FORM 10-Q/A
(Amendment No. 1)
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 MARCH 31, 1999
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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 0-5907
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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 March 31, 1999 - 18,949,507
shares.
INTRODUCTORY STATEMENT
1st Source is filing this Form 10-Q/A for the quarterly period ended March
31, 1999 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
$1,054,000 and net income by $648,000, or $0.03 per diluted common share, for
the three months ended March 31, 1999. As of March 31, 1999, this restatement
reduced retained interest assets by $569,000, decreased the reserve for loan
losses by $3,106,000 and increased shareholders' equity by $1,530,000. See Note
2 to Item 1, below.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Page
Consolidated statements of financial condition -- 3
March 31, 1999, and December 31, 1998
Consolidated statements of income -- 4
three months ended March 31, 1999 and 1998
Consolidated statements of cash flows -- 5
three months ended March 31, 1999 and 1998
Notes to the Consolidated Financial Statements 6
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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
1st Source Corporation and Subsidiaries
(Dollars in thousands)
March 31, December 31,
1999 1998
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(Restated) (Restated)
ASSETS
Cash and due from banks .......................... $ 102,401 $ 132,514
Federal funds sold and
interest bearing deposits with other banks ..... 2,935 41,951
Investment securities:
Securities available-for-sale, at fair value
(amortized cost of $415,181 and $440,147
at March 31, 1999 and December 31, 1998)...... 416,468 443,691
Securities held-to-maturity, at amortized cost
(fair value of $93,939 and $99,734 at
March 31, 1999 and December 31, 1998) ........ 91,519 96,008
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Total Investment Securities ...................... 507,987 539,699
Loans - net of unearned discount ................. 1,915,952 1,881,696
Reserve for loan losses ........................ (38,974) (38,629)
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Net Loans ........................................ 1,876,978 1,843,067
Equipment owned under operating leases,
net of accumulated depreciation 57,717 54,170
Premises and equipment,
net of accumulated depreciation ............... 31,373 31,227
Other assets ..................................... 93,465 90,964
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Total Assets ..................................... $ 2,672,856 $ 2,733,592
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ............................ $ 282,621 $ 294,810
Interest bearing ............................... 1,810,029 1,882,297
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Total Deposits ................................... 2,092,650 2,177,107
Federal funds purchased and securities
sold under agreements to repurchase ............ 217,846 159,478
Other short-term borrowings ...................... 37,641 82,681
Other liabilities ................................ 42,887 39,594
Long-term debt ................................... 13,107 13,189
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Total Liabilities ................................ 2,404,131 2,472,049
Guaranteed preferred beneficial interests
in the Company's subordinated debentures ....... 44,750 44,750
Shareholders' equity:
Common stock-no par value ...................... 6,883 6,270
Capital surplus ................................ 179,905 121,456
Retained earnings .............................. 46,085 98,300
Less cost of common stock in treasury .......... (11,609) (12,723)
Net unrealized appreciation (depreciation) of
securities available-for-sale ................ 2,711 3,490
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Total Shareholders' Equity ....................... 223,975 216,793
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Total Liabilities and Shareholders' Equity ....... $ 2,672,856 $ 2,733,592
=========== ===========
The accompanying notes are a part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
1st Source Corporation and Subsidiaries
(Dollars in thousands, except per share amounts)
Three Months Ended
March 31
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1999 1998
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(Restated)
Interest Income:
Loans, including fees ...................................... $ 40,986 $ 41,772
Investment securities:
Taxable ................................................ 4,917 4,046
Tax-exempt ............................................. 1,912 1,997
Other .................................................. 83 77
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Total Interest Income ....................................... 47,898 47,892
Interest Expense:
Deposits ................................................. 20,674 19,984
Short-term borrowings .................................... 3,418 4,432
Long-term debt ........................................... 227 232
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Total Interest Expense ...................................... 24,319 24,648
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Net Interest Income ......................................... 23,579 23,244
Provision for Loan Losses ................................... 1,293 2,401
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Net Interest Income After
