UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 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 1st SOURCE CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1068133 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 N. Michigan Street, South Bend, Indiana 46601 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 219/235-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock - without par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 20, 1996. Common Stock, without par value - $141,792,568. The number of shares outstanding of each of the registrant's classes of common stock as of February 20, 1996. Common Stock, without par value - 12,569,998 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended December 31, 1995 are incorporated by reference into Part II. Portions of the annual proxy statement for the year ended December 31, 1995 are incorporated by reference into Parts II and III. PART I ITEM 1. BUSINESS GENERAL 1st Source Corporation, an Indiana corporation, commenced operations as a registered bank holding company in 1971. Unless the context otherwise requires, the "Company" refers to 1st Source Corporation and its subsidiaries. At December 31, 1995, the Company had $1.80 billion in total assets, $1.44 billion in total deposits, and $152.6 million in total shareholders' equity. See Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's principal subsidiary, 1st Source Bank, has 33 branch offices and is the largest bank in both assets and deposits, as of December 31, 1995, headquartered in its principal market area, which consists of St. Joseph, Marshall, Elkhart, LaPorte, Porter, Kosciusko, and Starke Counties of Indiana. 1st Source Bank of Starke County, another subsidiary bank, was merged into 1st Source Bank in September 1995. The bank offers a broad range of commercial banking, personal banking and trust services. In addition, 1st Source Bank provides highly specialized financing services for: automobile fleets in the rental and leasing industries; privately-held used aircraft; heavy duty trucks and construction equipment. These services are marketed nationwide. The principal offices of the Company are located at 100 North Michigan Street, South Bend, Indiana, 46601 (telephone (219) 235-2000). 1st SOURCE BANK 1st Source Bank, which is the Company's principal subsidiary, was chartered as an Indiana state bank in 1922. It is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law. The bank conducts a full-service commercial banking business. 1st Source 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 the northern Indiana counties mentioned above. South Bend, in St. Joseph County, is the largest city in a 55-mile radius, and is a regional center for educational institutions, health care, financial, accounting and legal services, and retailing. CORPORATE BANKING 1st Source Bank's Corporate Banking Group ("CBG") provides a wide range of services to business customers, including loans, investments, international trade transactions and corporate cash management. CBG focuses its efforts on privately-held or closely-controlled firms, which have annual sales of between $2 million and $100 million and are located within a 75-mile radius of South Bend. Loans of approximately $294 million and deposits of $57 million were attributed to CBG at December 31, 1995. PERSONAL AND SMALL BUSINESS BANKING 1st Source Bank's Personal and Small Business Banking Group's ("PSBB") operations are conducted by the bank's central office, 32 other branch banking offices, two free-standing drive-up facilities, and 39 automatic teller machines. PSBB's services for individuals, executives and professionals, and small businesses include direct lending, credit cards, auto leasing, brokerage services, and a wide range of deposit products. Loans of approximately $485 million and deposits of approximately $1.26 billion were attributed to PSBB at December 31, 1995. TRANSPORTATION AND EQUIPMENT FINANCING 1st Source Bank's Transportation and Equipment Financing Group ("T & E") offers specialized financing services and programs to transportation and equipment industries nationwide. T & E's Truckers Bank Plan Division serves a limited number of high-quality automobile leasing and rental companies, truck leasing companies and manufacturers of specialized truck bodies. The Aircraft Division offers specialized nationwide financing for used aircraft. The Construction Equipment