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, 2000, 1st Source had assets of $3.18 billion, deposits of $2.46 billion and total shareholders' equity of $270.6 million. Pages 22 through 42 of 1st Source's Annual Report to Shareholders for the year ended December 31, 2000 are incorporated herein by reference.
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 49 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, construction and environmental 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 twelve counties in northern Indiana and 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 special purpose entity established for purposes of administering securitization activity, and Trustcorp Mortgage Company, a mortgage banking company with thirteen offices in Indiana, Ohio, Michigan and North Carolina. 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, identified several business objectives and strategies which focused on growth and customer service. The principal objectives of 1st Source under Vision 2000 were to (i) increase financial performance and market share, (ii) provide exceptional customer service, (iii) enhance credit quality, and (iv) maintain cost controls. 1st Source is in the process of setting its goals and objectives for 2005 while remaining committed to the initiatives developed in Vision 2000.
1st Source 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. As part of its banking center expansion program, 1st Source expanded from 33 banking centers in 1995 to 49 full service community banking centers in 2000. The program was designed to maintain 1st Source's position as one
of the dominant financial institutions in its market area -- which includes nine counties in northern Indiana and three counties in southwestern lower Michigan. It was management's belief that such a strategy would allow the most effective and efficient use of 1st Source's marketing resources and assure that 1st Source's banking offices were 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 provides a number of fee-based services to its clients, the major services being trust, mortgage banking, and insurance. As part of the Vision 2000 objectives, it was believed that additional sources of fee income were available from existing relationships and that existing fee-based product lines could be used effectively in developing new relationships with customers. 1st Source continues to believe 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 believed was 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, continues to be 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 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
- 1st Source's commercial and agriculture loans at December 31, 2000, were approximately $461 million and were 20.0% 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.
- Commercial loans secured by transportation and construction equipment totaled $1.055 billion, or 45.7% of total loans outstanding, at December 31, 2000. This loan area concentrates on specialty finance lending for automobile and truck leasing and rental companies, privately- owned aircraft for businesses and individuals, heavy duty trucks, environmental equipment and other equipment used in the construction business. Currently, 1st Source has 23 locations nationwide supporting these lending activities. Loan sale and servicing income resulting from loan securitizations from these specialty finance lending activities totaled $12.40 million in 2000. 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 2000 totaled $21.2 million with depreciation on this equipment amounting to $16.8 million.
- Loans secured by real estate amounted to $645 million, which was approximately 27.9% of total loans outstanding, at December 31, 2000. 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.
- 1st Source's consumer loans at December 31, 2000, amounted to $148 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 49 branches in 12 counties in Indiana and Michigan, 1st Source generates deposits to fund its lending activities. Total deposits at December 31, 2000 were $2.46 billion. Enhancing customer service, 1st Source offers banking services, in addition to its traditional branches, through its network of 52 automatic teller machines, bank by phone services and on-line personal and business financial products. Service charges on deposit accounts totaled $8.07 million for 2000.
Fee Based Businesses
1st Source maintains various fee based businesses to complement net interest income.
- Trust fees are generated from employee benefit services, personal and agency trusts and estate planning. In 2000, trust fees were approximately $9.61 million.
- Mortgage loan sale and servicing income for 2000 amounted to $9.60 million. Income from loan sale and servicing is generated from the mortgage banking operations of Trustcorp Mortgage Company. Trustcorp serviced approximately $2.07 billion of mortgage loans at December 31, 2000. In January 2001, Trustcorp executed an agreement to sell $1.0 billion of its mortgage servicing portfolio which was expected to settle in the first quarter of 2001 and generate approximately $6.0 million of net income.
- Insurance commissions from 1st Source's property and casualty insurance agency totaled $1.85 million for 2000.
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 Key Bank, Wells Fargo Bank, Bank One, Fifth Third Bank, Standard Federal Bank, Old Kent Bank and National City Bank. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits.
In addition to competing with other banks within 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 1,070 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. As discussed below, the Gramm-Leach-Bliley Act, which was enacted in 1999, established a new type of bank holding company known as a "financial holding company," that has powers that are not otherwise available to bank holding companies.
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.