Provision for Loan Losses ................................ 22,286 20,843
Noninterest Income:
Trust fees ............................................... 2,266 2,066
Service charges on deposit accounts ...................... 1,540 1,406
Loan servicing and sale income ........................... 5,597 2,520
Equipment rental income .................................. 3,413 2,347
Other income ............................................. 2,526 2,445
Investment securities and other investment (losses) ...... (102) (122)
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Total Noninterest Income .................................... 15,240 10,662
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Noninterest Expense:
Salaries and employee benefits ........................... 12,972 11,687
Net occupancy expense .................................... 1,258 1,218
Furniture and equipment expense .......................... 2,011 1,642
Depreciation - leased equipment .......................... 2,980 1,820
Business development and marketing expense ............... 731 587
Other expense ............................................ 3,648 2,900
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Total Noninterest Expense ................................... 23,600 19,854
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Income Before Income Taxes and Subsidiary Trust Distributions 13,926 11,651
Income taxes ................................................ 4,844 3,926
Distribution on preferred securities of
subsidiary trusts, net of income tax benefit .............. 554 565
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Net Income .................................................. $ 8,528 $ 7,160
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Other Comprehensive Income, Net of Tax:
Change in unrealized appreciation (depreciation) of
available-for-sale securities ........................... (779) 395
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Total Comprehensive Income .................................. $ 7,749 $ 7,555
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Per Common Share: (1)
Basic Net Income Per Common Share ......................... $ 0.45 $ 0.38
============ ============
Diluted Net Income Per Common Share ....................... $ 0.44 $ 0.36
============ ============
Dividends ................................................. $ 0.073 $ 0.066
============ ============
Basic Weighted Average Common Shares Outstanding ............ 18,913,234 19,080,036
============ ============
Diluted Weighted Average Common Shares Outstanding .......... 19,241,047 19,482,288
============ ============
(1) The computation of per share data gives retroactive recognition to a 10%
stock dividend declared on January 14, 1999.
The accompanying notes are a part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
1st Source Corporation and Subsidiaries
(Dollars in thousands)
Three Months Ended March 31
1999 1998
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(Restated)
Operating Activities:
Net income .................................... $ 8,528 $ 7,160
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ..................... 1,293 2,401
Depreciation of premises and equipment ........ 3,944 2,730
Amortization of investment security premiums
and accretion of discounts, net ............. 452 219
Deferred income taxes ......................... (1,520) 269
Realized investment securities losses ......... 77 122
Realized (gains) on securitized loans ......... (2,449) (8)
Increase in interest receivable ............... (636) (909)
Increase in interest payable .................. 1,275 2,171
Other ......................................... 7,684 1,239
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Net Cash Provided by Operating Activities ....... 18,648 15,394
Investing Activities:
Proceeds from sales and maturities
of investment securities .................... 92,520 38,516
Purchases of investment securities ............ (62,593) (48,299)
Net decrease in short-term investments ........ 39,016 10,885
Loans sold or participated to others .......... 80,693 33,679
Net increase in loans made to customers
and principal collections on loans .......... (115,862) (141,500)
Net increase in leased assets ................. (2,309) (4,776)
Purchases of premises and equipment ........... (905) (604)
Increase in other assets ...................... (1,416) (2,417)
Other ......................................... (3,185) (2,116)
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Net Cash Used in Investing Activities ........... 25,959 (116,632)
Financing Activities:
Net increase in demand deposits, NOW
accounts and savings accounts ............... (134,118) (20,016)
Net increase in certificates of deposit ....... 49,661 59,812
Net increase in short-term borrowings ......... 13,328 49,780
Payments on long-term debt .................... (82) (3,997)
Acquisition of treasury stock ................. (2,115) (340)
Cash dividends ................................ (1,394) (1,262)
Other ......................................... -- 12
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Net Cash Provided by Financing Activities ....... (74,720) 83,989
Increase (Decrease) in Cash and Cash Equivalents (30,113) (17,249)
Cash and Cash Equivalents, Beginning of Year .... 132,514 90,864
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Cash and Cash Equivalents, End of Period ........ $ 102,401 $ 73,615
========= =========
The accompanying notes are a part of the consolidated financial statements.