Division provides lending services and programs to dealers, contractors and other end users of construction equipment. Transportation and equipment loans outstanding were approximately $458 million, or 36.4% of the Company's consolidated total loans at December 31, 1995. T & E also services approximately $85 million in loans that were previously securitized. The Company believes that T & E serves a national market segment not being served adequately by either the credit subsidiaries of manufacturers or by other financial institutions. T & E is headquartered in South Bend and maintains field representatives at various locations throughout the country who serve their customers on a nationwide basis. The Company maintains offices in Farmington Hills and Wyoming, Michigan; Atlanta, Georgia; Downingtown, Pennsylvania; Vancouver, Washington; Waukesha, Wisconsin; and Wichita, Kansas. TRUST AND INVESTMENT MANAGEMENT 1st Source Bank's Trust and Investment Management Group ("TIM") manages approximately 1,401 personal trusts and agency accounts, and 525 retirement plans for corporations, partnerships and individuals. Assets under management and fee income for TIM during each of the past three years ended December 31 were as set forth in the following table: Assets Under Management Trust Investment Year ended: At Record Value Management Fee Income December 31, 1995 $923,277,000 $6,639,000 December 31, 1994 898,009,000 6,125,000 December 31, 1993 857,712,000 5,803,000 SUBSIDIARIES In addition to 1st Source Bank, the Company's subsidiaries include 1st Source Insurance, Inc., which is licensed as an insurance agent and operates a general insurance agency in South Bend; 1st Source Capital Corporation, a licensed Small Business Investment Company; 1st Source Leasing, Inc., which originates and services leases of tangible personal property to businesses and other leasing firms located nationwide, which are financed by 1st Source Bank; and Trustcorp Mortgage Company, a mortgage banker with three offices in Indiana and one in Ohio. Inactive subsidiaries include 1st Source Travel, Inc., 1st Source Auto Leasing, Inc., and FBT Capital Corporation. COMPETITION The business of the Company and its subsidiaries is highly competitive. Competition comes from numerous commercial banks located in and near its service area, as well as elsewhere in the Midwest, and from other financial institutions such as savings and loan associations, insurance companies, leasing companies, financial services companies and credit unions. In addition, the Company and the bank compete for funds with some of these institutions, as well as with other forms of investment for individuals and businesses. The Company's principal market area has been the site for expansion by several banking organizations domiciled outside of the state of Indiana. This type of activity could further expand as new laws go into effect in 1997 permitting bank holding companies to acquire a bank anywhere in the nation as well as banking organizations to branch nationwide by acquistion or consolidation of existing out-of-state banks. EMPLOYEES The Company employs approximately 811 persons on a full-time equivalent basis. The Company provides a wide range of employee benefits and considers employee relations to be good. LEGISLATIVE DEVELOPMENTS The insurance fund maintained by the Federal Deposit Insurance Corporation (the "FDIC") to insure deposits at commercial banks has been renamed the "Bank Insurance Fund" ("BIF") and is maintained and administered by the FDIC separately from the new fund set up by that agency to insure the deposits of savings associations. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") provides for the assignment of financial institutions into nine different risk classifications for the purpose of determining the annual deposit insurance assessment rate. The deposit insurance assessment rate for each risk classification is based on a percentage per each $100 of deposits. During 1995, the FDIC relaxed the premium assessment for 1st Source Bank to 4 cents from 23 cents per $100 of assessable deposits. Federal legislation effective in 1995 permits the acquisition of an Indiana bank or Indiana bank holding company by a bank holding company with its principal place of business in any other state in the United States. Unless a state opts in earlier, effective June 1997 a bank holding company has the option of consolidating its existing