Gramm-Leach-Bliley Act of 1999. The Act is intended to modernize the banking industry by removing barriers to affiliation among banks, insurance companies, the securities industry and other financial service providers. It provides financial organizations with the flexibility of structuring such affiliations through a holding company structure or through a financial subsidiary of a bank, subject to certain limitations. The Act establishes a new type of bank holding company, known as a financial holding company, that may engage in an expanded list of activities that are "financial in nature," which include securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking. The Act also sets forth a system of functional regulation that makes the Federal Reserve the "umbrella supervisor" for holding companies, while providing for the supervision of the holding company's subsidiaries by other federal and state agencies. A bank holding company may not become a financial holding company if any of its subsidiary financial institutions are not well-capitalized or well-managed. Further, each bank subsidiary of the holding company must have received at least a satisfactory Community Reinvestment Act ("CRA") rating. The Act also expands the types of financial activities a national bank may conduct through a financial subsidiary, addresses state regulation of insurance, generally prohibits unitary thrift holding companies organized after May 4, 1999 from participating in new financial activities, provides privacy protection for nonpublic customer information of financial institutions, modernizes the Federal Home Loan Bank system and makes miscellaneous regulatory improvements. The Federal Reserve and the Secretary of the Treasury must coordinate their supervision regarding approval of new financial activities to be conducted through a financial holding company or through a financial subsidiary of a bank. While the provisions of the Act regarding activities that may be conducted through a financial subsidiary directly apply only to national banks, those provisions indirectly apply to state-chartered banks, such as the Bank, as well. In addition, the Bank is subject to other provisions
of the Act, including those relating to CRA and privacy, regardless of whether 1st Source elects to become a financial holding company or to conduct activities through a financial subsidiary of the Bank. 1st Source does not, however, currently intend to file notice with the Federal Reserve to become a financial holding company or to engage in expanded financial activities through a financial subsidiary of the Bank. At this time, 1st Source cannot predict the impact the Act will have on its operations.
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 40 in Footnote "O" of the annual shareholders report for year ended December 31, 2000, 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.
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 $44.3 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.
Regulation FD. The Securities and Exchange Commission issued Regulation FD which became effective in October 2000. The regulation mandates that public companies disclose material, nonpublic information to all investors simultaneously for intentional disclosures, or promptly for non-intentional disclosures. Regulation FD was issued in order to increase investor confidence and to uphold the integrity of the capital markets.
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
The information regarding "forward-looking statements" on page 9 of the annual shareholders report for the year ended December 31, 2000, is incorporated herein by reference.
ITEM 1. BUSINESS (Continued)
(1) Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate. Tax equivalent adjustments were $3,003 in 2000, $3,441 in 1999 and $3,408 in 1998.
(2) Loan income includes fees on loans of $6,043 in 2000, $5,745 in 1999 and $4,889 in 1998. Loan income also includes the effects of taxable equivalent adjustments, using a 40.525% rate. Tax equivalent adjustments were $136 in 2000, $196 in 1999 and $202 in 1998.
(3) For purposes of this computation, nonaccruing loans are included in the daily average loan amounts outstanding.
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:
(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.
ITEM 1. BUSINESS (Continued)
INVESTMENT PORTFOLIO
The carrying amounts of investment securities at the dates indicated are summarized as follows:
The following table shows the maturities of investment securities at December 31, 2000, 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.
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.
ITEM 1. BUSINESS (Continued)
LOAN PORTFOLIO
The following table shows 1st Source's loan distribution at the end of each of the last five years for December 31:
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, 2000. The amounts due after one year are also classified according to the sensitivity to changes in interest rates.
The following table summarizes the nonaccrual, past due and restructured loans:
ITEM 1. BUSINESS (Continued)
LOAN PORTFOLIO (Concluded)
Information with respect to nonaccrual and restructured loans at December 31, 2000 and 1999 is as follows:
December 31 2000 1999 -------- -------- (In Thousands)
Nonaccrual loans $19,168 $11,967
Interest income which would have been recorded under original terms 2,663 1,237
Interest income recorded during the period 801 371
At December 31, 2000, $18,913,000 of the nonaccrual loans are collateralized.
Potential Problem Loans
At December 31, 2000, 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, 2000, 13.6% of total business loans were concentrated with borrowers in truck and automobile rental and leasing companies. Loans to air transportation and aircraft dealers accounted for 12.9% of all business loans at December 31, 2000.
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:
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 losses inherent in the loan portfolio. 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 2000, after management's assessment of loan quality, 1st Source made a charge of $14.88 million to operations as a provision for loan losses. At December 31, 2000, the reserve for loan losses was $44.64 million, or 1.93% of loans outstanding, net of unearned discount.