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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 restated 1998 1st Source Corporation Annual Report on
Form 10-K/A should be read in conjunction with these statements.
2. The financial information for the three-months ended March 31, 1999 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.
The following summarizes the impact of these adjustments on the assets and
liabilities as of March 31, 1999 and to the results of operations for the
three-months ended March 31, 1999:
March 31, 1999
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As reported As restated
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BALANCE SHEET
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Reserve for Loan Losses $ 42,080 $ 38,974
Net Loans 1,873,872 1,876,978
Retained Interest Assets 11,408 10,839
Total Assets 2,670,319 2,672,856
Total Liabilities 2,403,124 2,404,131
Shareholders' Equity 222,445 223,975
Total Liabilities and
Shareholders' Equity 2,670,319 2,672,856
Three Months Ended
March 31, 1999
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As reported As restated
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INCOME STATEMENT
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Total Noninterest Income $ 14,186 $ 15,240
Income Before Taxes 12,872 13,926
Income Taxes 4,438 4,844
Net Income 7,880 8,528
Comprehensive Income 7,153 7,749
Basic EPS 0.42 0.45
Diluted EPS 0.41 0.44
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3. 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.
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PART I.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
As more fully described in Note 2 to the Consolidated Condensed Financial
Statements, certain information related to the activity for the three-months
ended March 31, 1999 has been restated.
This discussion and analysis should be read in conjunction with the
Company's consolidated condensed financial statements and the financial and
statistical data appearing elsewhere in this report and the restated 1998
1st Source Corporation Annual Report on Form 10-K/A.
Except for historical information contained herein, the matters discussed
in this document, and other information contained in the Company's SEC filings,
may express "forward-looking statements." Those "forward-looking statements" may
involve risk and uncertainties, including statements concerning future events or
performance and assumptions and other statements concerning future events or
performance and assumptions and other statements that are other than statements
of historical facts. The Company wishes to caution readers not to place undue
reliance on any forward-looking statements, which speak only as of the date
made. Readers are advised that various factors--including, but not limited to,
changes in laws, regulations or generally accepted accounting principles; the
Company's competitive position within the markets served; increasing
consolidation within the banking industry; certain customers' and vendors'
critical systems or services failing to comply with Year 2000 programming
issues; unforeseen changes in interest rates; any unforeseen downturns in the
local, regional or national economies--could cause the Company's actual results
or circumstances for future periods to differ materially from those anticipated
or projected.
1st Source does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions that may be made to any
forward-looking statements to reflect the occurrence of unanticipated events or
circumstances after the date of such statements.
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COMPARISON OF THREE-MONTH PERIODS
ENDED MARCH 31, 1999 AND 1998
Net income for the three-month period ended March 31, 1999, was $8,528,000
compared to $7,160,000 for the equivalent period in 1998. The primary reasons
for the increase were an increase in net interest income, a strong increase in
noninterest income and a decrease in the provision for loan losses. This was
offset by an increase in noninterest expense.
Diluted net income per common share increased to $0.44 for the three-month
period ended March 31, 1999, from $0.36 in 1998. Return on average common
shareholders' equity was 15.70% for the three months ended March 31, 1999,
compared to 14.64% in 1998. The return on total average assets was 1.31% for the
three months ended March 31, 1999, compared to 1.19% in 1998.
NET INTEREST INCOME
The taxable equivalent net interest income for the three-month period ended
March 31, 1999, was $24,482,000, an increase of 1.36% over the same period in
1998, resulting in a net yield of 4.14% compared to 4.33% in 1998.
Total average earning assets increased 5.95% for the three-month period
ended March 31, 1999, compared to the period ended March 31, 1998. Total average
investment securities increased by 20.06% from one year ago primarily due to an
increase of investments in U.S. Government Securities. An increase in average
loans of 2.63%, compared to March 31, 1998, was achieved despite loan
securitizations of $346 million of auto fleet and aircraft loans during 1998.