bank subsidiaries into a single bank with interstate branches. The states of Indiana and Michigan have opted in early and also permitted interstate branching through the establishment of de novo branches. REGULATION The Company, as a bank holding company, is subject to regulation under the Bank Holding Company Act ("BHC Act") by the Federal Reserve Board of Governors (the "Board"). The Company is required to file reports with the Board and to provide such additional information as the Board may require. Under the BHC Act, the Company is required to obtain the prior approval of the Board before acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank. The Company may engage in, and may own shares of companies engaged in, certain activities found by the Board to be closely related to banking. Some of the activities that the Board has determined by regulation to be closely related to banking are the making or servicing of loans, discount brokerage, performing certain data processing services, acting as fiduciary, investment or financial advisors, and the making of investments in corporations or projects designed primarily to promote community welfare. The Company, the bank and the other nonbank subsidiaries are "affiliates" within the meaning of the Federal Reserve Act. The Federal Reserve Act and the Federal Deposit Insurance Act limit a bank's loans or extensions of credit to the Company or any of its subsidiaries, its investments in the stock or other securities thereof, and its taking of such stocks or securities as collateral for loans to any borrower. The bank, as an Indiana state bank, is supervised by the Indiana Department of Financial Institutions (the "DFI"). As such, the bank is regularly examined by and subject to regulations promulgated by the DFI. Federal and Indiana laws limit dividends the bank may pay. GOVERNMENT POLICIES AND LEGISLATION The policies of regulatory authorities, including the board, the FDIC and DFI, have a significant effect on the operating results of commercial banks. An important function of the Federal Reserve system is to regulate aggregate national credit and money supply through such means as open-market dealings in securities, establishment of the discount rate of member bank borrowings and changes in reserve requirements against member bank deposits. Policies at these agencies may be influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and fiscal policies of the United States Government. FDICIA was enacted on December 19, 1991. It protects deposit insurance funds, improves regulation of federally insured deposit institutions, and improves reporting requirements relating to financial institutions. Within FDICIA are contained separate legal requirements such as the Truth in Savings Act which gives the Federal Reserve Board authority to promulgate regulations implementing the provisions of this Act. In addition, many studies and reports are required by FDICIA. The various federal supervisory agencies are directed to develop uniform procedures of regulation of financial institutions. Generally, FDICIA requires regulations covering annual reports, audited financial statements, a management statement, annual assessment of the institution's internal controls and compliances, annual audit, independent audit committee reports, responsibilities and qualifications of the independent auditors, and reports to banking agencies as well as other related matters. Much of the Company's presently constituted business is affected by FDICIA; although in many areas the Company is currently in compliance with standards made formal and/or extended to smaller size financial institutions under the Act. The regulations under FDICIA rewards those financial institutions maintaining high standards of capital requirements. Additionally, the Company expects to see increased efficiency and consistency with respect to the regulatory agencies. At this time, however, the Company and other financial institutions are experiencing a massive increase in paperwork and time expenditure of personnel in order to keep current with the new regulations. ITEM 1. BUSINESS (Continued) SELECTED STATISTICAL INFORMATION Distribution of Assets, Liabilities and Shareholders' Equity Interest Rates and Interest Differential (Dollars in Thousands) Year ended December 31, 1995 Interest Average Income/ Yield/ Balance Expense Rate ASSETS: Interest bearing deposits $1,062 $30 2.79% Investment