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:
Allowance for loan losses not specifically identified is allocated on a pro rata basis to all loan categories.
ITEM 1. BUSINESS (Continued)
DEPOSITS
The average daily amounts of deposits and rates paid on such deposits are summarized as follows:
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, 2000, by time remaining until maturity is as follows (in thousands):
Under 3 months $154,924 4 - 6 months 90,539 7 - 12 months 91,391 Over 12 months 131,676 -------- Total $468,530 ========
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 2000 1999 1998 ------ ------ ------ Percentage of net income to:
Average shareholders' equity 14.88% 15.74% 15.30%
Average total assets 1.24% 1.31% 1.23%
Dividend payout ratio 18.67% 16.83% 17.16%
Percentage of average shareholders' equity to average total assets 8.31% 8.29% 8.06%
Intangible assets (in thousands) $3,109 $3,545 $3,981
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.
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.
ITEM 2.
ITEM 2. PROPERTIES
1st Source's headquarters building is located in downtown South Bend. In 1982, the land was leased from the City of South Bend on a 49-year lease, with a 50-year renewal option. The building is part of a larger complex, including a 300-room hotel and a 500-car parking garage. 1st Source sold the building and entered into a leaseback agreement with the purchaser for a term of 30 years. The bank building is a structure of approximately 160,000 square feet, with 1st Source and its subsidiaries occupying approximately 70% of the available office space, and approximately 30% presently subleased to unrelated tenants.
1st Source also owns property and/or buildings on which 29 of the bank subsidiary's 49 banking offices are located, including the facilities in Elkhart, LaPorte, Marshall, Porter, St. Joseph and Starke Counties in the state of Indiana, as well as a parking facility, two buildings housing drive-in banking plazas, a records retention facility, and a computer operations center. In 1995, 1st Source reacquired its former headquarters building through foreclosure. It is being refurbished for additional tenants and 1st Source use. The remaining properties utilized by the subsidiary are leased from unrelated parties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information regarding common stock prices and dividends on page 20 of the annual shareholders report for the year ended December 31, 2000, is incorporated herein by reference. There were 1,125 shareholders of 1st Source Common Stock as of December 31, 2000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Consolidated Financial Data" on page 10 of the annual shareholders report for the year ended December 31, 2000, is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 21 of the annual shareholders report for the year ended December 31, 2000, is incorporated herein by reference.
1st Source cautions that any forward looking statements contained in this report, in a report incorporated by reference into this report or made by management of 1st Source involve risks and uncertainties and are subject to change based on various factors. Actual results could differ materially from those expressed or implied.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Interest Rate Risk Management" on pages 13 and 14 of the annual shareholders report for the year ended December 31, 2000, is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent accountants and the consolidated financial statements of 1st Source and its subsidiaries are included on pages 22 through 43 in the annual shareholders report for the year ended December 31, 2000, and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The required Forms 8-K, Item 4, "Changes in Registrant's Certifying Accountants", dated May 26, 2000 and June 14, 2000, were filed with the Securities and Exchange Commission on June 1, 2000 and June 16, 2000, respectively, and are incorporated herein by reference.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Directors and Executive Officers" on pages 3 through 6 and under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 17 of the proxy statement dated March 7, 2001, is incorporated herein by reference with respect to Directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Renumeration of Executive Officers" on pages 8 through 16 of the proxy statement dated March 7, 2001, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Voting Securities and Principal Holders Thereof" on page 2 and under the caption "Directors and Executive Officers" on pages 3 through 6 of the proxy statement dated March 7, 2001, is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on pages 5 and 6 of the proxy statement dated March 7, 2001, is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) -- The financial statements and financial statement schedules are submitted as a separate section on page of this report.
(3) -- Listing of exhibits is submitted as a separate section on page E-2 of this report.
(b) Reports on Form 8-K -- None filed during the fourth quarter of 2000.
(c) Exhibits -- The exhibits to this form 10-K begin on page E-2
(d) Financial Statement Schedules -- None.