The taxable equivalent yields on total average earning assets were 8.26% and
8.75% for the periods ended March 31, 1999, and 1998 respectively.
Average deposits increased 10.90% from the first quarter of 1998 to the
first quarter of 1999. The cost rate on average interest-bearing funds was 4.77%
for the three-months ended March 31, 1999, compared to 5.17% for the three
months ended March 31, 1998. The majority of the growth in deposits from last
year has occurred in NOW accounts.
The following table sets forth consolidated information regarding average
balances and rates.
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DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
(Dollars in thousands)
Three Months Ended March 31
------------------------------------
1999 1998
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Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
(Restated)
ASSETS:
Investment securities:
Taxable ................. $ 348,643 $ 4,917 5.72% $ 271,221 $ 4,046 6.05%
Tax exempt (1)........... 155,688 2,767 7.21% 148,832 2,855 7.78%
Net loans (2 & 3).......... 1,885,317 41,034 8.83% 1,837,020 41,823 9.23%
Other investments ......... 7,614 83 4.42% 5,462 77 5.72%
---------- -------- ----- ---------- ------- ----
Total Earning Assets 2,397,262 48,801 8.26% 2,262,535 48,801 8.75%
Cash and due from banks ... 105,259 78,492
Reserve for loan losses ... (38,511) (36,113)
Other assets .............. 176,455 143,107
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Total ..................... $2,640,465 $2,448,021
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $1,796,227 $20,674 4.67% $1,628,832 $19,984 4.98%
Short-term borrowings ... 256,405 3,418 5.41% 292,933 4,432 6.14%
Long-term debt .......... 13,154 227 7.00% 13,310 232 7.06%
---------- ------- ----- ---------- ------- -----
Total Interest Bearing
Liabilities ............. 2,065,786 24,319 4.77% 1,935,075 24,648 5.17%
Noninterest bearing deposits 268,527 233,018
Other liabilities ....... 85,840 81,547
Shareholders' equity .... 220,312 198,381
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Total ..................... $2,640,465 $2,448,021
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Net Interest Income ....... $24,482 $24,153
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Net Yield on Earning Assets on a Taxable ----- -----
Equivalent Basis ........ 4.14% 4.33%
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(1) Interest income includes the effects of taxable equivalent adjustments,
using a 40.525% rate for 1999 and 1998. Tax equivalent adjustments were
$855 in 1999 and $858 in 1998.
(2) Loan income includes fees of $1,409 in 1999 and $1,094 in 1998. Loan income
also includes the effects of taxable equivalent adjustments, using a
40.525% rate for 1999 and 1998. The tax equivalent adjustments were $48 in
1999 and $51 in 1998.
(3) For purposes of this computation, non-accruing loans are included in the
daily average loan amounts outstanding.
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PROVISION FOR LOAN LOSSES
The provision for loan losses for the three-month periods ended March 31,
1999, and 1998, was $1,293,000 and $2,401,000, respectively. Year-to-date Net
Charge-offs of $142,000 have been recorded in 1999, compared to $151,000 of Net
Charge-offs for the same period in 1998. The reserve for loan losses was
$38,974,000 or 2.03% of net loans at March 31, 1999, compared to $38,629,000 or
2.05% of net loans at December 31, 1998.
Non-performing assets at March 31, 1999, were $11,426,000 compared to
$10,571,000 at December 31, 1998, an increase of 8.09%. At March 31, 1999,
non-performing assets were .60% of net loans compared to .56% at December 31,
1998. It is management's opinion that the reserve for loan losses is adequate to
absorb anticipated losses in the loan portfolio as of March 31, 1999.