securities: Taxable 244,567 15,184 6.21% Tax-exempt <F1> 129,409 11,285 8.72% Net loans <F2><F3> 1,172,438 111,115 9.48% Other investments 22,227 1,307 5.88% Total Earning Assets 1,569,703 138,921 8.85% Cash and due from banks 72,647 Reserve for loan losses (26,081) Other assets 70,291 Total $1,686,560 LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,181,219 56,185 4.76% Short-term borrowings 135,373 6,938 5.13% Long-term debt 23,302 1,823 7.82% Total Interest Bearing Liabilities 1,339,894 64,946 4.85% Noninterest bearing deposits 173,234 Other liabilities 30,765 Shareholders' equity 142,667 Total $1,686,560 Net Interest Income $73,975 Net Yield on Earning Assets on a Taxable Equivalent Basis 4.71% Year ended December 31, 1994 Interest Average Income/ Yield/ Balance Expense Rate ASSETS: Interest bearing deposits $971 $14 1.42% Investment securities: Taxable 256,404 14,667 5.72% Tax-exempt <F1> 103,872 10,077 9.70% Net loans <F2><F3> 1,066,752 91,523 8.58% Other investments 7,893 399 5.05% Total Earning Assets 1,435,892 116,680 8.13% Cash and due from banks 74,240 Reserve for loan losses (23,685) Other assets 60,518 Total $1,546,965 LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,094,197 42,012 3.84% Short-term borrowings 109,944 3,788 3.45% Long-term debt 27,248 1,909 7.01% Total Interest Bearing Liabilities 1,231,389 47,709 3.87% Noninterest bearing deposits 162,233 Other liabilities 25,892 Shareholders' equity 127,451 Total $1,546,965 Net Interest Income $68,971 Net Yield on Earning Assets on a Taxable Equivalent Basis 4.80% Year ended December 31, 1993 Interest Average Income/ Yield/ Balance Expense Rate ASSETS: Interest bearing deposits $148 $4 2.70% Investment securities: Taxable 252,644 14,593 5.78% Tax-exempt <F1> 91,447 9,603 10.50% Net loans <F2><F3> 986,958 83,275 8.44% Other investments 9,160 277 3.02% Total Earning Assets 1,340,357 107,752 8.04% Cash and due from banks 70,137 Reserve for loan losses (20,859) Other assets 50,383 Total $1,440,018 LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits $1,020,205 39,753 3.90% Short-term borrowings 110,598 3,251 2.94% Long-term debt 20,865 1,574 7.54% Total Interest Bearing Liabilities 1,151,668 44,578 3.87% Noninterest bearing deposits 149,268 Other liabilities 23,896 Shareholders' equity 115,186 Total $1,440,018 Net Interest Income $63,174 Net Yield on Earning Assets on a Taxable Equivalent Basis 4.71% <FN> <F1> Interest income includes the effects of taxable equivalent adjustments, using a 40.525% rate. Tax equivalent adjustments were $3,635 in 1995, $3,512 in 1994 and $3,372 in 1993. <F2> Loan income includes fees on loans of $2,739 in 1995, $3,111 in 1994 and and $3,415 in 1993. Loan income also includes the effects of taxable equivalent adjustments, using a 40.525% rate. Tax equivalent adjustments were $171 in 1995, $226 in 1994 and $276 in 1993. <F3> For purposes of this computation, nonaccruing loans are included in the daily average loan amounts outstanding. </FN> 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: Increase (Decrease) Due To <F1> Volume Rate Net (In Thousands) 1995 compared to 1994 Interest earned on: Loans $9,501 $10,091 $19,592 Investment securities: Taxable (612) 1,129 517 Tax-exempt 2,051 (843) 1,208 Interest-bearing deposits with other banks 2 14 16 Federal funds sold and other money market investments 833 75 908 Total Earning Assets 11,775 10,466 22,241 Interest paid on: Savings deposits (1,015) 381 (634) Other time deposits 6,556 8,251 14,807 Short-term borrowings 1,013 2,137 3,150 Long-term debt (438) 352 (86) Total Interest-Bearing Liabilities 6,116 11,121 17,237 Net Interest Income $5,659 ($655) $5,004 1994 compared to 1993 Interest earned on: Loans $6,847 $1,401 $8,248 Investment securities: Taxable 222 (148) 74 Tax-exempt 1,080 (606) 474 Interest-bearing deposits with other banks 11 (1) 10 Federal funds sold and other money market investments (32) 154 122 Total Earning Assets 8,128 800 8,928 Interest paid on: Savings deposits 1,410 (1,902) (492) Other time deposits 1,777 974 2,751 Short-term borrowings (24) 561 537 Long-term debt 436 (101) 335 Total Interest-Bearing Liabilities 3,599 (468) 3,131 Net Interest Income $4,529 $1,268 $5,797 <FN> <F1> 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. </FN> ITEM 1. BUSINESS (Continued) INVESTMENT PORTFOLIO The carrying amounts of investment securities at the dates indicated are summarized as follows: December 31 