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 14, 2001 ------------------------
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 14, 2001 ---------------------
/s/ WELLINGTON D. JONES III - ------------------------------------ Wellington D. Jones III, Executive Vice President and a Director
Date: February 14, 2001 ---------------------
/s/ LARRY E. LENTYCH - ------------------------------------ Larry E. Lentych, Treasurer, Chief Financial Officer and Assistant Secretary Date: February 14, 2001 ---------------------
/s/ E. WILLIAM BEAUCHAMP, c.s.c. - ------------------------------------ Reverend E. William Beauchamp, C.S.C. Director
Date: February 14, 2001 ---------------------
/s/ PAUL R. BOWLES - ------------------------------------ Paul R. Bowles, Director
Date: February 14, 2001 ---------------------
/s/ DANIEL B. FITZPATRICK - ------------------------------------ Daniel B. Fitzpatrick, Director
Date: February 14, 2001 ---------------------
/s/ LAWRENCE E. HILER - ------------------------------------ Lawrence E. Hiler, Director
Date: February 14, 2001 ---------------------
/s/ WILLIAM P. JOHNSON - ------------------------------------ William P. Johnson, Director
Date: February 14, 2001 ---------------------
/s/ REX MARTIN - ------------------------------------ Rex Martin, Director
Date: February 14, 2001 ---------------------
/s/ DANE A. MILLER - ------------------------------------ Dane A. Miller, Director
Date: February 14, 2001 ---------------------
/s/ TIMOTHY K. OZARK - ------------------------------------ Timothy K. Ozark, Director
Date: February 13, 2001 ---------------------
/s/ RICHARD J. PFEIL - ------------------------------------ Richard J. Pfeil, Director
Date: February 14, 2001 ---------------------
/s/ CLAIRE C. SKINNER - ------------------------------------ Claire C. Skinner, Director
Date: February 22, 2001 ---------------------
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (1) and (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 2000
1st SOURCE CORPORATION
SOUTH BEND, INDIANA
FORM 10-K -- ITEM 14(a) (1) and (2)
1ST SOURCE CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following report of independent auditors and consolidated financial statements of 1st Source Corporation and subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 31, 2000, are incorporated by reference in Item 8:
Report of Ernst & Young LLP, Independent Auditors
Consolidated statements of financial condition -- December 31, 2000 and 1999
Consolidated statements of income -- Years ended December 31, 2000, 1999 and 1998
Consolidated statements of shareholders' equity -- Years ended December 31, 2000, 1999 and 1998
Consolidated statements of cash flows -- Years ended December 31, 2000, 1999 and 1998
Notes to consolidated financial statements -- December 31, 2000, 1999 and 1998
The following report of independent accountants is submitted herewith in response to Item 14(a): Page Number ----------- Report of PricewaterhouseCoopers LLP, Independent Accountants
Financial statement schedules required by Article 9 of Regulation S-X are not required under the related instructions, or are inapplicable and, therefore, have been omitted.
[PRICEWATERHOUSECOOPERS LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of 1st Source Corporation:
In our opinion, the consolidated statement of financial condition as of December 31, 1999 and the related consolidated statements of income, shareholders' equity and of cash flows for each of the two years in the period ended December 31, 1999, (appearing on pages 22 through 26 of the 1st Source Corporation 2000 Annual Report to Shareholders which has been incorporated by reference in this Form 10-K) present fairly, in all material respects, the financial position, results of operations and cash flows of 1st Source Corporation and its subsidiaries at December 31, 1999 and for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. We have not audited the consolidated financial statements of 1st Source Corporation for any period subsequent to December 31, 1999.
/s/ PricewaterhouseCoopers LLP
South Bend, Indiana February 15, 2000
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (3) and 14(c)
LIST OF EXHIBITS
YEAR ENDED DECEMBER 31, 2000
1st SOURCE CORPORATION
SOUTH BEND, INDIANA
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FORM 10-K -- Item 14(a) (3) and 14(c)
1ST SOURCE CORPORATION AND SUBSIDIARIES
LIST OF EXHIBITS *
3(a) -- Articles of Incorporation of Registrant, as amended April 30, 1996, and filed as exhibit to Form 10-K, dated December 31, 1996, and incorporated herein by reference.
3(b) -- By-Laws of Registrant, as amended April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference.
4(a) -- Form of Common Stock Certificates of Registrant filed as exhibit to Registration Statement 2-40481 and incorporated herein by reference. Note: No long-term debt of the Registrant exceeds 10% of the consolidated total assets of the Registrant and its subsidiaries. In accordance with paragraph (4)(iii) of Item 601(b) of Regulation S-K, the Registrant will furnish the Commission upon request copies of long-term debt instruments and related agreements.
4(b)(1) -- Form of 9% Cumulative Trust Preferred Securities Indenture, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference.
4(b)(2) -- Form of 9% Cumulative Trust Preferred Securities Trust Agreement, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference.