NONINTEREST INCOME
Noninterest income for the three-month periods ended March 31, 1999, and
1998 was $15,240,000 and $10,662,000, respectively, an increase of 42.94%. Trust
fees increased 9.68%, service charges on deposit accounts increased 9.53%, loan
servicing and sale income increased 122.10%, equipment rental income increased
45.42% and other income increased 3.31%. The increase in loan servicing and sale
income is due to increased loan securitization activity and income recognition
required by SFAS No. 125. The increase in equipment rental income was primarily
due to growth in operating leases. Investment Security and other net losses for
the three-month period ended March 31, 1999, were $102,000 compared to net
losses of $122,000 in 1998. The net losses for both years were primarily
attributed to certain partnership and venture capital investments.
NONINTEREST EXPENSE
Noninterest expense for the three-month period ended March 31, 1999, was
$23,600,000, an increase of 18.86% over the same period in 1998. For the
three-month period ended March 31, 1999, salaries and employee benefits
increased 11.0%, net occupancy expense increased 3.28%, furniture and equipment
expense increased 22.47%, depreciation on leased equipment increased 63.74%,
business development and marketing expense increased 24.53%, and miscellaneous
other expenses increased 25.79% over the same period in 1998. The primary
increase in salaries and employee benefits is attributed to an increase in
commissions and referrals and a 10% increase in our employee base compared to
1998. The increase in furniture and equipment expense is primarily due to
software and computer charges, equipment rental and repair expenses. The
increase in depreciation of leased equipment is due to a significant volume
increase from the prior year. The miscellaneous other expense increase from one
year ago is attributed primarily to Year 2000 consulting expenses.
INCOME TAXES
The provision for income taxes for the three-month period ended March 31,
1999, was $4,844,000 compared to $3,926,000 for the comparable period in 1998.
The provision for income taxes for the three months ended March 31, 1999, and
1998, is at a rate which management believes approximates the effective rate for
the year.
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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 9.98% at March 31, 1999.
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 1999 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 March 31, 1999, was 12.22% and the
total risk-based capital ratio was 13.49%.
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
March 31, 1999, the consolidated statement of financial condition was rate
sensitive by $49,741,000 more liabilities than assets scheduled to reprice
within one year or 96.38%. Management adjusts the composition of its assets and
liabilities to manage the interest rate sensitivity gap based upon its
expectations of interest rate fluctuations.
1st Source has two off-balance sheet interest rate swaps as part of its
interest rate risk management strategy. The swaps are being used to hedge
against the Company's prime floating rate loans. The notional amount of the
first swap as of March 31, 1999, is $9.1 million. It has a maturity date of
January, 2002, and has a current fair value of $21,223. The second swap has a
notional amount of $9.1 million as of March 31, 1999. It has a maturity date of
March, 2001, and has a current fair value of $25,532.
The Company pays a variable interest rate (one-month LIBOR) on each swap
and receives a fixed rate. The interest rate swaps are the most efficient means
of protecting the bank's net interest rate margin in a declining interest rate
environment. Conversely, if interest rates increase, the increased contribution
to net interest income from on-balance sheet assets will substantially offset
any negative impact on net interest income from these swap transactions.
-12-
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.
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 from normal loan operations, 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
$2,000,000 and $2,200,000. The total amount expended on the project through
March 31, 1999, was $1,110,000 of which approximately $1,040,000 related to the
cost to repair or replace software. Approximately $59,000 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.
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The project team 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 ESTIMATED COMPLETION
Awareness 100% --
Assessment 100% --
Renovation 100% --
Validation 100% --
Implementation 94% June 30, 1999
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.
1st Source cautions that this Y2K disclosure includes certain
"forward-looking statements." The reader should refer to the "forward-looking
statements" disclosure at the beginning of Part I, Item 2 for further
discussion.
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PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
Exhibit 27 - Restated Financial Data Schedule.
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 3/14/00 /s/ Christopher J. Murphy III
---------- ----------------------------------------
(Signature)
Christopher J. Murphy III
Chairman of the Board, President and CEO
DATE 3/14/00 /s/ Larry E. Lentych
---------- ----------------------------------------
(Signature)
Larry E. Lentych
Treasurer and Chief Financial Officer
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