1995 1994 1993 (In Thousands) U.S. Treasury and government agencies and corporations $239,658 $223,115 $240,759 States and political subdivisions 140,319 108,468 97,585 Other 16,398 18,302 21,810 Total $396,375 $349,885 $360,154 The following table shows the maturities of investment securities at December 31, 1995, 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. The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. The taxable equivalent adjustment represents the annual amounts of income from tax-exempt obligations divided by .59475 (which includes the effect of state income taxes), less the amount of such tax-exempt income. Maturing After One After Five Within But Within But Within After One Year Five Years Ten Years Ten Years Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in Thousands) U.S. Treasury and government agencies and corporations $35,041 5.75% $84,336 5.83% $31,750 6.18% $88,531 6.19% States and political subdivisions 5,915 6.71% 44,333 7.68% 66,281 8.61% 23,790 8.47% Other 353 5.79% 833 7.13% 1,086 8.49% 14,126 7.21% Total $41,309 5.89% $129,502 6.47% $99,117 7.83% $126,447 6.73% At December 31, 1995, there were $53,043 of securities in the portfolio which were issued by the state of Indiana, or political subdivisions thereof, whose aggregate carrying value was 34.76% of shareholders' equity. LOAN PORTFOLIO The following table shows the Company's loan distribution at the end of each of the last five years: 1995 1994 1993 1992 1991 (Dollars in Thousands) Domestic Loans: Transportation and equipment $457,930 $358,128 $382,483 $346,513 $279,082 Commercial, financial and agricultural 314,421 293,171 256,467 238,445 193,610 Real estate 408,028 377,532 316,758 298,151 267,207 Installment 79,036 71,882 64,105 73,307 86,285 Total Domestic Loans $1,259,415 $1,100,713 $1,019,813 $956,416 $826,184 ITEM 1. BUSINESS (Continued) LOAN PORTFOLIO (Continued) The following table shows the rate sensitivity of loans (excluding residential mortgages for 1-4 family residences, installment loans and lease financing) outstanding as of December 31, 1995. The amounts due after one year are also classified according to the sensitivity to changes in interest rates. Rate Sensitivity Within After One But After One Year Within Five Years Five Years Total (In Thousands) Transportation and equipment $294,030 $136,198 $4,131 $434,359 Commercial, financial and agricultural 217,480 33,493 12,266 263,239 Real estate 69,875 41,217 52,647 163,739 Total $581,385 $210,908 $69,044 $861,337 Rate Sensitivity Fixed Variable Rate Rate Due after one year but within five years $172,533 $38,375 Due after five years 11,002 58,042 Total $183,535 $96,417 The following table summarizes the nonaccrual, past due and restructured loans: December 31 1995 1994 1993 1992 1991 (In Thousands) Nonaccrual loans $4,893 $3,314 $3,175 $4,024 $4,530 Accruing loans past due 90 days or more 274 477 494 354 657 Restructured loans - 133 667 3,185 425 ITEM 1. BUSINESS (Continued) LOAN PORTFOLIO (Continued) Information with respect to nonaccrual and restructured loans at December 31, 1995 and 1994 is as follows: December 31 1995 1994 (In Thousands) Nonaccrual loans $4,893 $3,314 Restructured loans --- 133 Interest income which would have been recorded under original terms 612 432 Interest income recorded during the period 229 181 Commitments to lend additional funds --- --- At December 31, 1995, $4,891,000 of the nonaccrual loans are collateralized. Potential Problem Loans At December 31, 1995, 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, 1995, 15.1% of total business loans were concentrated with borrowers in air transportation and aircraft dealers. Loans to truck and automobile leasing companies accounted for 12.1% of all business loans at December 31, 1995. 