4(b)(3) -- Form of 9% Cumulative Trust Preferred Securities Guarantee Agreement, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference.
4(c)(1) -- Form of Floating Rate Cumulative Trust Preferred Securities Indenture, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference.
4(c)(2) -- Form of Floating Rate Cumulative Trust Preferred Securities Trust Agreement, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference.
4(c)(3) -- Form of Floating Rate Cumulative Trust Preferred Securities Guarantee Agreement, dated March 21, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference.
10(a)(1) -- Employment Agreement of Christopher J. Murphy III, dated April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference.
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10(a)(2) -- Employment Agreement of Wellington D. Jones III, dated April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference.
10(a)(3) -- Employment Agreement of Allen R. Qualey, dated April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference.
10(a)(4) -- Employment Agreement of Larry E. Lentych, dated April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference.
10(a)(5) -- Employment Agreement of Richard Q. Stifel, dated April 16, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference.
10(b)(1) -- Form of Company's Employees' Money Purchase Pension Plan and Trust Agreement dated January 1, 1989, and amendment to the Company's Employees' Money Purchase Pension Plan and Trust dated April 1, 1994, filed as exhibit to Form 10-K dated December 31, 1994, and incorporated herein by reference.
10(b)(2) -- An amendment to Company's Employees' Money Purchase Pension Plan and Trust Agreement dated July 20, 1999, and filed as exhibit to Form 10-K dated December 31, 1999, and incorporated herein by reference
10(b)(3) -- An amendment to Company's Employees' Money Purchase Pension Plan and Trust Agreement dated December 29, 2000, and filed as exhibit to Form 10-K dated December 31, 2000, and attached hereto.
10(c)(1) -- Form of Company's Employees' Profit Sharing Plan and Trust Agreement dated January 1, 1989, amendment to the Company's Profit Sharing Plan and Trust Agreement dated April 1, 1994, filed as exhibit to Form 10-K dated December 31, 1994, and incorporated herein by reference.
10(c)(2) -- An amendment to 1st Source Corporation Employees' Profit Sharing Plan and Trust Agreement dated September 30, 1996, and filed as exhibit to Form 10-K, dated December 31, 1996, and incorporated herein by reference.
10(c)(3) -- An amendment to 1st Source Corporation Employees' Profit Sharing Plan and Trust Agreement dated July 20, 1999, and filed as exhibit to Form 10-K dated December 31, 1999, and incorporated herein by reference.
10(c)(4) -- An amendment to 1st Source Corporation Employees' Profit Sharing Plan and Trust Agreement dated December 29, 2000, and filed as exhibit to Form 10-K dated December 31, 2000, and attached hereto.
10(d) -- 1st Source Corporation Employee Stock Purchase Plan dated April 17, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference.
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10(e) -- 1st Source Corporation 1982 Executive Incentive Plan, amended April 19, 1988, and filed as exhibit to Form 10-K, dated December 31, 1988, and incorporated herein by reference.
10(f) -- 1st Source Corporation 1982 Restricted Stock Award Plan, as amended February 19, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference.
10(h) -- 1st Source Corporation Non-Qualified Stock Option Agreement with Christopher J. Murphy III, dated January 1, 1992, as amended December 11, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference.
10(i)(1) -- 1st Source Corporation 1992 Stock Option Plan, dated April 23, 1992, as amended December 11, 1997, filed as exhibit to Form 10-K, dated December 31, 1997, and incorporated herein by reference.
10(i)(2) -- An amendment to 1st Source Corporation 1992 Stock Option Plan, dated July 18, 2000, and filed as exhibit to Form 10-K, dated December 31, 2000, attached hereto.
10(j) -- 1st Source Corporation 1998 Performance Compensation Plan, dated February 19, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference.
10(k) -- Consulting Agreement of Ernestine M. Raclin, dated April 14, 1998, filed as exhibit to Form 10-K, dated December 31, 1998, and incorporated herein by reference.
13 -- Annual Report to Shareholders for the year ended December 31, 2000, attached hereto.
21 -- Subsidiaries of Registrant, attached hereto.
23(a) -- Consent of Ernst & Young LLP, Independent Auditors, attached hereto.
23(b) -- Consent of PricewaterhouseCoopers LLP, Independent Accountants, attached hereto.
* The exhibits included under exhibit 10 constitute all management contracts, compensatory plans and arrangements required to be filed as an exhibit to this form pursuant to Item 14(c) of this report.
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