements, expressed in terms of Tier 1 or core capital as a percentage of
average assets, to measure the soundness of a financial institution. These
guidelines require all banks to maintain a minimum leverage capital ratio of
4.00% for adequately capitalized banks and 5.00% for well-capitalized banks. 1st
Source's leverage capital ratio was 9.81% at June 30, 2000.
The Federal Reserve Board has established risk-based capital guidelines for
U.S. banking organizations. The guidelines established a conceptual framework
calling for risk weights to be assigned to on and off-balance sheet items in
arriving at risk-adjusted total assets, with the resulting ratio compared to a
minimum standard to determine whether a bank has adequate capital. The minimum
standard risk-based capital ratios effective in 2000 are 4.00% for adequately
capitalized banks and 6.00% for well-capitalized banks for Tier 1 risk-based
capital and 8.00% and 10.00%, respectively, for total risk-based capital. 1st
Source's Tier 1 risk-based capital ratio on June 30, 2000, was 11.43% and the
total risk-based capital ratio was 12.69%.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Asset and liability management includes the management of interest rate
sensitivity and the maintenance of an adequate liquidity position. The purpose
of liquidity management is to match the sources and uses of funds to anticipated
customers' deposits and withdrawals, to anticipate borrowing requirements and to
provide for the cash flow needs of 1st Source. The purpose of interest rate
sensitivity management is to stabilize net interest income during periods of
changing interest rates.
Close attention is given to various interest sensitivity gaps and interest
spreads. Maturities of rate sensitive assets are carefully maintained relative
to the maturities of rate sensitive liabilities and interest rate forecasts. At
June 30, 2000, the consolidated statement of financial condition was rate
sensitive by $72,402,000 more liabilities than assets scheduled to reprice
within one year or 95.67%. Management adjusts the composition of its assets and
liabilities to manage the interest rate sensitivity gap based upon its
expectations of interest rate fluctuations.
1st Source has three off-balance sheet interest rate swaps as part of its
interest rate risk management strategy. The swaps are being used to hedge
against 1st Source's prime and LIBOR floating rate loans. The notional amount of
the first swap as of June 30, 2000, is $1.6 million. It has a maturity date of
January, 2002, and a market value of ($6,358). The second swap has a notional
amount of $160,000 as of June 30, 2000. It has a maturity date of
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<PAGE>
March, 2001, and a market value of ($312). The third swap has a notional amount
of $40.2 million as of June 30, 2000. It has a maturity date of April, 2003, and
a market value of ($1,098,240).
1st Source pays a variable interest rate (one-month LIBOR) on each swap and
receives a fixed rate. The interest rate swaps are the most efficient means of
protecting the bank's net interest rate margin in a declining interest rate
environment. Conversely, if interest rates increase, the increased contribution
to net interest income from on-balance sheet assets will substantially offset
any negative impact on net interest income from these swap transactions.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
None
ITEM 2. Changes in Securities.
None
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders
During the second quarter of 2000, 1st Source Corporation's shareholders
elected Claire C. Skinner, and re- elected Paul R. Bowles, Rev. E. William
Beauchamp, William P. Johnson, and Richard J. Pfeil, as directors at the
April 18, 2000, annual meeting. Mr. Bowles was elected for a term ending in
April, 2001. All other directors were elected for terms ending in April, 2003.
The election showed that 17,817,131 votes were cast (representing 93.6% of all
eligible shares) with all directors receiving a majority of the votes cast.
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during the
quarter ended June 30, 2000.
June 2, 2000- Change in Registrant's Certifying Accountants -
PricewaterhouseCoopers, LLP declining to stand for
re-election as independent auditors as of May 26,
2000.
June 16, 2000- Change in Registrant's Certifying Accountants -
Ernst & Young, LLP engaged as new independent
auditors as of June 14,2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1st Source Corporation
-------------------
DATE 8/10/00 /s/ Christopher J. Murphy III
---------- ----------------------------------------
(Signature)
Christopher J. Murphy III
Chairman of the Board, President and CEO
DATE 8/10/00 /s/ Larry E. Lentych
---------- ----------------------------------------
(Signature)
Larry E. Lentych
Treasurer and Chief Financial Officer
- 14 -
<PAGE>