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: December 31 1995 1994 1993 1992 1991 (In Thousands) Amount of loans outstanding at end of period $1,259,415 $1,100,713 $1,019,813 $956,416 $826,184 Average amount of net loans outstanding during period $1,172,438 $1,066,752 $986,958 $894,163 $791,028 Balance of reserve for loan losses at beginning of period $23,868 $22,350 $19,141 $16,417 $12,891 Charge-offs: Transportation and equipment 36 29 560 1,017 1,084 Commercial, financial and agricultural 985 1,007 809 783 571 Real estate 597 816 92 565 476 Installment 372 205 560 708 1,483 Total charge-offs 1,990 2,057 2,021 3,073 3,614 Recoveries: Transportation and equipment 2,224 225 699 202 35 Commercial, financial and agricultural 287 166 359 889 1,599 Real estate 122 215 362 120 119 Installment 202 214 277 68 290 Total recoveries 2,835 820 1,697 1,279 2,043 Net charge-offs (recoveries) (845) 1,237 324 1,794 1,571 Additions charged to operating expense 2,757 4,197 3,533 3,724 5,006 Recaptured reserve due to loan securitization - (1,442) - - - Increase resulting from acquisitions - - 794 91 Balance at end of period $27,470 $23,868 $22,350 $19,141 $16,417 Ratio of net charge-offs (recoveries) to average net loans outstanding (0.07%) 0.12% 0.03% 0.20% 0.20% The Company'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 possible losses from loans presently outstanding. The provision made to this reserve is determined by management based on assessment of the risk factors affecting the loan portfolio, including general economic conditions, changes in the portfolio mix, past loan loss experience and the financial condition of the borrower. Management of the Company 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 1995, after management's assessment of loan quality, the Company made a charge of $2,757,000 to operations as a provision for loan losses. At December 31, 1995, the reserve for loan losses was $27,470,000, or 2.18% of loans outstanding net of unearned discount. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, effective January 1, 1995. Under the new standard, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. The adoption of SFAS No. 114 had no impact on the 1995 provision for loan losses as reported. As of December 31, 1995, impaired loans totaled $6,381,000, of which $5,253,000 had corresponding specific reserves for loan losses totaling $1,240,000. The remaining $1,128,000 of impaired loans had no specific reserves for loan losses associated with them. The vast majority of the impaired loans are nonaccrual loans; interest is not recognized on nonaccrual loans subsequent to the date the loan is placed in nonaccrual status. Interest on the remainder of the impaired loans is recognized on an accrual basis. For 1995, the average recorded investment in impaired loans was $6,515,000 and interest income recognized on impaired loans totaled $284,000. ITEM 1. BUSINESS (Continued) SUMMARY OF LOAN LOSS EXPERIENCE (Continued) 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: (Dollars in Thousands) 1995 1994 1993 1992 1991 Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans in Each in Each in Each in Each in Each Category Category Category Category Category Reserve to Total Reserve to Total Reserve to Total Reserve to Total Reserve to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Transportation and equipment 3,608 36.4 2,917 32.5 2,864 37.5 3,032 36.2 2,764 33.7 Commercial, financial and agricultural 3,396 25.0 2,565 26.6 3,011 25.1 3,141 24.9 2,156 23.4 Real estate 1,868 32.4 2,060 34.3 2,119 31.1 904 31.2 810 32.3 Installment 1,147 6.2 1,166 6.5 920 6.3 917 7.7 1,100 10.6 Unallocated 17,451 - 15,160 - 13,436 - 11,147 - 9,587 - Total $27,470 100% $23,868 100% $22,350 100% $19,141 100% $16,417 100% ITEM 1. BUSINESS (Continued) DEPOSITS The average daily amounts of deposits and rates paid on such deposits are summarized as follows: Year Ended December 31 1995 1994 1993 Amount Rate Amount Rate Amount Rate (Dollars in Thousands) Noninterest bearing demand deposits $173,234 - $162,233 - $149,268 - Interest bearing demand deposits 174,059 2.22% 177,232 2.15% 167,727 2.51% Savings deposits 242,504 2.85% 277,021 2.75% 249,702 3.08% Other time deposits 764,656 5.94% 639,944 4.78% 602,776 4.62% Total $1,354,453 $1,256,430 $1,169,473 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, 1995, by time remaining until maturity is as follows (in thousands): Under 3 months $109,807 3 to 6 months 23,594 6 to 12 months 18,517 Over 12 months 17,611 Total $169,529 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 1995 1994 1993 Percentage of net income to: Average shareholders' equity 14.75 % 14.49 % 14.52 % Average total assets 1.25 1.19 1.16 Percentage of dividends declared per common share to net income per common share 17.43 17.54 16.48 Percentage of average shareholders' equity to average total assets 8.46 8.24 8.00 ITEM 1. BUSINESS (Concluded) SHORT-TERM BORROWINGS The following table shows the distribution of the Company'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, as well as weighted average interest rates for the last three years. (Dollars in Thousands) Federal Funds Purchased and Security Other Repurchase Commercial Short-Term Total Agreements<F1> Paper<F2> Borrowings Borrowings 1995 Balance at December 31, 1995 $101,166 $4,515 $47,298 $152,979 Maximum amount outstanding at any month-end 123,393 5,318 52,835 180,616 Average amount outstanding 96,091 4,369 34,913 135,373 Weighted average interest rate during the year 5.16% 5.61% 4.97% 5.13% Weighted average interest rate for outstanding amounts at December 31, 1995 5.13% 5.54% 6.84% 5.67% 1994 Balance at December 31, 1994 $76,403 $844 $23,318 $100,565 Maximum amount outstanding at any month-end 127,854 2,131 31,149 148,261 Average amount outstanding 94,935 1,100 13,909 109,944 Weighted average interest rate during the year 3.44% 3.84% 3.46% 3.45% Weighted average interest rate for outstanding amounts at December 31, 1994 4.31% 4.79% 6.12% 4.74% 1993 Balance at December 31, 1993 $112,221 $2,097 $20,000 $134,318 Maximum amount outstanding at any month-end 130,791 3,706 24,505 156,432 Average amount outstanding 96,305 2,241 12,052 110,598 Weighted average interest rate during the year 2.93% 3.44% 2.89% 2.94% Weighted average interest rate for outstanding amounts at December 31, 1993 2.81% 3.06% 2.99% 2.84% <FN> <F1> Federal funds purchased and securities sold under agreements to repurchase generally mature within 1 to 30 days of the transaction date. <F2> Commercial paper and other short-term borrowings generally mature within 30 days. </FN> 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 50% of the available office space, and approximately 25% presently subleased to an unrelated tenant. The Company also owns property and buildings on which 25 of the bank subsidiary's 33 banking offices are located, including the facilities in Marshall, Elkhart, LaPorte, Porter, and Starke Counties as well as a parking facility, two buildings housing drive-in banking plazas and a computer operations center. In 1995, the Company reacquired its former headquarters building through foreclosure. It is being refurbished for additional tenants. The remaining properties utilized by the banking subsidiary are leased from unrelated parties. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock Prices and Dividends on pages 19 and 44 of the annual shareholders report for the year ended December 31, 1995, are incorporated herein by reference. There were 1,116 shareholders of 1st Source Common Stock as of February 20, 1996. ITEM 6. SELECTED FINANCIAL DATA Consolidated Selected Financial Data on page 9 of the annual shareholders report for the year ended December 31, 1995, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 8 through 19 of the annual shareholders report for the year ended December 31, 1995, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The report of independent accountants and the consolidated financial statements of the registrant and its subsidiaries are included on pages 20 through 41 in the annual shareholders report for the year ended December 31, 1995, and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The relationship with independent public accountants on page 16 of the proxy statement dated March 15, 1996, is incorporated herein by reference. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Executive Officers on pages 3 through 6 of the proxy statement dated March 15, 1996, are incorporated herein by reference with respect to Directors. ITEM 11. EXECUTIVE COMPENSATION Renumeration of Executive Officers on pages 7 through 13 of the proxy statement dated March 15, 1996, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Voting Securities and Principal Holders Thereof on page 2 of the proxy statement dated March 15, 1996, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with management and others which have a direct or indirect material interest on page 6 of the proxy statement dated March 15, 1996, are incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) and (2) -- The response to this portion of Item 14 is submitted as a separate section of this report. (3) -- The response to this portion of Item 14 is submitted as a separate section of this report. (b) Reports on Form 8-K -- None filed during the fourth quarter of 1995. (c) Exhibits -- The response to this portion of Item 14 is submitted as a separate section of this report. (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 President and a Director Date: March 19, 1996 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/ ERNESTINE M. RACLIN Ernestine M. Raclin, Chairman of the Board and a Director (Principal Executive Officer) Date: March 19, 1996 /s/ CHRISTOPHER J. MURPHY III Christopher J. Murphy III, President and a Director Date: March 19, 1996 /s/ VINCENT A. TAMBURO Vincent A. Tamburo, Secretary and General Counsel Date: March 19, 1996 /s/ LARRY E. LENTYCH Larry E. Lentych, Treasurer (Chief Financial Officer) Date: March 19, 1996 /s/ E. WILLIAM BEAUCHAMP, c.s.c. Reverend E. William Beauchamp, Director Date: March 19, 1996 /s/ VINCENT A. TAMBURO, P/A Paul R. Bowles, Director Date: March 20, 1996 /s/ VINCENT A. TAMBURO, P/A Philip J. Faccenda, Director Date: March 21, 1996 /s/ DANIEL B. FITZPATRICK Daniel B. Fitzpatrick, Director Date: March 19, 1996 /s/ LAWRENCE E. HILER Lawrence E. Hiler, Director Date: March 19, 1996 /s/ VINCENT A. TAMBURO, P/A Leo J. McKernan, Director Date: March 21, 1996 /s/ VINCENT A. TAMBURO, P/A Jo Ann R. Meehan, Director Date: March 21, 1996 /s/ VINCENT A. TAMBURO, P/A Dane A. Miller, Director Date: March 21, 1996 /s/ RICHARD J. PFEIL Richard J. Pfeil, Director Date: March 19, 1996 ANNUAL REPORT ON FORM 10-K ITEM 14(a) (1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1995 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 accountants 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, 1995, are incorporated in Item 8: Report of independent accountants Consolidated statements of financial condition -- December 31, 1995 and 1994 Consolidated statements of income -- Years ended December 31, 1995, 1994 and 1993 Consolidated statements of shareholders' equity -- Years ended December 31, 1995, 1994 and 1993 Consolidated statements of cash flows -- Years ended December 31, 1995, 1994 and 1993 Notes to consolidated financial statements -- December 31, 1995, 1994 and 1993 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. ANNUAL REPORT ON FORM 10-K ITEM 14(a) (3) and 14(c) LIST OF EXHIBITS YEAR ENDED DECEMBER 31, 1995 1st SOURCE CORPORATION SOUTH BEND, INDIANA 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 May 5, 1992, and filed as exhibit to Form 10-K, dated December 31, 1992, and incorporated herein by reference. 3(b) -- By-Laws of Registrant, as amended April 19, 1993, 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. 10(a) -- Employment Agreement of Christopher J. Murphy III, dated January 1, 1992, filed as exhibit to Form 10-K, dated December 31, 1991, and incorporated herein by reference. 10(b) -- 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(c) -- Form of Company's Employees' Profit Sharing Plan and Trust Agreement dated January 1, 1989, and 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(d) -- 1st Source Corporation Employee Stock Purchase Plan dated April 23, 1992, filed as exhibit to Form 10-K, dated December 31, 1992, and incorporated herein by reference. 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. Filed as exhibit to Form 10-K, dated December 31, 1982, and incorporated herein by reference. 10(g) -- 1st Source Corporation Non-Qualified Stock Option Agreements with Christopher J. Murphy III, and Wellington D. Jones III, dated March 1, 1988, and filed as exhibit to Form 10-K, dated December 31, 1988, and incorporated herein by reference. 10(h) -- 1st Source Corporation Non-Qualified Stock Option Agreement with Christopher J. Murphy III, dated December 31, 1991, and filed as exhibit to Form 10-K, dated December 31, 1991, and incorporated herein by reference. 10(i) -- 1st Source Corporation 1992 Stock Option Plan, dated April 23, 1992, and filed as exhibit to Form 10-K, dated December 31, 1992, and incorporated herein by reference. 10(j) -- 1st Source Corporation Non-Qualified Stock Option Agreement with Richard Q. Stifel, dated January 1, 1992, and filed as exhibit to Form 10-K, dated December 31, 1992, and incorporated herein by reference. 11 -- Computation of Earnings Per Share, attached hereto. 13(a) -- Proxy Statement, previously submitted via EDGAR on March 15, 1996. 13(b) -- Annual Report to Security Holders for the year ended December 31, 1995, attached hereto. 21 -- Subsidiaries of Registrant, attached hereto. 23 -- Consent of Independent Accountants, attached hereto. 24 -- Power of Attorneys for signatures to report pursuant to Power of Attorneys, previously submitted to the SEC. 27 -- Financial Data Schedule, attached hereto.